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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. The original article, which may include hyperlinks to
companies and current ratings, can be accessed at www.fitchratings.com. All
opinions expressed are those of Fitch Ratings.

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Contact:

Fitch Ratings
Mark C. Sadeghian, CFA, +1 312-368-2090
Senior Director
Corporates
or
Kellie Geressy-Nilsen, +1 212-908-9123
Senior Director
Fitch Wire
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Media Relations:
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com
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