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Oil By Rail Is In Desperate Need of Clean-Up

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Railways are transforming North America's energy sector and are, coincidentally, helping to save Canada's bacon.

That's because the train infrastructure has helped bypass the pipeline bottlenecks that threaten to impede the oil booms underway in the U.S. and Canada. The political flashpoint has been the Keystone XL scheme, delayed due to Washington's green politics for five years, but opposition exists against all pipeline and refinery projects in both countries.

The facts are, by the end of next year, three times the amount of oil (nearly 800,000 barrels per day) that Keystone would have carried will be shipped by train out of Canada and North Dakota's vibrant shale oil region to refineries everywhere.

In fact, a recent Congressional Research Report noted this and suggested that oil by train may render Keystone unnecessary.

"Increasing cross-border movements of crude oil by rail on existing track does not require State Department approval, so such an approach seeks to avoid regulatory delays. While the potential volumes associated with rail transportation of crude could be lower than pipeline volumes, they could still be significant. Some analysts have suggested that oil-by-rail volumes could be large enough to make a major new pipeline project like Keystone XL unnecessary," concluded the report.

Train transport is two or three times' pricier than pipelines, but even so has already travelled way down the track in a handful of years. The result is more spills -- not to mention the catastrophic Lac-Megantic derailment in 2013 that destroyed a town and killed 47 people -- and dramatically enhanced governmental attention to the issues surrounding rail transport.

(Interestingly, the tragedy illustrated the inter-dependence of the two countries: the train was owned and operated by a third-rate U.S. railway company, partially owned by the Quebec Pension Plan; the oil was from the North Dakota Bakken oil play and the customer was New Brunswick's Irving Oil.)

At a hearing in Washington, federal figures showed that four times' as much oil has been spilled as a result of derailments in 2013 as occurred in the previous four decades. This is in part because traffic has increased exponentially.

Years ago little oil travelled by train. But by 2013, they carried one million barrels a day of U.S. oil production, equivalent to the total Bakken output. This year shipments are likely to total 1.5 million barrels per day -- an increase that has resulted in insufficient capacity to haul coal and some farm products. Several U.S. utilities in the U.S. have cut back on power because their coal inventories are not being replenished quickly enough.

The story's similar in Canada. From a standstill in 2008 oil producers moved 200,000 barrels per day by trains in 2013 and are forecasted to ship 700,000 barrels per day by the end of next year. That's not the limit either. Rail loading capacity for oil tankers in Canada is expected to hit 1 million barrels per day by next year and 1.4 million barrels a day in 2016.

The Congressional report surmised that if Keystone is never built, the railway option will be more needed than ever. "In its ongoing review of the Keystone XL pipeline proposal, the State Department has argued that, if the pipeline is not constructed, additional oil-by-rail capacity will be developed instead."

The environmentalists are just as opposed to rail as to pipelines or refineries and political battles have sprouted everywhere to prevent the building of smaller versions of Keystone or expansions of existing lines. Another new argument is that oil trains will become major terrorist targets as they travel through populated areas.

The facts are that any infrastructure is a target. The real issue is to clean up both the industry and radicalize government oversight.

The Lac-Megantic firebomb resulted in criminal charges against the railway and several employees as well as a mega-lawsuit against Ottawa for its pathetic supervision and inadequate rules. The culprit railway ran on a shoestring but should have been banned altogether from operations. Instead, it limped along saving money by cutting maintenance and crew.

Worst of all, the train company -- now bankrupt -- was allowed to operate with virtually no insurance, some $17 million in liability. This was negligence on the part of governments: any railway should be legally required to carry catastrophic insurance. Lac-Megantic has run up a tab of $200 million in just physical damage.

It took a tragedy to get both countries to impose new rules: they must swap out old tank cards for newer, safer ones; must improve trackage; must travel at lower speeds and must be inspected more often.

But additionally, I believe that railways should pay for this extra oversight and that railway unable to afford catastrophic insurance in the hundreds of millions per incident should not be allowed to operate. This will weed out the fly-by-night operators who operate unsafely.

Then the sector must be revamped. The train business has been allowed to remain a 19th-century technology run with 19th-century mentality by workers without credentials. Aviation, by contrast, is heavily supervised and operated by licensed personnel with professional expertise and constant surveillance.

For the moment, the critically important oil industry has been saved, but if governments aren't as tough as nails in their demands and dealings with the railways, then all bets are off.

This first appeared in the National Post

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