Ribbons of Steel 2: Ensuring an Economic Future for Petrochemicals and Petroleum Fuels

Published On: April 28, 2020

Executive Summary

Rail has been a vital link for commerce since the Canadian Confederation. In fact, we are reminded of its importance every time there is a service disruption either due to accidents, labour issues, weather or civil protests. CERI has undertaken a detailed review of how rail impacts Canada’s crude and petrochemicals market. Can oil companies and petrochemical companies depend on rail as part of their logistical lifeline? If so, what does that mean for investment in rail infrastructure?

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One of the main objectives of this study is to determine the makeup of commodities currently transported by the rail system in Canada. This information, combined with a perspective of future growth or decline on a commodity by commodity basis will help establish a future view of the commodities that could be moving on the rail system in 2025, with a focus on petrochemicals and petroleum products, including crude oil. The study also outlines the Canadian rail-based supply chain, including shippers, terminal operators, and ports, since the performance of the system can be affected by any stakeholders involved in the movement or handling of rail freight traffic.

While road transportation is a primary mode for moving freight, rail transportation touches nearly every sector of the Canadian economy, including manufacturing, agricultural, natural resources, wholesale and retail sectors, and tourism (Transport Canada 2018a). It represented nearly 10 percent of the total transportation and warehousing sector in 2018 or $8.4 billion in GDP contribution.

In 2018, the top categories that made up the rail traffic (with percentage shares in brackets) were: coal (14 percent), containerized cargo (14 percent), grain (13 percent), forest products (9 percent), chemicals (8 percent), petroleum products (8 percent) and potash (7 percent). (Transport Canada 2018). The monetary values of freight almost doubled, increasing to $143 billion in 2018 compared to nearly $75 billion in 2009.

Overall, in Canada, in terms of tonnes, total freight demand for all commodity groupings is expected to grow throughout the study period except for the minerals category, which is expected to remain flat.

Figure E.1 shows the total freight in Canada and to US/Mexico markets is foreseen to increase from 312 million tonnes in 2019 to 370.4 million tonnes in the year 2025, growing by 11.2 percent. In comparison to the 2015-2018 period, the growth will amount to almost 19 percent. Agriculture products, plastic and chemical products, and coal account for half of the total freight moved by rail. In a scenario where none of the new oil pipelines are operational by 2025, we predict that the fuels category, which includes fuel oils and crude petroleum, will also be among the top commodity groupings transported by rail.

Source: CERI

When it comes to destination markets, the Prairies region will continue to dominate the rail traffic, with the top two destination markets – Western region and the US/Mexico markets in the forecast period. Together these two destination markets make up more than 75 percent of freight volumes originating in Alberta.

The Western region will experience growth, as well. About 60 percent of rail traffic in this region is intraprovincial, mostly destined for Western coast ports for international exports, with just over 20 percent of traffic is directed to the US/Mexico markets. The rest is moved to other regions in Canada.

A significant portion of Central region’s rail traffic will move to the US/Mexico markets, ranging 40-45 percent for provinces of Quebec and Ontario, respectively. The remainder is moved within the Central region and to Western, Prairies and Atlantic regions.

As for the Atlantic region, three-quarters of rail traffic originating in this region will be moved to the Central region, about 10 percent to the US/Mexico, and the rest is split among other regions in Canada.

For the 2019-2025 period, on average, the fuel oils and crude petroleum and plastic and chemical products rail traffic will increase by 1.7 percent and 1.9 percent, respectively (See Figure E2).

Figure E2: Regional Fuels and Petrochemicals Inflow and Outflow Comparison 2018-2015

Source: CERI

Baseline crude by rail volumes assumes completion of three main export pipelines that are in various stages of construction – Line 3, Trans Mountain Pipeline System (TMX) and the Keystone XL Pipeline (KXL). In addition, in summer 2019, pipeline companies have made several announcements on their plans to add additional pipeline capacity to alleviate some egress issues (CERI 2019). CERI’s baseline rail forecast does not incorporate these debottlenecking projects, as some of them remain uncertain.

It is expected that if none of the three pipelines are onstream within a relatively short time frame (2020- 2025), additional crude by rail volumes are expected. Another factor that plays into increasing crude by rail volumes is that the Government of Alberta exempts the crude barrels transported via rail from the ongoing provincial crude production curtailment. The additional volume of crude and bitumen to be moved by rail is estimated to increase substantially, depending on whether one, two or all three pipelines are operational.

In the case of all three operating pipelines (i.e., baseline scenario presented above), the crude and other fuels transported on rail would grow from 280,000 bpd in 2019 to 360,000 bpd by 2025. In a scenario where no pipelines are operational, the crude fuel volume is expected to reach almost 1.4 million bpd by 2025. The other two scenarios present cases of various degrees of available incremental pipeline capacity – with Line 3 and no TMX or KXL scenario, volumes will reach just above a million bpd; with Line 3 and TMX and no KXL, volumes will be less, averaging around 400,000 bpd in 2025. Figure E3 illustrates crude by rail scenarios.

Source: CER, CERI

As seen in Figure E.4, the total annual capital investment is forecast to grow from $2.5 billion in 2019 to $4 billion in 2020, reaching almost $5.3 billion by 2025, representing a 26 percent growth in the short term from 2020 to 2025. Approximately half of the investment directed towards track and roadways, followed by building and machinery, rolling stock and signals and power systems. Other elements, such as terminals and fuel stations, will account for a smaller share of investment. In comparison, in 2018, close to $2.4 billion was invested into Canadian rail-based network, up 30.6 percent from the previous year and 37.1 percent from the 2013–2017 average (Railway Association Of Canada, Pre-budget 2019 n.d.).

Source: CERI

This outlook is based on the economic conditions as per “business-as-usual,” in other words, the forecast depends on the prevailing market, social, geopolitical, and trade environments. The uncertainty of this forecast is the current global events. At the time of publication of this report, the world was battling a COVID-19 pandemic, which resulted in an immediate energy demand drop, resulting in the oversupply of crude and, consequently, a sharp reduction in oil prices. These events already have had global and domestic impacts, and depending on the duration, could result in a further negative impact on energy demand, economic growth, rail traffic demand and, consequently, capital investment.

Alberta’s Industrial Heartland (AIH) is presented in this report as a case study to analyze the rail transport of petrochemical and chemical products, and fuel oil and crude petroleum. Fuel oils and crude petroleum and plastic and chemical products are considered the two major transported commodities from Alberta, and by inference, from the AIH. Shippers and the railways are currently working together to assess growth projections and ensure adequate capacity is available for future freight tonnage in the region. CERI’s investment model estimated that an additional investment of $339.2 million would be needed in the AIH to accommodate new facilities that will become operational in this period. As a result of additional investment, the AIH region will see further economic benefits from the spin-offs of this investment. The GDP impact is measured to be almost $6.7 billion over the six years, more than a 10-fold impact.

The study also presents key challenges and opportunities for the rail-based supply chain. The key rail challenges that were identified during CERI’s interviews with rail-based supply chain participants include delays and congestion, lack of metrics, yard and terminal capacity, planning and forecasting, and communication. The key opportunities include employing a holistic approach among all members of the supply chain to address problems facing the entire network, adopting standard metrics and indicators, integrating the performance measurement system into the decision-making process, and embracing new technologies.

This study also reviewed different approaches to how rail networks are managed in Australia and Europe. When economic and market cycles occur, the government might need to intervene, and the Australian and European cases have shown that a hybrid model of investments/control of the railroad market is an option to managing the long-term infrastructure requirements of a rail network. This is not to say that Canadian railways should be operated similarly, rather this provides an alternative business model and examples. The Australia and United Kingdom examples of alternative strategies for how to fund and operate rail infrastructure are instructive but would be difficult to implement in North America.

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