A Railroad Megamerger Could Be A Boon To Canada’s Dirty Oil Industry

Shortly after 1 a.m. on July 6, 2013, Bernard Théberge stepped outside a bar in eastern Québec for a cigarette. At just that moment, a runaway freight train carrying 2.1 million gallons of oil throttled into Lac-Mégantic, a tiny town near the Maine border. The train derailed and exploded in a giant fireball. When he saw the flames, Théberge started pedaling away on his bike. Soon after, the entire downtown was decimated, killing 47 in Canada’s deadliest rail accident since 1894. 

“Smoking saved my life,” Théberge later told The Globe and Mail newspaper.

It was hardly the first accident of its kind. In 1996, a train carrying propane and natural gas flew off the tracks and exploded in an inferno that burned for weeks in a rural Wisconsin town, forcing 3,000 people to evacuate for nearly a month. Miraculously, no one was injured. 

The chief executive of the Wisconsin rail company behind the accident would go on to serve as CEO of Montreal Maine and Atlantic Railway, the company responsible for the Lac-Mégantic disaster 17 years later. MMA, as the firm was known, changed hands twice more, becoming a subsidiary of Canadian Pacific Railway in 2020.

Deregulation on both sides of the border has allowed railroads to rake in cash by cutting costs and consolidating the continent’s railways from 40 major rail companies in 1980 to just seven today.

Now Canadian Pacific is eying an even bigger prize — with a potential payoff from connecting Canada’s uniquely dirty oil fields to U.S. refineries on the Gulf of Mexico and creating what analysts say could be an attractive new backup route for crude producers if pipelines shut down. If successful, it could increase how much oil is passing by rail through certain parts of the United States, despite a long line of catastrophes. Since 2013, at least 20 more oil-freighting locomotives — dubbed “bomb trains” by environmentalists — went off the rails across North America.

The Calgary-based giant is seeking approval from U.S. regulators to buy rail giant Kansas City Southern in a $27 billion deal that would fuse the two smallest of the remaining so-called Class 1 railways into the first system with connections to the U.S., Canada and Mexico — but leave the continent with just six separate operators. The so-called “NAFTA super railway” could increase rail traffic of fast-moving, miles-long trains by over 300% in some regions.

At a regulatory hearing on the deal Wednesday, Bill Gluba, the former mayor of Davenport, Iowa, gave a grave assessment of what that could mean for a stretch of his Mississippi River city that hosts baseball games and festivals.

“When one of those trains derails while passing through one of these events,” Gluba said, “it won’t be 47 people killed like tragically happened in Canada, it will be hundreds of people.”

“This is a disaster of monumental proportions just waiting to happen.”

Currently, crude mostly makes its way from the tar sands producers in Alberta down to refiners in Texas and Louisiana via pipelines, which analysts say will continue to be the case, since rail shipments are always more expensive. The fraction of U.S. imports that do travel by train come by way of Canadian National Railway, which boasts North America’s longest rail network.

But Canadian Pacific and Kansas City Southern have long sought a piece of that market. Last year, Canadian Pacific started running specialized new oil trains carrying Canadian imports through Minnesota. The company declined to tell the Minneapolis Star Tribune how many of the new trains it was running. But the railroad’s chief marketing officer told Wall Street analysts in a July 2021 earnings call that he expects “the business to ramp up to 15 or 20 trains per month” as they travel down to Port Arthur, Texas.

In 2019, the two firms inked an unprecedented 10-year deal to haul oil bitumen — a thicker, more viscous type of crude that operators say is less prone to accidents because the flammable diluting substances are removed — from Canada down to the U.S. Gulf, using a new technology Canadian Pacific said is much safer and less likely to explode.

Railway officials say the flow of oil won’t be impacted by any merger. “The volume of crude oil shipments from source to refinery is determined by macroeconomic forces that will not be affected by the transaction, so the [Canada Pacific-Kansas City Southern] combination will not cause more crude oil to be shipped by rail,” Patrick Waldron, a Canadian Pacific spokesperson, wrote in an email.

But if the U.S. Surface Transportation Board gives the Canadian Pacific-Kansas City Southern merger the green light, the new route could make it cheaper and easier to ship crude that may have otherwise flowed through the now-defunct Keystone XL pipeline.

“It is a deliberate, intentional workaround for the loss of Keystone; at least, the fossil fuel industry is viewing it that way,” said Conan Smith, president of the Michigan Environmental Council, which opposes a merger that would likely increase shipments of oil through an area of Detroit known as the Great Lake State’s most polluted ZIP code.

“The oil industry has been looking to increase transport to those southern states by any means necessary,” he added. “The introduction of a secondary route is going to make that more viable.”

The federal regulator earlier this month extended the deadline for environmental comments on the proposed merger to Oct. 14.

Canadian Pacific said it’s hoping to see the biggest bump in profits after the merger from hauling cargo shipments. Known as “intermodal” shipments, the category has been one of the few sectors where railroads have seen significant growth in recent years as trucking gobbled up the freight market.

As a result, the railroad giant said its deal would help take long-haul trucks off the road. Railroads have often complained that trucking companies are unfairly subsidized in that they don’t pay to maintain federal highways, despite the damage increased tractor-trailer traffic causes, while rail operators are solely responsible for maintaining rail lines.

Intermodal shipping, Waldron said, would be the “primary driver” of new traffic, and could actually be a climate benefit, since the company projects it could reduce demand for as many as 64,000 tractor-trailer trucks.

U.S. imports of Canadian oil increased by nearly 50% between 2013 and 2021, according to Energy Information Administration data. But shipments by rail peaked in 2019 and plunged in 2020, when pandemic-induced lockdowns sent oil markets into chaos. Rail shipments returned to 2018 levels again in January 2021, but have declined steadily since.

The reason: Two pipelines got up and running. Last October, the Line 3 replacement project, a hotly protested 1,031-mile pipeline carrying crude from Alberta to Wisconsin, started operation, marking the first expansion of Canadian export capacity in at least six years.

Then Marathon Petroleum reversed the flow of the Capline Pipeline, a 632-mile conduit that had carried crude drilled off the Gulf Coast northward to refiners in the Midwest. The reversal project, completed in January 2022, will at maximum capacity ship 200,000 barrels of oil per day from Illinois to Louisiana. Its initial shipments are “100% Canadian crude,” the pipeline’s operator, Plains All American Pipeline, said in a November earnings call.

“Shipping oil by rail, no matter how you slice it, is going to be more expensive than shipping oil by a pipeline,” said Clark Williams-Derry, an oil analyst at the Institute for Energy Economics and Financial Analysis, a nonprofit research outfit. “It is unlikely that oil by rail would be the first choice for Canadian producers to try to get oil down to the Gulf, because it’s so expensive.”

But part of what makes it so costly is that every time a railcar switches to another company’s tracks, it pays that railroad a fee. Since rail shipments are usually a “backup policy, almost like insurance if the pipeline system fails, or it’s overloaded, or there’s too much production,” he said the combined railroads could offer a cheaper route.

“What this does is make that second option more attractive and a little more beneficial to oil producers because they may be able to get it to the Gulf at a slightly lower cost,” Williams-Derry said.

Analysts polled by S&P Global last year said a spike in rail shipments would only come if more pipelines shut down. The Dakota Access Pipeline, which primarily conveys crude from North Dakota’s Bakken oil fields to U.S. refineries, will face a legally mandated environmental review that activists hope could lead to the closure of a project that has already leaked multiple times. In Canada, opposition is mounting against the contentious Trans Mountain Pipeline, which would funnel oil from Alberta to British Columbia.

If those projects fail, or if legal challenges or activists disrupt the flow of oil through operating pipelines, then there would likely be an uptick of shipments by rail.

The Surface Transportation Board’s approval of the Canadian Pacific-Kansas City Southern merger is not guaranteed. The Biden administration has signaled greater skepticism of industry consolidation, and appointed multiple members to the five-person board with backgrounds in passenger rail.

Indeed, President Joe Biden, known throughout his career as “Amtrak Joe” for his enthusiastic commutes on the Northeast rail corridor, has vowed to vastly expand the nation’s network of passenger trains.

“We have an opportunity to transform our train systems as essential infrastructure of this country,” environmental activist Winona LaDuke wrote in an op-ed opposing the merger. “After all, trains are the most efficient way to move freight. And those trains should be safe, full of people and not dangerous freight.”

Outside the Northeastern U.S., Amtrak’s trains use freight rail lines, and federal laws require passenger locomotives to get priority access.

“There’s a lot of friction there because they don’t mix too well, operationally speaking,” said Lawrence Gross, a freight transportation analyst and founder of Gross Transportation Consulting. “Freight trains are supposed to get out of the way, but freight trains are two miles long, so they’re not agile.”

Compared to the lucrative cargo shipments, the passenger trains with only a few coaches “carrying 60, 70, 100 people” are “gumming up the works from a railroad perspective,” he said.

While unions representing rail employees nearly crippled the U.S. freight system in a fight over working conditions, others in the labor movement have opposed a merger they say could reduce jobs at West Coast ports. The deal would “greatly harm our maritime and industrial labor by diverting the cargo coming through our US ports in favor of Canadian ports,” United Steelworkers Local 592 President Jared Moe told Sen. Maria Cantwell (D-Wash.) in a February 2022 letter.

“This will ultimately cost much of our community their livelihoods,” he said.

Warning that the merger would mean Canadian Pacific decamps from its Minneapolis headquarters for Kansas City, Missouri, Rep. Betty McCollum (D-Minn.) urged the Surface Transportation Board Chairman Martin Oberman to “strongly consider” the “potential negative economic impacts on our community” in a letter sent earlier this month.

Rep. Katie Porter (D-Calif.) said in a five-page letter to the board: “The proposed merger represents a grave threat to competition in the domestic rail industry, which is already highly consolidated. It would likely lead to job losses, harm to other industries reliant on railroads, and more fragility in American supply chain infrastructure.”

Perhaps unsurprisingly, rival Class 1 railroads have raised objections to the deal. But “while there’s the feeling that if you had a combination of two of these giants, it would create a behemoth that others would have to match,” ending up “with just two or three railroads in North America,” Gross said the merger would allow two of the smallest companies to compete in a system already dominated by bigger giants.

“You could make the case that this is bringing the system more into balance than it was before,” he said.

The Surface Transportation Board held three days of hearings on the merger this week in Washington, D.C. On Friday, the regulator added another three days of hearings, set for next week.

Whether the oil shipments will weigh on the approval is difficult to tell.

“If you don’t have the pipeline and it makes economic sense, the stuff is going to move by rail, one way or the other,” Gross said. “This becomes more of a story of how it moves rather than whether it moves.”

CORRECTION: This story was updated to amend Bill Gluba’s first name.