Increased crude-by-rail in Alberta comes with increased risks

This week Alberta Premier Rachel Notley announced her government will purchase rail cars in an attempt to reduce the province’s transportation bottlenecks and help lower the massive oil price differential for Canadian heavy crude. “Alberta's oil is going to flow one way or another,” she said, “if not by pipelines, then by rail or by truck.”

Specifically, the Alberta government will buy two new unit trains that can transport an additional 120,000 barrels a day, increasing the amount of oil being moved by rail by one-third.

In recent months, Canadian crude oil prices have dropped significantly relative to other international benchmarks, costing energy companies, provincial governments and the broader economy billions in foregone revenues. For instance, the average price difference between Canadian oil (WCS) and U.S. oil (WTI) last month was about US$43 per barrel, which represented a staggering discount of 61 per cent (of the U.S. crude price).

The price differential is largely due to Canada’s lack of transportation capacity and restricted market access. Despite growing oil production in recent years, Canada has been unable to build any major pipelines, resulting in significant excess production compared to transportation capacity.

Consider how we got here.

Earlier this year, the Trudeau government bought the Trans Mountain pipeline and expansion project in a last ditch effort to save it. The government’s announcement to buy the project was made after the private owner, Kinder Morgan, said it was unclear whether it could proceed with the project due to ongoing delays. (It’s worth noting these delays were after a five-year approval process that included environmental assessments and Indigenous consultations.)

Despite following the legal and regulatory process to acquire approvals, the project was essentially blocked by the British Columbia government and several court challenges. The Trudeau government repeatedly promised the project would be built, yet failed to take concrete and timely action while sending mixed signals regarding its support.

And this was not the first time the actions (or inaction) of the Trudeau government impeded pipeline projects in Canada.

For example, in 2016 the government cancelled the previously-approved $7.9 billion Northern Gateway pipeline—a project expected to expand market access off the west coast and ultimately allow oil producers to “capture stronger prices available in global markets.”

Ottawa also imposed new regulatory hurdles on TransCanada’s proposed Energy East project, which included consideration of downstream emissions that were never part of prior assessments. Consequently, TransCanada deemed the pipeline uneconomical and scuttled the project.

Simply put, federal government policy decisions have resulted in cancelled pipeline projects and the associated oil price differentials and foregone revenues.

Without adequate pipeline capacity, the Alberta government is adding more crude-by-rail as a last resort to help mitigate the price differential. However, crude-by-rail is a less safe mode of transportation according to a recent study. Specifically, the study examined the safety of the three major modes of oil transport in North America and concluded that, on an apples-to-apples basis, transporting a billion tonnes of oil over a mile of distance by pipeline had a very low likelihood of leakage—less than one incident per billion tonne-miles. The risk of a leak by rail was twice as high, at two likely incidents per billion tonne-mile. And trucks are 10 times higher still, with 20 incidents likely in moving a billion tonnes of oil over a mile.

In short, the Alberta government’s decision to buy rail cars is a Band-Aid solution to a problem created largely by the federal government. In reality, Premier Notley’s plan to increase rail capacity comes with increased risks.