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Canada’s O&G facing another rail strike challenge

November 30, 20227:00 AM Maureen McCall

Earlier this year in mid-March, a major Canadian Pacific Railway (CP Rail) worker strike threatened to cut off a key trade corridor with the U.S. and create spiking prices in the U.S. for crude oil, food and other products already experiencing price increases.

A dispute between railway workers and CP Rail which could have led to a possible strike put the labour-friendly Canadian and U.S. administrations in a tough spot. Neither relished forcing union workers back to work. However, the strike threatened to cut a key trade corridor to the US. Canada and the U.S. have one of the largest trading relationships in the world, with over $1 trillion in trade of goods and services in 2021.

Happily for all involved, by August 15, CP Rail resolved the situation by signing a two-year collective agreement with union members, ending the supply chain disruption issue for both countries. However, the spectre of rail disruption once again surfaced this fall- this time in the U.S.

To be clear, the disruption came to a head in September 2022 before a last minute deal was stuck that forestalled the impact. Both unions reached tentative deals in September in a marathon 20-hour negotiating session just hours before their earlier strike deadlines. The event was not without impact as the September strike preparation among freight railways caused a drop of 1,975 carloads.

However, the biggest US rail union, SMART Transportation Division, or SMART-TD rejected a tentative deal last week on November 21, joining three others that have failed to approve contracts. All eleven rail unions must ratify the contract, which was negotiated by the U.S. Labour Department in mid-September but so far, only four unions have accepted it.  This raises the risk of a rail strike, which could start as soon as Dec. 5  (strike date) just as rising Canadian output continues to increase demand for crude by rail.

As reported in S & P Global’s market insights in August, Canadian rail into the U.S. is expected to increase for the rest of this year and well into 2023 until the Trans Mountain Pipeline expansion is completed and increases pipeline takeaway.

AJ O’Donnell, product team director for East Daley Capital commented at the time “There’s definitely going to be an uptick in crude-by-rail. The (Canadian) producers are setting up for growth, and they need a way out of the basin.”

An Association of American Railroads (AAR) report estimated that the rail service interruption would dramatically impact U.S. economic output and a shutdown could cost more than $2 billion per day. Trucking would not be an option as the AAR also estimates that 467,000 additional trucks a day would be needed to handle all the goods railroads deliver.

The U.S. Chemicals industry is warning that a rail strike will shut its plants. Rail trade between the U.S. and Canada accounts for 16 per cent of total cross-border trade, according to data from the U.S. Bureau of Transportation Statistics. Michael Gullo, vice president of policy at the Business Council of Canada, said if U.S. freight workers walk off the job, it could hurt Canada’s economy, as 70 per cent of Canadian exports are sold to U.S. buyers, and rail is crucial for the supply chain.  “We can only assume that a $2-billion daily impact on the American economy will spill over to Canada,” Gullo said. He is also a former senior director at the Railway Association of Canada.

Two of Canada’s largest railway companies, Canadian National Railway Co. and Canadian Pacific Railway Ltd., could face challenges in moving products across the border amid a strike. CN Rail derives 47 per cent of its revenue from its U.S. business, either through cross-border trade, or U.S. domestic operations. The company had no comment on the strike situation.

CP Rail is not a part of the NCCC and is not involved in ongoing labour negotiations, according to a customer notice issued Tuesday, November 22. “As such, in the event of a service interruption at other railroads in the U.S, CP will continue to fully operate in Canada as well as in the U.S., subject only to any applicable embargo imposed by any of the U.S. railroads,” the customer notice states.

Canadian producers, chemical manufacturers and refineries using Canadian railroads into the U.S. will be immediately affected since U.S. railroads will stop shipping hazardous chemicals about a week before the strike deadline to ensure that no tank cars filled with dangerous liquids wind up stranded.

The impact on Canadian producers, refiners and the chemical industry exporting to the U.S. will be substantial as well as the impact on the Canadian economy. Sources are expecting U.S. Congress to intervene at the 11th hour and impose contract terms on railroad workers in much the same way as Congress intervened in a previous 1992 rail strike.

Maureen McCall is an energy professional who writes on issues affecting the energy industry.

 

 

Crude by Rail Trans Mountain pipeline

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