Fitch: Keystone Prospects Progress as Rail Safety Issues Arise

  Fitch: Keystone Prospects Progress as Rail Safety Issues Arise  Business Wire  NEW YORK -- February 4, 2014  The State Department's impact statement for Keystone as well as several accidents involving crude-by-rail shipments may have improved the prospects for the pending Keystone XL pipeline expansion project, according to Fitch Ratings. However, Fitch expects both rail and pipelines to provide part of the logistical solution to move Canadian heavy crude oil to the US.  On Jan. 31 the State Department released its final supplemental environmental impact statement for the 2012 presidential permit application for the proposed Keystone XL pipeline. The report states that the project would likely have limited impact on climate change as a function of oil being removed from Canadian oil sands. The project still needs final approval from the President.  Growing volumes of rail-delivered crude to the Gulf Coast have provided a transportation alternative to Keystone in the wake of longstanding project delays. Gulf Coast refiners need growing quantities of discounted heavy crude oil given their investments in conversion capacity and high operating leverage due to heavy crude oil economics. As a result, the completion of Keystone XL would offer an important increase in supply of Canadian heavy oil on the Gulf Coast.  Railcars provide an outlet for crude transport to refineries, but recent accidents have raised questions about the safety of crude-by-rail transport. The derailment of a crude-oil carrier in Lac-Megantic in Quebec last July resulted in an explosion with multiple casualties and destroyed many buildings in the downtown area. The December collision of another crude carrier with a train in North Dakota forced evacuations as fumes from the explosion posed health risks for residents.  Railcars serving the industry consist of older tanker cars as well as newer specification tanker cars built after October 2011. According to the Association of American Railroads (AAR), newer railcars have higher standards for the transport of flammable liquids, including a thicker, more puncture-resistant shell; extra protective head shields at both ends of tank car; and additional top fittings protections. Fitch believes that a requirement to retrofit older railcars with the latest safety features or replace them is a distinct possibility. Other industry proposals to address industry safety issues include slower track speeds and rerouting around congested areas.  These measures are likely to add to the future costs of rail deliveries, although how much depends on what changes are implemented and how quickly. Despite typically higher costs compared to pipelines, rail provides greater optionality in moving crude to the most favorable end markets.  Keystone XL has faced significant opposition over its potential environmental and economic impact and is seeking approval for its sixth year, having first filed its application in September 2008. TransCanada Corp. has worked toward approval, but the review process has been hard fought. The plan called for the transportation of synthetic crude oil from Alberta, Canada, to refineries on the Gulf Coast. Keystone XL would extend the existing Keystone pipeline that connects Alberta oil to Patoka, IL and Cushing, OK. The proposed extension would bring the oil from Cushing to the refineries in the Gulf Coast. Another part of the extension would start in Canada and connect to the existing Keystone pipeline in the U.S.  Additional information is available on www.fitchratings.com.  The above article originally appeared as a post on the Fitch Wire credit market commentary page. 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