Pipeline vs. Rail: Canada Oil Train Crash

Pipeline vs. Rail: Canada Oil Train Crash


By EconMatters

Almost exactly like the 2010 movie "Unstoppable" which tells the story of a runaway freight train carrying hazardous chemicals, another unmanned 73-tanker runaway train full of crude oil also was passing through a small town of Lac-Megantic in Quebec, Canada on an early Saturday morning, July 6. However, in the movie, the runaway train was eventually stopped by two railroad workers (played by Denzel Washington and Chris Pine), sadly, this runaway train derailed and caused five tanker rail cars to explode in the downtown district of Lac-Megantic.

Graphic Source: BBC
Loose Oil Market Remains Calm


What ensued was described as "a war zone with multiple blasts came over a span of several hours" in the town of 6,000, which is about 155 miles east of Montreal and about 10 miles west of the Maine border. The latest news reported 13 dead, 50 missing, and crews are still working to contain 27,000 gallons of light crude that spilled from the tankers and possibly into a near-by river.

Typically, this kind of oil related disaster would have sent at least a spike or two to the oil price. However, attesting to the current loose and already over-supplied environment, traders and crude oil market hardly even blinked.

Further Reading: Oil Is The Next Major Commodity to Crash

Bakken Oil Rail Shipping Economics

The train, which belongs to Montreal Maine & Atlantic (MMA), reportedly was shipping the crude oil from the Bakken Field (in Williston Basin) in North Dakota towards Maine. Some of you may be wondering how this trade could make any economic sense considering shipping by rail adds about $20 a barrel, on average, to the cost of oil. Here is how the math works:

The modern day shale revolution has helped elevated North Dakota as well as the U.S. to be the most prolific oil producing regions in the world, but also has caught the energy and oil transport industry by surprise.

Chart Source: Minneapolis Fed

The lack of sufficient pipeline takeaway capacity was a major factor behind Bakken oil priced at a discount of $28 a barrel to NYMEX WTI in February 2012. Mind you that there’s also an additional WTI-to-Brent discount of up to $25/bbl at some point during 2012, owing largely again to the pipeline constraint leading to the oil glut at Cushing, OK, artificially depressing the price of NYMEX WTI.

The light and sweet Bakken crude is actually more suited for the refineries in the U.S. East Coast since plants there are mostly older and require higher grades of crude oil such as Bakken’s as feedstock, whereas the refineries on the Gulf Coast are geared more towards handling cheaper and heavier crude grades.

Further Reading: Seaway Pipeline No Panacea for Cushing's Oil Glut

This unprecedented huge spread between the land-locked Bakken, WTI and Brent has made shipping crude oil by rail across Maine to a refinery in the Maritimes an attractive alternative. For example, by mid- 2012, both Pan Am Railways and MMA were looking to move vast amounts of crude to an Irving Oil refinery in St. John, New Brunswick.

Pipeline’s Loss Is Rail’s Gain

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