Will slower trains impact crude-by-rail capacity in Canada?

A photograph of a train by a hillside.

As the rail industry awaits the preliminary investigation findings on what caused the Thursday derailment of a Canadian Pacific (NYSE: CP) crude oil train, observers also are mulling how a temporary federal mandate to slow down trains carrying dangerous goods will affect the broader Canadian economy.

Transport Canada last week ordered all freight trains hauling 20 or more cars of dangerous goods to limit their speed to 20 miles per hour in metropolitan areas and 25 mph outside of metropolitan areas. The mandate, which went into effect on Friday, will last for 30 days, although that could change based on what new information becomes available.

In issuing the order, Transport Minister Marc Garneau alluded to potential economic impacts that could result from the order. Investment firm Morgan Stanley estimated that the order could potentially reduce the current crude-by-rail capacity by up to 10%. 

“The situation is still early but on a preliminary basis we estimate this mandate could effectively reduce current Canadian crude-by-rail capacity by 10% if we assume railcars travel at top speeds (above the new speed limit) one-third of the time. However, a potential remedy for this is for those with excess capacity to add more railcars,” Morgan Stanley said in a Friday research note.

The order to slow down train speeds comes as the Alberta government has been allowing additional crude oil volumes to travel via rail. The government has been allowing oil producers to exceed their crude production limits and ship crude via rail amid delays in adding pipelines. Alberta will be setting crude oil production limits through December to match production with export capacity.

Both CP and Canadian National (NYSE: CNI) in recent fourth-quarter earnings calls said they have the capacity available to handle crude volumes. CP handled more than 36,000 carloads of crude in the fourth quarter, and executives said last month that they could match that level in 2020.

Update on derailment aftermath

CP said late Friday evening that the fires resulting from last Wednesday’s derailment of 32 tank cars carrying crude oil were finally extinguished. An order to evacuate nearby residents of the hamlet of Guernsey also was rescinded by the Rural Municipality of Usborne.

The rail line also has been reopened, CP said Friday, although Highway 16 was still closed due to the derailment as of Monday morning.

Meanwhile, the Federal Railroad Administration in the U.S. has been engaged with Transport Canada and CP, and it has been monitoring the accident investigation led by the Transportation Safety Board of Canada. It will review the data and information it receives to determine whether any additional safety measures or operational precautions for related cross-border shipments are necessary and appropriate.