Will you still love me tomorrow?

The news from Canada today is that oil producers are at loggerheads with Canadian National and Canadian Pacific railways. Pipeline capacity to preferred destinations on the U.S. Gulf coast is almost nonexistent, and producers want the two railroads to haul their product at favorable rates. The railroads insist the oil companies either put some skin in the game—commit to long term contracts—or pay the publicly posted carload rates. This the shippers are refusing to do.

You may wonder why CN and CP are turning up their noses at this business. The reason is they remember the lesson that BNSF Railway learned the hard way just a few years ago. BNSF spend billions creating capacity to move oil trains from North Dakota to the coastal refineries on all three coasts. The traffic was strangling the railroad’s northern Transcon between Chicago and Seattle, causing BNSF to advise United Parcel Service to move its trailers via rival Union Pacific until the mess could be straightened out. Amtrak passengers aboard the Empire Builder won’t soon forget being eight hours late and missing connections in Chicago.

And what did the oil companies do to show their appreciation? Why, the second that pipeline capacity opened up in North Dakota, they bid BNSF (and CP) goodbye. Crude by rail is a fraction of its former volume, primarily to refineries in Washington state, which are not reached by pipelines.

Now that little drama is playing out again, and the two Canadian railroads aren’t rolling over. They’ve heard this song before, and it’s called “Will You Still Love Me Tomorrow?” Canadian National, for one, is almost plugged with business as it is. Its available capacity between Edmonton and the Twin Cities or Chicago is about nil. Canadian Pacific may have more wiggle room for business, having competed installation of centralized traffic control between Glenwood, Minn., and Portal, N.D., during Hunter Harrison’s recent tenure as CEO.

The two railroads are holding out for long-term contracts that commit oil shippers beyond two years, which is when more pipeline capacity will come on line. They are entirely right to do so. Why tie yourself in knots and anger all your other shippers just to please oil producers who admit they will have no use for you soon?

Actually, if you do it right, crude by rail to the Gulf coast can be close to price-competitive with pipelines. Remember, the Canadian oil is bitumen, or heavy oil, which must be expensively diluted by about 20 percent with lighter oil to flow through a pipeline. Then at the other end, the diluent must be extracted and sent back to be used again or otherwise disposed of.  But specially built tank cars can accept pure bitumen once it is heated, and the stuff can be reheated at destination to flow out of the rail cars, sparing all these expenses. I understand it’s already being done on a limited basis.

I suspect CN and CP will stand firm. They hold the trump cards. First, they’re both doing well as it is and don’t need this business. Second, the oil sands producers really have no options—you can’t wrap this goo in a box and take it to the post office. One correspondent of mine reports that Cenovus has agreed to longer term contracts to get some tar sands oil to its refinery in Chicago, and may be willing to commit to more rail. In due course, the other companies will have to give in and cut a deal—maybe not as long term as CN and CP want, but long enough for the railroads to feel the love beyond tomorrow.—Fred W. Frailey