Will Worries About Losing Overall Rail Network Capacity Force More CBR To Shorter Trains ie. Higher Costs, Less CBR Effective Capacity?

Feb 22, 2020


We certainly don’t have inside knowledge of the Transport Canada discussions, but CN’s Feb 16 response to the modified Feb 16 restrictions points to the primary problem to solve and therefore the likely implications to crude by rail (CBR) when Transport Canada announces the permanent CBR safety restriction on or before April 1.  These new safety restriction are in response to the second CP crude by rail tank car derailment and fire on Feb 6 (the first was Dec 9) near Guernsey, Sask, Transport Canada immediately put temporary CBR safety restriction on Feb 6, but then surprised with modified CBR safety restrictions on Feb 16.  We believe CN’s Feb 16 press release was significant as it points to the real problem for the Liberals on putting in new crude by rail safety rules.  The original Feb 6 restrictions of slower speeds for CBR >20 tank car trains would reduce CN’s overall rail network capacity by 1/3. No one is going to say making CBR safer isn’t a key priority.  But we think we also found the other priority – not hammering Canada’s rail network capacity and impacting all sectors ie. agriculture, bulk, coal, etc.  If as CN points out that its slow speeds that hammer the overall network capacity, then it seems logical that the upcoming CBR safety restrictions will disincentivize longer (>80 tank cars) trains moving at slower speeds by disproportionately restricting/adding costs to try to get more smaller (<80 tank cars) moving at the highest speeds allowed. Its not just higher costs per barrel, if industry is incentivized to use shorter trains, it will inevitably reduce over all CBR capacity. We don’t believe there is sufficient space locomotive and conductor capacity to add more trains to make up for the shorter trains.  Lastly, we think the likely scenario is to also disincentivize CBR away from the DOT-117R Retrofits and Jacketed CPC-1232 tank cars but, we don’t see the Liberals move to an earlier than planned phase out of these tank cars as we have been expecting. That would be a double hit to overall CBR capacity.  This may be our guess, but CN’s comments and the surprise modified restrictions on Feb 16 certainly make the guess seem logical.  We have to believe higher CBR costs will be the end result of the upcoming April 1 permanent changes.

2nd CP tank car derailment and fire near Guernesy Sask in 2 months.  There was the 2nd CP crude by rail (CBR) derailment and fire near Guernsey (Sask) on Feb 6. The prior one was on Dec 9.  The Feb 6 incident was a CBR unit train that had 32 tank cars derail, several tank cars were breached, and a fire ensued involving a number of tank cars.  Fortunately no one was injured.  The difference in the Feb 6 incident was that the tank cars were the top of the line DOT-117J new builds, whereas the Dec 9 incident involved DOT-117R retrofits and Jacketed CPC-1232 tank cars.  The Transportation Safety Board report noted “The derailed tank cars were all DOT 117J100-W tank cars. The tank cars located from line 32 to 63 (32 cars) derailed. One derailed tank car that remained upright was otherwise unaffected and was subsequently re-railed. Of the remaining 31 derailed cars, about 19 derailed cars were involved in a pool fire from released product west of the crossing, while an estimated 12 cars derailed east of the crossing but were not directly involved in the fire. To date, there have been no mechanical defects observed that could be considered causal. A review of the locomotive event recorder download determined that the train was handled in accordance with regulatory and company requirements.”

Significantly, the Feb 6 incident was a Class 2 investigation.  One of the reasons why we expected added CBR restrictions was that Transportation Safety Board of Canada elevated this occurrence to a higher level than the CP Dec tank car derailment an fire. The TSB said “This is a class 2 investigation. These investigations are complex and involve several safety issues requiring in-depth analysis. Class 2 investigations, which frequently result in recommendations, are generally completed within 600 days.”  Whereas the TSB wrote on the CP Dec oil tank care derailment/fire that was a class 3 investigation.  “This is a class 3 investigation. These investigations analyze a small number of safety issues, and may result in recommendations. Class 3 investigations are generally completed within 450 days. For more information, see the Policy on Occurrence Classification”.  This is elevating the level of concern is why we thought there would be increased CBR restrictions. Class 2 is a higher priority investigation than a Class 3. Here is the excerpt from the Transportation Safety Board of Canada definitions of the top 3 class levels of investigation so you can see the difference.  “Class 1 occurrence.  A class 1 occurrence is a series of occurrences with common characteristics that have formed a pattern over a period of time. This pattern is made of one or more significant safety risks previously identified by the TSB or organizations in other jurisdictions in the course of their investigations, or of an issue of interest that has emerged from statistical analysis. Class 2 occurrence. A class 2 occurrence has significant consequences that attract a high level of public interest across Canada or internationally. A large number of people are affected, some of whom may be fatally or seriously injured. There may be a large release of dangerous goods. There is significant damage to property and/or the environment. There is a high public expectation that the TSB will investigate. There is a high likelihood of identifying new safety lessons and of advancing transportation safety by reducing risks to persons, property, or the environment. A complex and exhaustive investigation is required.  Class 3 occurrence. A class 3 occurrence may have significant consequences that attract a high level of public interest. It may involve multiple fatalities and/or serious injuries. There may be a medium-sized release of dangerous goods. There is moderate to significant damage to property and/or the environment. There are public expectations that the TSB will investigate. It is quite likely that new safety lessons will be identified and that transportation safety will be advanced by reducing risks to persons, property, or the environment. A detailed investigation is required.”

Transport Canada quickly put in its Feb 6 “temporary” lower speed limits” for “Key Train” CBR and these were to be in place until March 9.   Transport Canada moved fairly quickly and issued its Feb 6, 2020 “Order Pursuant to Section 32.01 of the Railway Safety Act (MO 20-02)” [LINK]The order defined a “Key Train” as “that includes one or more loaded tank cars of dangerous goods that are included in Class 2.3, Toxic Gases and of dangerous goods that are toxic by inhalation subject to Special Provision 23 of the Transportation of Dangerous Goods Regulations; or b) that includes 20 or more loaded tank cars or loaded intermodal portable tanks containing dangerous goods, as defined in the Transportation of Dangerous Goods Act, 1992 or any combination thereof that includes 20 or more loaded tank cars and loaded intermodal portable tank”s.  Basically this would include all CBR trains.  The new order then put low speeds in for a Key Train, saying “Not operate a Key Train at a speed that exceeds 20 miles per hour within Census Metropolitan Areas or, in all other locations, at a speed that exceeds 25 miles per hour.  This order is effective on February 8, 2020 and remains in effect until March 9, 2020.  For the purpose of this order, Census Metropolitan Areas (CMAs) means population centres defined and published by Statistics Canada as core (i.e., at least 50,000 persons) and secondary core (i.e., at least 10,000 persons) of CMAs.). 

The slower speeds were to be in place until March 9, and Transport Canada said it was open to requests for a review of the order for slower speeds until March 9.  The Feb 6 order did not specifically say Transport Canada was working with the rail industry for a permanent solution to CBR safety. But the order was clear that the new slower speeds were temporary as the new slower speeds were only in effect until March 9, 2020.  And Transport Canada said that the rail industry could request a review of the new slower CBR speeds.   Transport Canada said “If you intend to initiate a review of the Order, you must file a request in writing with the Transportation Appeal Tribunal of Canada, no later than March 9, 2020.”  The expectation was that sometime prior to but, likely close to, March 9, Transport Canada would reveal the post March 9 rules for CBR.

And then surprised with the Feb 16 new “temporary” speed limits splitting crude by rail into higher risk and other CBR trains.  Transport Canada then surprised by not waiting until March 9, with its Feb 16 announcement [LINK] of superseded new “temporary” speed limits and by adding a new category “Higher Risk” Key Trains. Transport Canada said “Since then, Transport Canada officials have worked diligently with large railway companies to further assess the causes of recent derailments, and to develop plans to address the areas of greatest concern. As a result of this work, new measures are being implemented effective immediately to reduce the speed of the higher risk key trains traveling through areas of greatest concern.” The new rules included (i) A splitting of Key Trains to include a new category of “Higher Risk” Key Trains defined as “Higher risk key trains are unit trains where tank cars are loaded with a single dangerous goods commodity moving to the same point of destination; or trains that include any combination of 80 or more tank cars containing dangerous goods.”  Ie. Higher Risk” Key Risk CBR trains are more than 80 trains vs High Risk CBR trains at more than 20 tank cars. (ii) For Key Trains (20 to 80 CBR tank cars), revised speed limits were 35 mpg in metro cities.  all other areas 40 mph if there are no signals and 50 mph if signals.  (ii) For “Higher Risk” Key Trains (ie. more than 80 CBR tank cars), the revised speed limits were 25 mph if no signals and 30 mph if signals. All other areas, 25 mph if no signals, 50 mph if signals.

The new “temporary” measures are in place until April 1, Transport Canada said they are now working with the railways to develop permanent measure.  The new Feb 16 speed limits and Higher Risk classification are in place until April 1, 2020.  Interestingly, Transport Canada highlighted they are working with industry for permanent changes.  Transport Canada wrote “The new Ministerial Order will enter into effect immediately and will remain in place until April 1, 2020. Transport Canada is working with the railways to develop a more comprehensive set of safety measures, which will include permanent measures. These will target track infrastructure maintenance and renewal, winter operations, safety practices of the railway companies, and any other actions necessary to keep Canadians safe.”

Why did Transport Canada surprise with the Feb 16 announcement and not wait until March 9? Transport Canada did not specify why they came out with the new “temporary” rules, but we believe the CN’s Feb 16 release (on the modified Transport Canada) points to the logical reason why the new limits came then as opposed to March 9.  CN’s Feb 16 release “CN Supportive of the Amendment to the Ministerial Order on Train Speed” [LINK] said it was “supportive of the decision by Canada’s Transport Minister to amend the Ministerial Order issued on February 7, 2020. That Order restricted the speed of trains carrying dangerous goods on all parts of the railway networks in Canada, the consequence of which was a reduction in at least a third of CN’s overall network capacity for all trains, even those not carrying dangerous goods.”  A reduction in the overall network capacity by 1/3 had to be a non-starter for CN and for the Liberals on an impact on the Cdn economy of this magnitude. We believe this is the real reason for the Feb 16 announcement instead of waiting until March 9, CN (and we assume CP) would have gone to Transport Canada and warned them on the impact to the overall rail capacity by the original lower speed limits.  We don’t believe anyone will say that the primary reason for these changes were to maximize overall rail capacity, rather the changes will always be messaged as being safety for CBR.  However, it was interesting to Minister Garneau quote in the press release, which to us, seemed to be the acknowledgement to CN that he listened to their concerns, its not just safety, its also the need for an efficient rail system.  Garneau said “It is for this reason that I put immediate speed restrictions to reduce the risk of derailments until more permanent measures are put into place to address this situation. A safe and efficient railway system is critical to the well-being of our country and its citizens.””

Does this mean the real problem to solve is to minimize impact on overall rail capacity while working to increase CBR safety?  CN said the original speed limits would reduce overall network capacity by 1/3, but didn’t specify the reduction under the revised temporary rules that added the new “higher risk” (>80 tank cars) classification ie. slower speeds for CBR is what causes overall network capacity loss.  The Feb 16 modifications will be less than 1/3 reduction but we don’t know how much less.  We can’t believe the Liberals will have permanent CBR safety rules that reduce CN’s overall rail capacity by 30% or even 15%.  Can you imagine the complaints from sectors like agriculture, coal, even for bulk products moving from the west coast to Midwest.  Recall that one of the big advantages for Prince Rupert is moving goods to the Midwest faster than if they unload on the US west coast.  We don’t know the magic number but have to believe it can’t be too much more than a 10% loss in overall capacity.

If the restrictions are to add costs/discourage slower moving >80 tank car trains, it has to push more CBR to shorter <80 tank car trains, which will add to cost per barrel. So if the Liberals are concerned about limiting the loss of CN’s overall network capacity (and also CP)  and if the key factor that hits the capacity loss is train speeds,  it seems like the problem the Liberals are solving for is how to allow the maximum number of CBR trains (not necessarily number of tank cars) that can move at higher speeds ie. they aren’t higher risk trains with >80 tank cars.  Or perhaps said the right way, how to discourage higher risk >80 tank car trains that go at slower speeds.  Right now the higher risk trains are >80 crude tank cars.  But if the objective is to minimize the number of slower moving trains, isn’t the only logical solution is to make the restrictions (effective costs) on higher risk trains disproportionately more than for trains with lesser cars?  Separate question is if they change the current higher risk train # to less than 80 crude tank cars.

If industry gets pushed to shorter trains, its not just higher costs, there will be an inevitable loss in total CBR capacity. Any loss in overall CN or CP rail capacity means there will be increasing competition among sectors (ie. agriculture, bulk, coal, etc) for rail capacity.  Plus the other specific negative to CBR is that pushing the oil patch to shorter trains is that it has to inevitably reduce the overall CBR capacity. There isn’t an unlimited amount of locomotives and crews to simply assume the overall CBR capacity can be maintained by saying CN and CP can just run more shorter trains to make up for any loss in train length. We don’t have a CN or CP locomotive and conductor forecast model, but we think its fair to assume CN and CP just don’t have that much spare locomotive and conductor capacity lying in wait.  Lets say the average train length goes from 100 to 80 tank cars.  We don’t believe CN and CP have >25% more locomotives and conductors on call that can come back immediately to move CBR trains to maintain the overall effective CBR capacity.

It also makes it difficult for any earlier phase out of DOT-117R Retrofits and Jacketed CPC-1232 tank car, The challenge will be how to maintain as much CBR capacity as possible if there is a push to smaller trains and this means it will be tough to have an earlier phase out of DOT117R retrofits and Jacketed CPC-1232 tank cars.  There may be one advantage for the oilpatch from any potential additional safety CBR restrictions.   For over a year, we have been warning of the likelihood for the Liberals to move to an earlier than planned phase out of the DOT-117R Retrofit and Jacketed CPC-1232 tank cars ie. what BNSF did in the summer of 2018.  However, if we are correct that there is a push to shorter trains and this reduces the overall CBR capacity, we believe it will make it difficult for Transport Canada to have an earlier than expected phase out of the DOT-117R Retrofit and Jacketed CPC-1232 tank cars.   That would be another hit to CBR overall capacity.  Rather we believe the Liberals can (i) make the case that new slower, shorter CBR trains will help with the safety risk for all tank cars including DOT-117R Retrofits and Jacketed CPC-1232 tank cars, and/or (ii) they also include more of these tank cars in the Higher Risk category so the added cost deters the usage of these tank cars.