Moody's warns of rising oil-by-rail costs after Lac-Mégantic

Credit rating agency Moody's says it expects the deadly train disaster in Lac-Mégantic, Que., to make shipping oil by rail more costly, putting pressure on both major railroads and oil producers.

Moody's says the disaster will inevitably lead to increased scrutiny and result in regulatory delays from Canadian and U.S. governments.

That's expected to increase capital and operating costs for rail companies — as has been the case in the past.

The July 6 incident, in which a Montreal, Maine & Atlantic Railway Ltd. train carrying 72 carloads of crude rolled from an overnight parking spot into the town, derailed and exploded, is the worst Canadian train disaster in more than 103 years.

Twenty bodies have been recovered and a total of about 50 people are "probably dead," Chief Inspector Michel Forget of the Surete du Quebec police, said Wednesday.

That toll would put the Quebec incident as the deadliest train disaster since Jan. 21, 1910, when the back half of a Canadian Pacific Railway Ltd. passenger train derailed, killing 63 at Spanish River, Ontario. The train, heading for Minneapolis, came off the tracks after it struck the end of a bridge, according to a government database.

Bakken region most affected

Crude producers in North Dakota's Bakken region — the origin point of the oil-laden train that derailed and exploded over the weekend — are expected to take a hit.

About two thirds of North Dakota's daily production — at 727,000 barrels per day in April — moves to market by rail in the absence of sufficient pipeline capacity.

Even though rail tolls are more expensive than those of pipelines, moving crude by train has some advantages, Moody's said. For instance, crude can move easily to coastal ports by rail, enabling it to be sold in lucrative overseas markets. Contracts to ship on rail also tend to be more flexible than on pipelines.

"But the accident threatens to delay the development of further rail routes, and will prompt a re-evaluation of pipeline transport as an alternative to rail," Moody's said.

"Today, refiners on the U.S. East and West Coasts buy Bakken and mid-continent crude at prices that satisfy both parties, but they rely on rail, since most major North American crude pipelines run north to south, not east or west."

Pressure on Obama over Keystone XL

Moody's also says the Lac-Mégantic disaster will put pressure on the Obama administration to approve TransCanada Corp.'s Keystone XL pipeline, which has been stuck in regulatory limbo for years.

If approved, that project will connect oilsands crude — and some Bakken production — to refineries on the U.S. Gulf Coast. With the hold-up in building Keystone XL, more and more oil freight have been moving to that market by rail and even river barge.

TransCanada CEO Russ Girling told reporters earlier this week that he fails to see any upside for Keystone XL as a result of the Lac-Megantic tragedy, saying "there's no good news here for anybody."

The CEOs of two major oilsands companies said this week that while pipeline transport is their preference, rail will continue to play a role.

"We know that the safest way of getting crude and petroleum products to market is by pipeline. The American safety statistics clearly, clearly demonstrate that," Suncor (TSX:SU) CEO Steve Williams told reporters at an energy conference on Wednesday.

Suncor, Canada's largest oilsands producer, moves very little of its crude by rail.

"In the long run, there will always be a mix of different transportation modes," he said.