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New restrictions could derail oil-by-rail shipments

More than 21,000 oil cars set to be made obsolete in November
Oil railcars in a Vancouver rail yard.| Chung Chow

(This story has been updated with recent comments from Alberta Premier Rachel Notely.)

The discount on Canadian crude oil hit a record last week – about US$50 per barrel – due in part to severe pipeline constraints that have forced more oil to move by rail.

In July, a record 206,624 barrels per day of Canadian oil was shipped by rail to American refineries.

Now, even that option could be severely crimped, thanks to accelerated Canadian railcar safety regulations and a unilateral move by the BNSF Railway (NYSE:BNI) in the U.S. that could potentially take a significant number of oil cars off the tracks.

All major oil pipeline expansions in Canada and the U.S. have faced regulatory delays: the Trans Mountain pipeline expansion, the Keystone XL and Line 3.

That has forced more oil to move by rail, which is more expensive and, in some cases, more hazardous than moving it via pipelines.

The 2013 Lac-Mégantic explosion that killed 42 people underscored that danger, although in that case, the oil cars were carrying Bakken shale oil, which contains explosive methane gases, unlike the heavier crude that Alberta produces.

To address safety concerns arising from oil shipped by rail, Transport Canada has ordered some 21,367 “unjacketed” oil cars to be retired as of November 1.

That alone could decrease capacity to move oil by rail and exacerbate the already steep discount for Canadian oil.

“It is significant, because you know what kind of volumes are moving right now,” said Brad Herald, vice-president of Western Canadian operations for the Canadian Association of Petroleum Producers. “So any car, I think, that comes out of service right now is a concern for the industry.”

Transport Canada and U.S. regulators have accelerated the phase-out of older unjacketed railcars. They were to be phased out 17 months from now but are now scheduled for retirement November 1.

These cars, which go by the model number 1232, must be replaced either with the new TC-117 or a retrofitted 1232 called the TC-117R.

The main difference between the 117 and 117R is that the latter retrofitted car has a steel shell that is 1/16th thinner than the newly built 117.

But following a massive derailment in Iowa in June involving some 117R cars, the BNSF Railway said it plans to restrict the use of the 117R oil cars as well.

When there is a derailment, the railway operator is responsible for the damage it causes, so companies like BNSF are understandably concerned that the 117R still isn’t safe enough, based on the Iowa derailment.

That derailment resulted in 160,000 gallons of oil spilling into the Little Rock River. Some of the oil cars punctured in that accident were the retrofitted 117R oil cars.

Conrad Tannhauser, editor of The Rail Mart, a railroad equipment trade journal in the U.S., said that if BNSF is allowed to ban the 117R, a significant number of oil cars will be removed from the fleet. He fears Canada will follow suit and also ban the 117R.

“If this goes through, and Canada doesn’t allow these cars, that means all cars built before 2016 that were hauling crude are no good anymore,” he said.

“And you’re talking $5 billion worth of equipment and costs. You’re wiping out cars that were built three years ago that were supposed to have a 50-year life on them.”

In response to queries from Business in Vancouver, Transport Canada confirmed that both the TC-117 and the TC-117R (the retrofitted cars) are approved under new regulations in both Canada and the U.S.

But Transport Canada also confirmed that individual railway operators, like BNSF, may be able to use “pricing” as a way to keep the 117R off their railway lines.

“A railway operator may decide to incentivize the oil and gas industry to use, for example, a new DOT/TC-117 tank car for the transport of crude oil as opposed to a retrofitted car (i.e., the TC-117R),” Transport Canada spokeswoman Marie-Anyk Côté said in an email.

“These incentives are structured through the pricing/cost of transport on a particular railway operator’s network depending on the selection of the tank car. The tank car must still always meet regulatory requirements.”

Asked to confirm that BNSF plans to restrict the 117R, Gus Melonas, a Pacific coast regional public affairs officer for BNSF, would say only that “BNSF wants crude to move in the safest cars, and we’re working with our customers toward that goal.”

Last week, Western Canadian Select oil was selling for US$25 per barrel compared with US$72 for West Texas Intermediate.

Much of the discount is due to the inability of Canadian oil producers to get their oil to American refineries  either by pipeline or by rail, so any additional reductions in capacity could increase that discount.

“The industry is still trying to play catch-up on new locomotives to move the increasing demand,” said Dan McTeague, an analyst for “So I can only imagine this presents a real threat to the expansion of crude by rail.” 

On October 22, Alberta Premier Rachel Notley said she would call on the federal government to increase the efficiency and capacity of railways to move oil by rail, as a stopgap measure, until new pipelines can be built.

"We need more cars," Notley said. "We need to order more locomotives in order to get more cars onto rail."

Asked if she was suggesting that Ottawa make direct investments in oil cars and new locomotives to move more oil by rail, Notley confirmed she was. She said the discount on Alberta oil is costing the Canadian economy $40 million per day.

"With the differential at the rate that it's at right now, it's notably more than that," she said. "So, quite frankly, the federal government can look at its impact on its own books and understand that it's a value-for-money kind of investment.

"Surely, if Ottawa can write off $2.6 billion in tax dollars paid to the auto industry in Ontario, it can support our oil industry with smart investments to help close the differential and return billions of dollars to the Canadian economy."

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