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Commentary on Fraser Research Bulletin: Safety in the Transportation of Oil and Gas: Pipelines or Rail?

Synopsis of the Report

Last week, the Fraser Institute’s research unit published a report by Dr. Kenneth Green and Taylor Jackson that sought to compare the safety records of Canadian railways and pipelines for transporting oil and gas products.  These researchers concluded that per volume of product transported, pipelines have a greater safety record than rail.

However, as the authors point out, it is difficult to do a direct comparison between rail and pipeline transport of petrochemicals.  In part, this is because the two industries are regulated differently, resulting in dissimilar safety classifications and standards for pipelines and railways.  Furthermore, market dynamics strongly impact producers’ choices of transportation modality, an aspect of the oil transportation comparison that was left out of the Fraser Research report. 

For example, the costs of shipping oil by rail are generally much higher than for shipping by pipeline, making rail an unattractive and uneconomic option except under short-haul, short-term circumstances.  Where pipelines are available, they are virtually always the more financially attractive option for moving oil products over long distances which is why industry contends that projects like Energy East make good financial sense.  Except, as the Fraser Research team pointed out last week, it is not always easy to directly compare rail systems and pipeline systems, and the two transportation modalities are certainly not directly interchangeable.

In the case of Energy East, the current oil by rail traffic from west to east isn’t a direct competitor for the product that would be shipped on this pipeline network.   Although some Alberta oil moved by rail, much of the oil moving on rail systems through Northwestern Ontario in 2013 came from the Bakken shale fields in the U.S. Midwest, Saskatchewan, and southwestern Manitoba (Figure 1).[1] Energy East is intended primarily to move Alberta tar sands products, with only a minor reliance on Bakken shale products, if these are still being extracted by the pipeline’s in-service date of 2020.[2]

Figure 1. Canadian fuel oil shipments by rail from 2009-2013, from western provinces to eastern provinces.  Saskatchewan is a leader in fracking extraction, primarily from the north end of the Williston (Bakken) basin, which reaches into southwestern Manitoba.  Alberta production is a combination of conventional and tar sands operations. 

Figure 1. Canadian fuel oil shipments by rail from 2009-2013, from western provinces to eastern provinces.  Saskatchewan is a leader in fracking extraction, primarily from the north end of the Williston (Bakken) basin, which reaches into southwestern Manitoba.  Alberta production is a combination of conventional and tar sands operations. 

As one reads through the Fraser Research report, it becomes obvious that comparing relative safety records between rail and pipeline systems can be a bit of a game of statistical manipulation.  Completely conflicting conclusions can be supported depending on which statistical analyses and which safety values one chooses to emphasize.   For example, on fatality and injury records or spill frequency, pipelines fare better than railways, but for spill volumes, pipelines are far worse than railways. 

Between 2003 and 2013, there was an annual average of only 27 oil by rail spills versus 111 such spill for pipelines, so based on this statistic, one could reasonably conclude that rail is the safer mode of transport for oil and gas products.  But then, the authors argue, in 2013 pipelines shipped 15 times more petrochemical product than railways, and if you look at the rate of spills per million barrels of product transported, pipelines had about 4.5 times fewer spill incidents than railways between 2003-2013, so railways have a higher spill frequency than do pipelines.  Thus, pipelines are safer for transporting oil products than are railways.  But then again, rail fared better than pipelines when it came to spill volumes: 73% of rail occurrences released product to the environment, whereas 84% of pipeline occurrences released product.  So, again, rail is safer than pipelines for transporting petrochemicals.

The authors present two U.S. reports that corroborate that while rail has a higher spill frequency, pipelines spill greater volumes of oil.

First, they present the highly controversial U.S. State Department final Environmental Impact Statement on Keystone XL, a report that received scathing reviews from the environmental resource management community, with the U.S. Environmental Protection Agency describing its analysis as “inadequate” and “insufficient” on climate impacts, oil spill risks, and threats to water.  The credibility of the US State Department’s report was further undermined when it came to light that the consulting firm that had prepared it, Environmental Resource Management, had close ties to Keystone owner TransCanada and had been recommended to the State Department by the company.[3]

Despite the State Department report’s shortcomings, it did confirm that while oil by rail in the U.S. had the highest incident frequency, rail spills had lower volumes than pipeline spills.  Relative to rail and other transportation modalities, pipelines had the highest number of barrels of oil released per ton-mile, as well as the highest number of barrels released per barrels transported.   The Fraser Research team commented that in pipelines’ favour, at least pipeline spills, because of their larger volumes, have tended to result in more spilled product being recovered per incident than small volume rail spills.

The second report the Fraser Research team looked at was an analysis by the Manhattan Institute, a U.S. analog to the Fraser Institute.  Wikipedia describes the Manhattan Institute as a “conservative American think tank” whose policies include promoting hydraulic fracturing as a means of stimulating the American energy economy.  Corroborating the State Department’s report, the Manhattan Institute found more oil by rail incidents (2.08 incidents per billion ton-miles per year) than for pipelines (0.58 of “serious” incidents per billion ton-miles per year) – so a higher frequency of incidents for rail – but that pipelines released much greater total volumes of oil products per year (6.6 million gallons per year).  When adjusted to account for the fact that pipelines move more product than railways, rail still came up considerably lower for spill volumes: pipelines released about 11,286 gallons per billion ton-miles; rail spilled only 3,504 gallons per billion ton-miles. 

The Fraser Research report plus the two U.S. analyses demonstrate that pipeline spills result in greater volumes of petrochemicals being released to the environment than occurs through more frequent but much smaller rail incidents. 

 

What Drives Oil by Rail?

Rather than allowing the data to speak for itself, the Fraser report concludes with a rather wild leap in editorial logic when the authors state, “At present, resistance to pipeline transport is sending oil to market by modes of transport that pose higher risks of spills and personal injuries, such as rail and road transport.”  It is a peculiar concluding comment given that the authors have not presented any evidence to support their contention that oil by rail volumes have increased because of popular resistance to pipelines.

In fact, the authors are somewhat misleading in their analysis of oil by rail dynamics, and this is a very crucial oversight.  Although the pipeline industry and its proponents, including the Fraser Institute, present evidence that plays to very legitimate public safety concerns around rail transportation, the crux of the whole rail versus pipeline argument is fundamentally an issue of economic market dynamics.  If oil by rail isn’t economically viable, it fails irrespective of any safety arguments either for or against it.

Aside from alleging that popular resistance to pipelines is driving growth in oil by rail, the present Fraser Research report does not explore the factual reasons underpinning the recent boom in oil by rail, nor does it discuss the subsequent contraction of oil by rail transportation in 2015 as global oil prices have plummeted.   However, earlier work done in 2013 by the same author, Kenneth Green, for the Fraser Institute explains that oil by rail becomes an attractive option for several reasons, not simply because pipeline capacity might be lacking.[4]   In his 2013 analysis, Green comments that rail already exists as an extensive network that often runs near to oil extraction and processing facilities.  It is also far cheaper and faster to bring rail loading and offloading terminals online than it is to construct pipeline infrastructure.  Finally, rail shipping does not require shippers enter into potentially risky, long-term freight contracts as are necessary with pipeline distribution.

The 2015 report misleads its audience into assuming a trend line exists toward ever-increasing oil by rail transportation, simply because between 2003 and 2013, oil by rail traffic increased substantially (166% as evidenced by StatsCan data cited in the report).  However, if you extend the analysis to include the same StatsCan data for 2014 and the first half of 2015[1], it becomes abundantly clear that oil by rail is not experiencing an unfettered boom (Figure 2).  At its peak in January 2014, there were over 17,000 oil by rail cars shipped in that month, but by May 2015, the most recent month for which data are available, only 9,879 oil by rail cars were in service, a level equivalent to what was seen in early 2012 prior to the oil by rail boom.  As subsequent months this year come online, it is likely that oil by rail numbers will fall even further as production continues to slow in North America with the falling price of oil.

The downturn in global oil prices and oil futures over the past year has taken a toll on high cost extraction projects.  Highly specialized processes are needed to extract oil from tar sands and through hydraulic fracturing (fracking).  These processes are also very costly.  Alberta tar sands operations are particularly heavy on infrastructure requirements, with new operations taking many years to come online and at tremendous investment costs.  Compared to tar sands operations, hydraulic fracturing can be started up and shut down relatively quickly although operating costs run high largely because fracking is an extremely energy intensive process and wells have very limited lifespans (3-5 years on average; tar sands mines last decades) so exploration costs are also very high for fracking. Oil prices must be robust for producers to realize a profit: many tar sands operations break even when oil is fetching around $65 per barrel, and for some of the most marginal projects, the break even point is higher than $90 per barrel.  Bakken shale fracking operations similarly need prices between $58 and $80 per barrel to break even.  

 

Figure 2.  Railcar loading of fuel oil, crude petroleum, gaseous hydrocarbons and liquefied petroleum gases in Canada from 2012 through the first half of 2015.

Figure 2.  Railcar loading of fuel oil, crude petroleum, gaseous hydrocarbons and liquefied petroleum gases in Canada from 2012 through the first half of 2015.

 

In early August, West Texas Intermediate (WTI), the standard for North American crude oil, was trading at its lowest level in years, below $46 per barrel.  By mid-August, this price fell further to less than $42 per barrel.  Alberta’s Western Canadian Select (WCS), the price benchmark for tar sands oil, always trades lower than WTI because of the additional costs refiners must incur to upgrade this dirty product.  As of mid-August, WCS futures market forecasts prices are between $13 and $19 per barrel over the next several years.  With oil prices a mere fraction of the break-even point for extraction operations, several proposed Alberta projects have been cancelled outright, while existing operations have been scaled down.  In the Bakken, where it is easier to bring a project online quickly, operations have simply shut down while producers hope to weather the low price storm. 

All of this volatility in oil prices affects transportation dynamics.  With the Bakken being slowed, there is less demand for rail networks to transport this product.  With tar sands mines contracting, and new projects being shelved, future distribution demands are similarly in flux.  Consequently, we see declining oil by rail traffic on Canadian networks. 

It is entirely possible that projects like Energy East, which was intended to satisfy future transportation demand in line with expanded tar sands development, will simply not be needed if oil prices remain low for a long time and Canadian oil production continues to slow.  Existing pipeline networks may be all that is required to continue to meet current demand if there is no future growth in this sector.

 

What is the future for Canada’s energy sector?

The truth is, no one can accurately predict what global oil markets will do.  Few would have speculated five years ago that OPEC would flood world oil commodities market in an aggressive bid to capture global market share.  Nor would many have predicted a decade ago that the U.S. would produce a glut of domestic oil through shale fracking, such that the U.S. oil inventory is now at its highest volume in 80 years.[2]  The impact of these two processes on world oil prices has, of course, been catastrophic.

The oil shock is happening as climate concerns are rising around the world, and international political and business leadership, the Pope and other faith leaders, and the general public are pressing for energy options that don’t break the carbon bank.  If the price of oil stays low for a sufficiently long time, it will be enough of a window to allow for disruptive clean energy technologies like solar to reach long-term price parity with oil.  And if this happens, renewables are likely to gain a foothold on a broad scale.  We may one day see that our current oil price depression served a crucial system shock: oil prices might never recover and instead we will recognize the present years as the beginning of a clean energy revolution. 

Indeed, in looking at solar technology implementation growth curves, it becomes evident that the long-term oil price depression has already been sufficiently lengthy to have started this process because solar uptake is already happening at an exponential rate globally.  

The future of energy globally, and in Canada, is dynamic and in a period of massive change that political and business leadership would do well to study critically and shrewdly because innumerable investment opportunities abound.

 

 

[1] Statistics Canada (2015).  Table 404-0021: Rail transportation, origin and destination of commodities, annual (tonnes). http://www5.statcan.gc.ca/cansim/a26?lang=eng&retrLang=eng&id=4040021&pattern=&csid

[2] Given current depressed oil prices and the resulting slowdown of high cost Bakken shale hydraulic fracturing exploration, anticipating steady and long-term production out of the Bakken isn’t necessarily a given.  See further discussion on this toward the end of this document.  

[3] Horn, Steve.  31 January 2014.  State Department Releases Flawed Keystone XL Final Environmental Review In Super Bowl Friday Trash Dump. DeSmogBlog. http://desmogblog.com/2014/01/31/keystone-xl-final-environmental-impact-statement-released-still-flawed/

[4] Angevine, G. and Green, K. (2013).  The Canadian Oil Transportation Conundrum.  Fraser Institute https://www.fraserinstitute.org/uploadedFiles/fraser-ca/Content/research-news/research/publications/canadian-oil-transport-conundrum.pdf

Richard Tolton