Quebec derailment will lead to tighter regulations on crude-by-rail: Moody's

Washington (Platts)--12Jul2013/1118 am EDT/1518 GMT


The deadly July 6 derailment of a train carrying crude in Quebec will likely lead to new safety regulations, raising costs for North American oil producers and limiting near-term growth of crude-by-rail shipments, according to a report by Moody's.

The disaster, which partially destroyed the town of Lac-Megantic and killed at least 24 people, "will inevitably lead to increased US and Canadian government scrutiny and permitting delays, along with higher costs for shippers," Moody's said in its Thursday report.

"Any slowdown in rail shipments of crude will pressure producers focused on the Bakken shale oil formation, which depends far more on rail than on pipelines for transport," the firm said.

About two thirds of North Dakota's Bakken oil production, which surpassed 727,000 b/d in April, is transported by rail, due to a lack of pipeline capacity, Moody's said, adding that Bakken-focused producers, such as Whiting Petroleum, Continental Resources, Oasis Petroleum and Kodiak Oil & Gas could be particularly hurt by the disaster.

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The train that derailed in Lac-Megantic was carrying Bakken crude.

Some rail safety advocates have called for tighter requirements, including thicker shields on the rail cars that carry crude and other hazardous materials.

Another analyst, meanwhile, said any regulatory changes would likely be made at the federal agency level, as he doubts US lawmakers will make widespread calls for tighter regulations.

Kevin Book, managing director of research with ClearView Energy Partners, called the accident "an outlier in terms of scale and consequences."

"We don't anticipate congressional action regarding railcar safety for crude-by-rail at this juncture," Book said in an email. "A series of such accidents would provide a stronger catalyst for lawmaker action."

Indeed, lawmakers who head the various congressional committees and subcommittees with jurisdiction over railways indicated to Platts that while safety is a top priority, they are focusing on the cause of the disaster and ways to mitigate future such incidents.

A spokesman for US Senate Commerce Committee Chairman John Rockefeller, Democrat-West Virginia, said the senator has been in contact with both the Federal Railroad Administration and the National Transportation Safety Board.

In addition, the senator requested in August 2012 that the Government Accountability Office conduct a comprehensive review of US freight safety regulations, which is expected to be completed in the coming months, the spokesman said.

Rockefeller "believes that regardless of how crude oil is transported, whether it be via rail or pipeline, it is imperative that it be done in the safest manner possible," the spokesman said.

ANALYSTS DISAGREE ON IMPACT ON KEYSTONE XL

The ratings firm said the accident could delay the development of further rail routes and put pressure on the Obama administration to approve the controversial Keystone XL pipeline.

Pipeline advocates, who have been pushing the White House to approve the proposed $7 billion project, have said that pipelines cause fewer spills and leaks than rail shipments, while the rail industry has countered that pipeline spills are typically more damaging in scale.

But Book disagreed with Moody's, saying he does not expect the accident to impact the Obama administration's Keystone decision.

Book said that many shippers who want the Keystone pipeline to be approved also rely on railroads. In addition, the size of potential Canadian crude exports to the US means that both the pipeline and crude-by-rail shipments can thrive, he said.

"Over the intermediate term, volumes that transit [the Keystone pipeline] are likely to be an addition to, not a substitute for, crude by rail," Book said.

--Herman Wang, herman.wang@platts.com
--Edited by Keiron Greenhalgh, keiron.greenhalgh@platts.com

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