Ensuring an Economic Future for Petrochemicals and Petroleum Fuels

STUDY NO. 186 APRIL 2020 RIBBONS OF STEEL 2: ENSURING AN ECONOMIC FUTURE FOR PETROCHEMICALS AND PETROLEUM FUELS

3512 - 33 Street NW, #150, Calgary, AB T2L 2A6 350 Sparks Street, #805, Ottawa, ON K1R 7S8

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@ceri_canada

Canadian Energy Research Institute

RIBBONS OF STEEL 2: ENSURING AN ECONOMIC FUTURE FOR PETROCHEMICALS AND PETROLEUM FUELS

Ribbons of Steel 2: Ensuring an Economic Future for Petrochemicals and Petroleum Fuels

Authors: Dinara Millington, Evar Umeozor, Iman Erfan, Madie Zamzadeh, Jose Duran-Armas

Recommended Citation (Author-date style): Millington, Dinara, Evar Umeozor, Iman Erfan, Madie Zamzadeh, and Jose Duran-Armas. 2020. “Ribbons of Steel 2: Ensuring an Economic Future for Petrochemicals and Petrochemical Fuels.” Study No. 186. Calgary, AB: Canadian Energy Research Institute. https://ceri.ca/assets/files/Study 186 Full Report.pdf

Recommended Citation (Numbered style): D. Millington, E. Umeozor, I. Erfan, M. Zamzadeh, and J. Duran-Armas, “Ribbons of Steel 2: Ensuring an Economic Future for Petrochemicals and Petroleum Fuels” Canadian Energy Research Institute, Calgary, AB, Study No. 186, 2020. URL: https://ceri.ca/assets/files/Study 186 Full Report.pdf

Acknowledgments: The authors of this report would like to extend their thanks and sincere gratitude to all CERI staff involved in the production and editing of the material. The authors would also like to acknowledge the following organizations for providing helpful and valuable insights for this study: FTR Transportation Intelligence, Alberta’s Industrial Heartland Association, Chemistry Industry Association of Canada, CN, Port of Vancouver, Freight Management Association of Canada.

ABOUT THE CANADIAN ENERGY RESEARCH INSTITUTE Founded in 1975, the Canadian Energy Research Institute (CERI) is an independent, registered charitable organization specializing in the analysis of energy economics and related environmental policy issues in the energy production, transportation, and consumption sectors. Our mission is to provide relevant, independent, and objective economic research of energy and environmental issues to benefit business, government, academia, and the public.

For more information about CERI, visit www.ceri.ca

CANADIAN ENERGY RESEARCH INSTITUTE 150, 3512 – 33 Street NW Calgary, Alberta T2L 2A6 Email: [email protected] Phone: 403-282-1231

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Table of Contents

List of Figures ...... v List of Tables ...... vii Acronyms and Abbreviations ...... ix Glossary ...... xi Executive Summary ...... xiii Chapter 1: Background and Study Objectives ...... 1 Background ...... 1 Study Objectives ...... 2 Chapter 2 : Overview of Rail Supply-Chain Logistics ...... 5 Supply Chain Services ...... 5 Shippers and Commodities ...... 6 Terminals, Yards, and Storage ...... 10 Railways ...... 13 Ports ...... 26 Chapter 3: Rail Traffic and Investment ...... 31 Current Rail Traffic in Canada ...... 31 Regional Rail Traffic ...... 33 Rail Traffic by Region in North America ...... 35 Forecast of Rail Traffic ...... 39 Commodities Forecast ...... 39 Capital Investment ...... 48 Chapter 4: Alberta’s Industrial Heartland (AIH) Case Study ...... 51 Background ...... 51 Alberta’s Industrial Heartland ...... 54 New Industrial Development Projects ...... 57 Capital Investment and Economic Impact ...... 60 Chapter 5: Australia and European Case Studies ...... 63 Australia ...... 63 The United Kingdom and Europe ...... 64 Chapter 6: Conclusions ...... 67 Bibliography ...... 69 Appendix A: Canadian Freight Transport Governing Bodies and Policies ...... 73 Transport Canada ...... 73 Canadian Transportation Agency ...... 75 Appendix B: Supply Chain Dynamics ...... 77

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Supply Chain Interview Results ...... 77 Methodology ...... 77 Interview Results ...... 78 Appendix C: Canadian Railway Overview ...... 87 Railcars ...... 87 Train Types ...... 89 Canadian National Railway (CN) Additional Information ...... 90 Canadian Pacific Railway(CP) Additional Information ...... 93 Appendix D: Model and Methodology ...... 95 CERI’s Rail Transportation and Investment Model ...... 95 Other Assumptions ...... 97

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List of Figures

Figure E.1: CERI’s Rail Volume Growth Forecast ...... xiv Figure E.2: Railway Investment Forecast, 2019-2025 ...... xv Figure 1.1: Canadian Merchandise Imports and Exports ...... 1 Figure 1.2: Total Canadian Rail International Trade ...... 2 Figure 2.1: Supply Chain Overview ...... 6 Figure 2.2: CN’s Commodity Mix (Revenue Shares in 2018) ...... 7 Figure 2.3: CP’s Commodity Mix in 2018 (Revenue Shares in 2018) ...... 8 Figure 2.4: Class I Railways in North America ...... 14 Figure 2.5: Rail Crossings in North America ...... 15 Figure 2.6: A CN Intermodal Train ...... 16 Figure 2.7: CN’s Rail Network ...... 18 Figure 2.8: CN Rail Network Traffic Density Map ...... 19 Figure 2.9: CN Rail Facilities in Western Canada ...... 20 Figure 2.10: CN Rail Facilities in Central and Eastern Canada ...... 21 Figure 2.11: CN Rail Facilities in the US ...... 21 Figure 2.12: CN Network Capacity Expansion ...... 22 Figure 2.13: CP’s Rail Network ...... 23 Figure 2.14: CP’s Rail Connections with NS and CSX ...... 24 Figure 2.15: CP’s Rail Network and Various Oil and Natural Gas Plays ...... 25 Figure 2.16: CP Rail Network Density Map ...... 26 Figure 2.17: Main Canadian Ports ...... 27 Figure 2.18: Prince Rupert New LPG Terminal ...... 28 Figure 2.19: Port of Prince Rupert Volume Forecast ...... 29 Figure 2.20: CN Intermodal Expansion – Port of Vancouver ...... 29 Figure 3.1: Total Rail Tonnage by Commodity Grouping (%, 2015-2018) ...... 33 Figure 3.2: Canadian Rail Traffic by Commodity and Origin, 2018 ...... 34 Figure 3.3: Canada’s Rail Traffic Exports to US/Mexico by Region ...... 36 Figure 3.4: Canada’s Commodity Exports to US/Mexico ...... 37 Figure 3.5: Canada’s Commodity Imports to US/Mexico ...... 38 Figure 3.6: Canada’s Rail Traffic Imports from the US/Mexico by Region ...... 38 Figure 3.7: CERI’s Rail Volume Growth Forecast...... 40 Figure 3.8: Rail Volume Forecasts by Province or Region (in million tonnes) ...... 42 Figure 3.9: Rail Volume Forecasts by Commodity (Million tonnes) ...... 44 Figure 3.10: Regional Fuels and Petrochemicals Inflow/Outflow Comparison (2018-2025) ...... 46 Figure 3.11: Crude by Rail Scenarios ...... 48 Figure 3.12: Railway Investment Forecast, 2019-2025 ...... 49 Figure 4.1: Alberta’s Intraprovincial and Interprovincial Rail Traffic in 2018 ...... 52 Figure 4.2: Alberta’s Fuel Oils and Crude Petroleum Rail Traffic in 2018 ...... 53 Figure 4.3: Alberta’s Plastic and Chemical Products Rail Traffic in 2018 ...... 53 Figure 4.4: Alberta’s Industrial Heartland ...... 55

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Figure 4.5: Inter Pipeline Propylene Ltd. Project Facilities ...... 58 Figure 4.6: CP’s Industrial Heartland Expansion Project ...... 60 Figure 4.7: Rail Investment for New AIH Projects and the GDP Impacts (2020-2025) ...... 61 Figure B.1: Distribution of Interview Participants...... 78 Figure B.2: Top Rail Challenges ...... 78 Figure C.1: Railcars by Type ...... 87 Figure C.2: Grain Unit Train ...... 89 Figure C.3: Manifest Train ...... 90 Figure C.4: Intermodal Train ...... 90 Figure C.5: Total Railcars moved by CN by Commodity Type ...... 91 Figure D.1: CERI’s Rail Transportation and Investment Model ...... 95 Figure D.2: Breakdown of Canadian Historical Annual Railway Investments by Segments ...... 97

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List of Tables

Table 2.1: Commodity Groups ...... 8 Table 2.2: Rail Terminal Functions ...... 11 Table 2.3: Crude-by-Rail Loading & Un-Loading Terminals ...... 12 Table 3.1: Standard Classification of Commodity Groupings ...... 31 Table 3.2: Transported Commodities ...... 32 Table 3.3: Commodity Flow Percentage (%) by Region, 2018 (Within Canada) ...... 35 Table 3.4: Commodity Growth Rates (%) ...... 41 Table 3.5: CERI’s Rail Commodity Flow Forecast by Region, in 2025 (%) ...... 43 Table 3.6: CERI’s Commodity Flow Share Forecast (%), in 2025 ...... 45 Table 4.1: Alberta’s Share for the Prairie Region’s Exports and Imports (%, 2018) ...... 54 Table A.1: Transport Canada ...... 74 Table B.1: Summary of Rail Supply Chain Challenges ...... 83

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Acronyms and Abbreviations

AAR American Association of Railways AIH Alberta’s Industrial Heartland AII Accelerated Investment Incentive ARTC Australian Rail Track Corporation ATMS Advanced Train Management System BNSF Burlington Northern Santa Fe CBP US Customs and Border Protection CBSA Canada Border Services Agency CFAF Canadian Freight Analysis Framework CKPC Canada Kuwait Petrochemical Corporation CN Canadian National Railway CP Canadian Pacific Railway CPA’S Canada Port Authorities CNoR Canadian Northern Railway CSX CSX Transportation Inc. DOT Department of Transportation FID Final Investment Decision GDP Gross Domestic Product GTM Gross Ton-Miles KCSR Kansas City Southern Railway KXL Keystone XL Pipeline LPGs Liquefied Petroleum Gases NGLs Natural Gas Liquids NS Norfolk Southern

PDH Propane Dehydrogenation PDP Petrochemicals Diversification Program PFIP Petrochemicals Feedstock Infrastructure Program PP Polypropylene

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PUP Partial Upgrading Program RTM Revenue ton-miles SCTG Standard Classification of Transported Goods TMX Trans Mountain Pipeline System TC Transport Canada TEU Twenty-foot Equivalent Unit UK United Kingdom UP Union Pacific Railway WCS Western Canadian Select WTI West Texas Intermediate

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Glossary

CanaPux™ The extra-heavy crude is blended with a polymer to form a solid pellet – CanaPux, that can be transported to markets using the same infrastructure as coal or petroleum coke.

Carload A shipment that uses one railcar for its transportation.

Containerization A freight shipping method in which a large amount of commodity (such as merchandise) is packaged into large standardized containers.

Demurrage A charge levied by the shipping line to the importer in cases where they have not taken delivery of the full container and move it out of the port/terminal area for unpacking within the allowed free days. Dwell time The time a train spends at a scheduled stop without moving. First mile/Last mile It is a term used in supply chain management and transportation planning to describe the movement of goods from a transportation hub to a destination. Fluidity Commodity flow refers to the performance of transportation supply chains and freight networks. Headway Headway (or frequency) is the distance between trains in a transportation system measured in time or space. It is a crucial input in calculating the overall route capacity of any transportation system. Industrial track A switching track that is serving industries such as mines, mills, smelters and factories. Intermodal transportation Defined as involving two or more different modes of transportation, such as rail, marine, and road, without the need for unloading and reloading the contents. Main track A measure of the track over which railway transportation service is conducted. It excludes parallel, yard, and siding trackage. Marshalling yard A location where goods trains are received, sorted, reformed and dispatched. Non-intermodal traffic Primarily comprised of bulk cargo and tank cars and includes commodities such as petroleum products, wheat, coal or potash. Rail operations Rail operations consist of transportation by rail, including intermodal transport, which may involve modes other than rail where such operations are required to complete a rail move.

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Railcar tap system A system of railcar tracking and monitoring solutions that allows owners and operators to “see” their railcar(s) and ensure asset visibility at every stage between the point of origin and destination.

Rolling stock Transportation equipment on wheels owned by a rail carrier, not including motive power equipment. Second main track Equivalent to the length of track in a second line running parallel to the first main track where the double-track (or triple track, etc.) is laid on the same roadbed. Shunting Pushing or pulling a train or a part of a train from the mainline to a siding or from one track to another. Siding A low-speed track section distinct from a running line or through routes such as the main track or branch line or spur. It may connect to through track or to other sidings at either end. Spur A railroad track on which cars are left for loading and unloading. Spurs are also used sometimes for railroad car storage. TEU The twenty-foot equivalent unit (often TEU or teu) is a measure used for capacity in container transportation. It is based on the volume of a 20-foot-long (6.1 m) intermodal container, which can be easily transferred between different modes of transportation, such as ships, trains and trucks. Unitized freight Grouped cargo where products are grouped packaged into “units” before loading onto a pallet. Yard switching Switching service performed by locomotives in yards where regular switching is performed, including both terminal switching and transfer operations within yard limits.

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Executive Summary

Rail has been a vital link for commerce since the Canadian Confederation. In fact, we are reminded of its importance every time there is a service disruption either due to accidents, labour issues, weather or civil protests. CERI has undertaken a detailed review of how rail impacts Canada’s crude and petrochemicals market. Can oil companies and petrochemical companies depend on rail as part of their logistical lifeline? If so, what does that mean for investment in rail infrastructure?

One of the main objectives of this study is to determine the makeup of commodities currently transported by the rail system in Canada. This information, combined with a perspective of future growth or decline on a commodity by commodity basis will help establish a future view of the commodities that could be moving on the rail system in 2025, with a focus on petrochemicals and petroleum products, including crude oil. The study also outlines the Canadian rail-based supply chain, including shippers, terminal operators, and ports, since the performance of the system can be affected by any stakeholders involved in the movement or handling of rail freight traffic.

While road transportation is a primary mode for moving freight, rail transportation touches nearly every sector of the Canadian economy, including manufacturing, agricultural, natural resources, wholesale and retail sectors, and tourism (Transport Canada 2018a). It represented nearly 10 percent of the total transportation and warehousing sector in 2018 or $8.4 billion in GDP contribution.

In 2018, the top categories that made up the rail traffic (with percentage shares in brackets) were: coal (14 percent), containerized cargo (14 percent), grain (13 percent), forest products (9 percent), chemicals (8 percent), petroleum products (8 percent) and potash (7 percent). (Transport Canada 2018). The monetary values of freight almost doubled, increasing to $143 billion in 2018 compared to nearly $75 billion in 2009.

Overall, in Canada, in terms of tonnes, total freight demand for all commodity groupings is expected to grow throughout the study period except for the minerals category, which is expected to remain flat.

Figure E.1 shows the total freight in Canada and to US/Mexico markets is foreseen to increase from 312 million tonnes in 2019 to 370.4 million tonnes in the year 2025, growing by 11.2 percent. In comparison to the 2015-2018 period, the growth will amount to almost 19 percent. Agriculture products, plastic and chemical products, and coal account for half of the total freight moved by rail. In a scenario where none of the new oil pipelines are operational by 2025, we predict that the fuels category, which includes fuel oils and crude petroleum, will also be among the top commodity groupings transported by rail.

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Figure E.1: CERI’s Rail Volume Growth Forecast

Source: CERI

When it comes to destination markets, the Prairies region will continue to dominate the rail traffic, with the top two destination markets – Western region and the US/Mexico markets in the forecast period. Together these two destination markets make up more than 75 percent of freight volumes originating in Alberta.

The Western region will experience growth, as well. About 60 percent of rail traffic in this region is intraprovincial, mostly destined for Western coast ports for international exports, with just over 20 percent of traffic is directed to the US/Mexico markets. The rest is moved to other regions in Canada.

A significant portion of Central region’s rail traffic will move to the US/Mexico markets, ranging 40-45 percent for provinces of Quebec and Ontario, respectively. The remainder is moved within the Central region and to Western, Prairies and Atlantic regions.

As for the Atlantic region, three-quarters of rail traffic originating in this region will be moved to the Central region, about 10 percent to the US/Mexico, and the rest is split among other regions in Canada.

For the 2019-2025 period, on average, the fuel oils and crude petroleum and plastic and chemical products rail traffic will increase by 1.7 percent and 1.9 percent, respectively.

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additional pipeline capacity to alleviate some egress issues (CERI 2019). CERI’s baseline rail forecast does not incorporate these debottlenecking projects, as some of them remain uncertain.

It is expected that if none of the three pipelines are onstream within a relatively short time frame (2020- 2025), additional crude by rail volumes are expected. Another factor that plays into increasing crude by rail volumes is that the Government of Alberta exempts the crude barrels transported via rail from the ongoing provincial crude production curtailment. The additional volume of crude and bitumen to be moved by rail is estimated to increase substantially, depending on whether one, two or all three pipelines are operational.

In the case of all three operating pipelines (i.e., baseline scenario presented above), the crude and other fuels transported on rail would grow from 280,000 bpd in 2019 to 360,000 bpd by 2025. In a scenario where no pipelines are operational, the crude fuel volume is expected to reach almost 1.4 million bpd by 2025. The other two scenarios present cases of various degrees of available incremental pipeline capacity – with Line 3 and no TMX or KXL scenario, volumes will reach just above a million bpd; with Line 3 and TMX and no KXL, volumes will be less, averaging around 400,000 bpd in 2025.

As seen in Figure E.2, the total annual capital investment is forecast to grow from $2.5 billion in 2019 to $4 billion in 2020, reaching almost $5.3 billion by 2025, representing a 26 percent growth in the short term from 2020 to 2025. Approximately half of the investment directed towards track and roadways, followed by building and machinery, rolling stock and signals and power systems. Other elements, such as terminals and fuel stations, will account for a smaller share of investment. In comparison, in 2018, close to $2.4 billion was invested into Canadian rail-based network, up 30.6 percent from the previous year and 37.1 percent from the 2013–2017 average (Railway Association Of Canada, Pre-budget 2019 n.d.).

Figure E.2: Railway Investment Forecast, 2019-2025

5000

4000 Work_RoadwayTools Track_Roadway 3000 Terminals_FuelStations Signals_PowerSystems

2000 Rolling_Stock $ CAD $ (Millions) Other_Equipment Intermodal_Equipment 1000 Building_Machinery

0 2019 2020 2021 2022 2023 2024 2025 Year

Source: CERI

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This outlook is based on the economic conditions as per “business-as-usual,” in other words, the forecast depends on the prevailing market, social, geopolitical, and trade environments. The uncertainty of this forecast is the current global events. At the time of publication of this report, the world was battling a COVID-19 pandemic, which resulted in an immediate energy demand drop, resulting in the oversupply of crude and, consequently, a sharp reduction in oil prices. These events already have had global and domestic impacts, and depending on the duration, could result in a further negative impact on energy demand, economic growth, rail traffic demand and, consequently, capital investment.

Alberta’s Industrial Heartland (AIH) is presented in this report as a case study to analyze the rail transport of petrochemical and chemical products, and fuel oil and crude petroleum. Fuel oils and crude petroleum and plastic and chemical products are considered the two major transported commodities from Alberta, and by inference, from the AIH. Shippers and the railways are currently working together to assess growth projections and ensure adequate capacity is available for future freight tonnage in the region. CERI’s investment model estimated that an additional investment of $339.2 million would be needed in the AIH to accommodate new facilities that will become operational in this period. As a result of additional investment, the AIH region will see further economic benefits from the spin-offs of this investment. The GDP impact is measured to be almost $6.7 billion over the six years, more than a 10-fold impact.

The study also presents key challenges and opportunities for the rail-based supply chain. The key rail challenges that were identified during CERI’s interviews with rail-based supply chain participants include delays and congestion, lack of metrics, yard and terminal capacity, planning and forecasting, and communication. The key opportunities include employing a holistic approach among all members of the supply chain to address problems facing the entire network, adopting standard metrics and indicators, integrating the performance measurement system into the decision-making process, and embracing new technologies.

This study also reviewed different approaches to how rail networks are managed in Australia and Europe. When economic and market cycles occur, the government might need to intervene, and the Australian and European cases have shown that a hybrid model of investments/control of the railroad market is an option to managing the long-term infrastructure requirements of a rail network. This is not to say that Canadian railways should be operated similarly, rather this provides an alternative business model and examples. The Australia and United Kingdom examples of alternative strategies for how to fund and operate rail infrastructure are instructive but would be difficult to implement in North America.

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Chapter 1: Background and Study Objectives

Background The transportation and warehousing sector is a significant contributor to the Canadian economy, representing 4.5 percent of total Canadian gross domestic product (GDP) or almost 88 billion in 20181. The sector encompasses various modes of transportation such as road, rail, air and marine, and it enables the movement of raw and manufactured goods, natural resources, and agricultural products across this vast country and to other international markets. The importance of this sector cannot be overlooked, supporting our connectivity, mobility and economic growth.

Transportation is critical to domestic and international trade. Figure 1.1 shows the value of Canada’s commodities trade transported by all modes of transportation between January 2014 and December 2019. Growth in Canada’s merchandise exports and imports have continued to exceed 2014 levels, exports growing by 12.5 percent and imports by 16.9 percent in this period, with the monthly value of exports of almost $50 billion and imports - $51 billion at the end of 2019.2

Figure 1.1: Canadian Merchandise Imports and Exports

$55

$50

$45

Billion CDN$ Billion $40

$35

$30 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Oct-14 Oct-15 Oct-16 Oct-17 Oct-18 Oct-19 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Apr-19

Imports Exports

Source: Statistics Canada Table 12-10-0011-01, Merchandise imports and exports, Balance of payments basis, seasonally adjusted.

1 Statistics Canada’s measure of GDP accounts only for the economic activities directly linked to for-hire or commercial transportation. However, transportation is also integral to activities not included in economic measures, such as the value of personal travel and of own-account transportation activity. Using the Canadian Transportation Economic Account (CTEA) 2014, the transportation sector contributed $153.4 billion or 8 percent of GDP. 2 All dollar values are in Canadian dollars unless stated otherwise.

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Total merchandise trade in 2018 amounted to almost $1.2 trillion, an increase of 6 percent from 2017. The US remains Canada’s largest trading partner, representing 69 percent of total Canadian trade in 2018. Total trade with the US amounted to $782 billion in 2018 ($371 billion in imports and $411 billion in exports), up by 5 percent from 2017. Other large trading partners include the European Union, China and Mexico.

In 2018, Canada’s rail transportation moved more than 330 million tonnes of freight, a 6 percent increase from 2017. The top categories (with percentage shares in brackets) were: coal (14 percent), containerized cargo (14 percent), grain (13 percent), forest products (9 percent), chemicals (8 percent), petroleum products (8 percent) and potash (7 percent), (Transport Canada 2018). The monetary values of freight almost doubled, increasing to $143 billion in 2018 compared to almost $75 billion in 2009 (Figure 1.2).

Figure 1.2: Total Canadian Rail International Trade

160

140

120

100 Billion CDN$

0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: (StatCan 2019b)

Study Objectives While it is recognized that freight transportation by rail and its subsequent mobility is closely related to Canada’s economic growth, the sector faces challenges. Specifically, stakeholders in the rail-based supply chain have expressed concerns regarding logistical challenges of using rail to get products to market. Additional and increased reliance on rail networks for crude oil, natural gas liquids (NGLs), petrochemical and other products may exacerbate these challenges that could impact economic growth potential for Canada.

One of the main objectives of this study is to determine the makeup of commodities currently transported by the rail system in Canada. This information combined with a perspective of future growth or decline

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on a commodity by commodity basis will help establish a future view of the commodities that could be moving on the rail system in 2025, with a focus on petrochemicals and petroleum products, including crude oil. The study also outlines the Canadian rail-based supply chain, including shippers, terminal operators, and ports, since the performance of the system can be affected by any stakeholders involved in the movement or handling of rail freight traffic. The scope of the project is limited to service issues within the rail-based logistics chain. Only freight trains will be evaluated, and passenger trains are not assessed.

In particular, the study:

• conducts a review of the current rail-based logistics chain (including railways, shippers, terminal operators, primary rail corridors and ports) with a focus on service provided to Canadian shippers and customers of the Canadian National Railway (CN) and the Canadian Pacific Railway (CP) within Canada, including to and from ports and border crossings; • presents CERI’s 2019-2025 commodity flows forecast on the rail-based network; • presents CERI’s 2019-2025 forecast for estimated capital investment requirements; • identifies current challenges and opportunities concerning rail-based supply chain based on conducted interviews with affected and interested parties on issues, solutions, best practices and logistical challenges of the current state of rail activities for resource commodities, petrochemical derivative products within the full range of rail transportation demand; • explores lessons learned from other railway business models practiced in Australia and Europe.

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Chapter 2 : Overview of Rail Supply-Chain Logistics

• Canadian shippers move multiple commodities, including coal, metals and minerals, grains, and forest products through Canada’s rail transportation system. • The rail-based supply chain includes shippers, terminals, ports and railways. • CN and CP are the dominant Class I railways in Canada. Both railway networks extend into the United States. There are also over 50 regional and short-line railways in operation. • Both CN and CP continue to invest in growing their networks for higher capacity, and to deploy innovative technologies focused on automation and optimization. Supply Chain Services Rail transportation moved 6 percent more merchandise in 2018, indicating a higher transportation demand from shippers. However, severe winter weather conditions, operational issues, and multiple outages resulted in congestion challenges in various parts of the network. This was especially the case in the Vancouver Lower Mainland, where grain, potash and forest supply chains were particularly impacted. Based on performance metrics produced by Transport Canada, intermodal and grain supply chain transit times were longer in 2018 compared to the previous years’ average. Railways and their stakeholders have been working in close collaboration to better understand and tackle capacity and performance challenges through the Commodity Supply Chain Table (Transport Canada 2018b).

Transport Canada is a government body that is responsible for transportation policies and programs, promoting safe, secure, efficient, and environmentally responsible transportation. More detail on Transport Canada and its policies and regulations are described in Appendix A.

The results of CERI’s interviews with affected and interested parties on issues, solutions, best practices and logistical challenges are described in Appendix B. Interviews were conducted with Canadian rail supply chain representatives in four categories: shippers, rail companies, port authorities and terminals, and government and regulatory bodies. The key rail challenges identified are delays and congestion, lack of metrics, yard and terminal capacity, planning and forecasting, and communication. The key opportunities include employing a holistic approach among all members of the supply chain to address problems facing the entire network, adopting standard metrics and indicators, integrating the performance measurement system into the decision-making process, and embracing new technologies.

Investment in the freight transportation system increases productivity by allowing for improvements in logistics, or the overall management of the supply chain. Rail has always been an essential part of Canada’s freight supply chain, working with other supply chain service providers to deliver goods and products. Canada’s capacity to remain competitive in the modern, global economy relies on its ability to move

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products to terminals and ports and deliver domestic commodities. Canadian Class I railways3 are critical elements in the supply chain to move freight from shippers through terminals, yards and finally terminals and ports to the domestic or international markets.

Figure 2.1: Supply Chain Overview

Source: CERI

Figure 2.1 gives an overview of supply chain services. A typical process starts with a shipper needing to move a product to a terminal or a yard to be loaded onto the railcars and shipped to domestic or international markets. The destination markets are reached via ships departing from ports or via receiving terminals for in-land transportation. This study covers the elements highlighted in the red box – from shipper to loading at port/terminal.

Shippers and Commodities Canadian shippers that move their commodities through Canada's rail transportation system are an essential component of the entire rail logistics supply chain. The Canadian supply chain comprises a wide range of shippers and commodities. Figure 2.2 and Figure 2.3 illustrate examples of commodity groupings that the two main Class I Canadian rail companies move, broken down by percentage share of each commodity grouping. The largest generators of rail traffic are bulk commodities, merchandise freight, and intermodal traffic. Producers and shippers of bulk commodities, which typically move in large volumes

3 Class I railways are defined as those with earned gross revenues exceeding C$250 million, both CN and CP are considered Class I rail carriers in Canada. Class II rail carriers are railroad companies with earned gross revenues less than C$250 million while Class III are railway companies (other than a Class I or II rail carrier) that are engaged in the operation of tunnels, stations and bridges.

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across long distances, include grain, coal, potash and fertilizers, and sulphur. Merchandise freight consists of industrial and consumer products, such as energy, chemicals and plastics, metals, minerals, consumer products, and automotive and forest products. Intermodal traffic consists mainly of retail goods in overseas containers that can be transported by train, ship, and truck and in domestic containers and trailers that can be moved by train or truck.

Figure 2.2: CN’s Commodity Mix (Revenue Shares in 2018)

Chart Title

5% 5% 19%

OTHER REVENUES 12% COAL METALS AND MINERALS 6% FOREST PRODUCTS GRAIN AND FERTILIZERS 13% PETROCHEMICAL AND CHEMICALS AUTOMOTIVE INTERMODAL 24%

16%

Source: (CN 2019a) and CERI

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Figure 2.3: CP’s Commodity Mix in 2018 (Revenue Shares in 2018)

Chart Title

22% 9% POTASH COAL METALS AND MINERALS 11% FOREST PRODUCTS 5% FERTILIZERS, SULPHUR & GRAIN 4% ENERGY, CHEMICALS & PLASTICS AUTOMOTIVE 17% INTERMODAL

25%

Source: (CP 2018) and CERI

The shippers include companies from various economic sectors across Canada. The shippers that move the most commodities include companies in automotive, coal, potash, forest products, grains and fertilizers, intermodal, metals and minerals and petroleum and chemical sectors, as described in Table 2.1.

Table 2.1: Commodity Groups Commodity Description Group

Automotive Domestically finished vehicles and parts located throughout North America, providing service to vehicle assembly plants in Ontario, Michigan, and Mississippi.

Coal Thermal grades of bituminous coal, metallurgical coal, and petroleum coke. Canadian thermal and metallurgical coal are mainly exported via terminals on the west coast of Canada to offshore markets.

Petroleum coke, a by-product of the oil refining process, is exported to offshore markets via terminals on the west coast of Canada and the US Gulf Coast, as well as shipped to industrial users in domestic markets. The leading factors affecting this

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market segment are weather conditions, environmental regulations, global supply and demand conditions, and for US domestic coal - the price of natural gas.

Potash Potash is an alkaline potassium compound most commonly used in fertilizers. It refers to a variety of salts produced through the mining of minerals and chemical manufacturing. Canada is the world's largest potash producer and exporter. The bulk of the country's potash industry is in Saskatchewan.

Most potash is moved from Saskatchewan through Thunder Bay, Ontario, and Portland, Oregon, to markets in the US and from the port of Vancouver, British Columbia to offshore markets. K+S Potash and Canpotex Limited markets all potash movements for export beyond Canada and the US. Canpotex Limited is a joint venture between Nutrien Ltd. and the Mosaic Company. Independently, these producers move domestic potash by rail to the US Midwest for local customers.

Forest products Various types of lumber, panels, paper, wood pulp and other fibres such as logs, recycled paper, wood chips, and wood pellets. CN and CP have extensive access to the western and eastern Canadian fibre-producing regions, which are among the largest fibre source areas in North America. In the US, the CN and CP rail companies are strategically located to serve both the Midwest and southern US corridors with interline connections to other Class I railways.

The key drivers for lumber and panels are housing statistics and renovation activities primarily in the US; for fibres (mainly wood pulp) they are consumption of paper, pulpboard and tissue in North American and offshore markets; and for newsprint, they are advertising lineage, non-print media, and overall economic conditions, primarily in the US.

Grains and Crops grown and fertilizers processed in Western Canada and the US Midwest. The fertilizers grain segment consists of wheat, oats, barley, flaxseed, rye, peas, lentils, corn, ethanol, dried distillers’ grain, canola seed and canola products, soybeans and soybean products. Production of grain varies considerably from year to year, affected by weather conditions, seeded and harvested acreage, the mix of grains produced and crop yields. Grain exports are sensitive to the size and quality of the crop produced, international market conditions and foreign government policy. Most of the grain produced in Western Canada and moved by railways is exported via the ports of Vancouver, Prince Rupert, and Thunder Bay.

The rail movement of grain is subject to government regulation that establishes a maximum revenue entitlement that railways can earn. In the US, grain grown in Illinois and Iowa is exported as well as transported to domestic processing facilities and feed markets.

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Intermodal Domestic intermodal transports consumer products and manufactured goods, serving both retail and wholesale channels, within domestic Canada, domestic US, Mexico and transborder. International intermodal handles import and export container traffic, serving the major ports of Vancouver, Prince Rupert, Montreal, Halifax, New Orleans, and Mobile. Railway networks of inland intermodal terminals are located near ports and large urban centers, connecting customers to major markets in North America and overseas. Domestic intermodal is driven by consumer markets, with growth generally tied to the economy. North American economic and trade conditions drive the international intermodal market.

Metals and Materials related to oil and gas development, steel, iron ore, non-ferrous base minerals metals and ores, construction materials and machinery, and dimensional (large) loads.

Petroleum and Chemicals and plastics, refined petroleum products, natural gas liquids, crude oil, chemicals gasoline, and asphalt. Western Canada is the primary producer of crude oil and natural gas and their by-products as well as a home to world-scale petrochemicals and plastics industry facilities; Eastern Canada has proximity to local refineries and other regional petrochemical plants. The primary markets for these commodities are within North America. As such, the performance of this commodity group is closely correlated with the North American economy as well as oil and gas market dynamics.

Terminals, Yards, and Storage Rail terminals and yards are important parts of the railway network because they function to ensure the mobility of freight. The terminals and yards across Canada vary in size, location, and type. The major terminals are described in the next section. Here we describe the types of terminals and yards available.

Unlike passenger terminals, rail freight yards do not have to be centrally located but must be spacious to fit multiple tracks for marshalling. Hence, these are often located on greenfield industrial sites, which tend to attract manufacturing activities that can use the distribution capabilities of rail. These areas may become important industrial zones. When dealing with bulk commodities, rail terminals and spurs will locate in the proximity of the manufacturing source as they are the primary means for these commodities to be shipped to markets. They also vary in complexity because of the different freight markets they service (e.g. grain, coal, automobiles, containers), each requiring specialized loading/unloading facilities and equipment. See Table 2.2 for various terminal functions.

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Table 2.2: Rail Terminal Functions Rail Terminal Type Function

Bulk These rail terminals are linked with extractive industries such as agriculture, mining, and wood products. Terminals are generally designed to be commodity specific. For instance, grain elevators are bulk terminals commonly used to store, mix and load grain into railcars. Another critical characteristic of bulk rail terminal is their unidirectional flows, meaning they are designed explicitly to either load or unload bulk freight. Bulk rail terminals doing both are uncommon, which is reflective of the nature of bulk trades.

Breakbulk Involves the handling of various cargoes that can be packaged in drums, rolls or crates. They usually relate to a specific facility such as a manufacturing plant or a warehouse handling breakbulk cargo and are serviced by dedicated rail spurs. Containerization has reduced the need for breakbulk terminals.

Intermodal Used to load and unload unitized freight from railcars. Containerization has dramatically expanded the intermodal activity of rail terminals since it permits quick loading and unloading but requires more trackside space. The intermodal terminal can be part of a port facility (on-dock or near-dock facilities) or can be a stand-alone inland terminal.

Roll-on/roll-off Used to transport vehicles such as cars, trucks or construction equipment where the vehicles are rolled in a railcar using a ramp. Such terminals commonly require a large amount of parking space to store vehicles, mainly if they focus on cars bound for retail outlets. They may also serve as storage facilities supplying regional markets.

Shunting Used to assemble, sort and break-up freight trains. Since trains can be composed of up to about 100 railcars, often of various types, origins and destinations, shunting can be a complicated task. Comparatively, unit trains that carry one kind of freight with the same commodity, such as coal, cars or crude oil, require little shunting.

Crude Terminals With the ongoing constraints in export crude pipeline capacity out of Western Canada, moving crude by rail has become an answer for some producers where pipeline capacity is constrained or non-existent. This has led to a significant build of crude-by-rail terminals in Alberta and Saskatchewan.

Table 2.3 shows Crude-by-Rail loading & un-loading terminals across Canada for different operators.

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Table 2.3: Crude-by-Rail Loading & Un-Loading Terminals NAME OPERATOR LOCATION CAPACITY bbl/day NEW BRUNSWICK

Irving Oil Rail Terminal (1) Irving Oil Saint John, NB 200,000 QUEBEC

Sorel-Tracey Rail Terminal (1) Kildar Services ULC Sorel-Tracey, QC 33,000

Montreal Rail Terminal (1) Suncor Energy Montreal, QC 30,000

Valero Rail Terminal (1) Valero Lévis, QC 60,000 Subtotal 123,000 ONTARIO

Nanticoke Terminal (1) Imperial Oil Nanticoke, ON 20,000 MANITOBA Cromer Rail Terminal Kingston Midstream Cromer, MB 60,000 CN/Watco Rail Terminal Watco Woodnorth, MB 8,000 Subtotal 68,000 SASKATCHEWAN Altex Lashburn Rail Terminal Altex Energy Lashburn, SK 88,000 Altex Lloydminster Rail Terminal Altex Energy Lloydminster, SK 4,000 Altex Unity Rail Terminal Altex Energy Unity, SK 29,000 Arrow Reload Systems Kerrobert Rail Arrow Reload Kerrobert, SK 5,000 Terminal Systems CP/Bulk Plus Logistics Estevan Rail Terminal Bulk Plus Logistics Estevan, SK 10,000

Crees Global Northgate Rail Terminal Ceres Global Northgate, SK 35,000 Crescent Point Dollard Rail Terminal Crescent Point Dollard, SK 27,000 Crescent Point Stoughton Rail Terminal Crescent Point Stoughton, SK 45,000

CN/PetroGas Willmar Rail Terminal PetroGas Willmar, SK 14,000 Kerrobert Train Loading Facility Plains All American Kerrobert, SK 80,000 TORQ Bromhead Rail Terminal TORQ Bromhead, SK 45,300 TORQ Instow Rail Terminal TORQ Instow, SK 18,000 TORQ Lloydminster Rail Terminal TORQ Lloydminster, SK 24,500 TORQ Unity Rail Terminal TORQ Unity, SK 79,000 Subtotal 503,800 ALBERTA Altex Falher Rail Terminal Altex Energy Falher, AB 6,000

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Altex Lynton Rail Terminal Altex Energy Fort McMurray, AB 27,000 Cenovus Bruderheim Rail Terminal Cenovus Bruderheim, AB 100,000 Elbow River Peace River Rail Terminal Elbow River Peace River, AB 20,000 Elbow River Roma Rail Terminal Elbow River Peace River, AB 7,500 Gibson Edmonton Rail Terminal Gibson Edmonton, AB 47,000 Gibson/USDG Hardisty Rail Terminal Gibson/USDG Hardisty, AB 225,000 Grizzlys Windell Rail Terminal Grizzly/Gulfport Conklin, AB 10,000 Alberta Crude Terminal Keyera Edmonton, AB 40,000 South Cheecham Terminal Keyera Anzac, AB 24,000 Edmonton Rail Terminal Kinder Morgan Sherwood Park, AB 210,000 Pembina Rail Terminal Pembina Fort Saskatchewan, 40,000 AB Peace River Terminal Savage Services Reno, AB 25,000 High Prairie Rail Terminal Secure Energy High Prairie, AB 19,000 TORQ Tilley Rail Terminal TORQ Tilley, AB 12,000 TORQ Whitecourt Rail Terminal TORQ Whitecourt, AB 4,000 Subtotal 816,000 BRITISH COLUMBIA

Burnaby Rail Terminal (1) Chevron Burnaby, BC 8,000 TOTAL 1,758,800

Notes: (1) Crude Offloading Terminal Source: Oil Sands Magazine (Oil Sands Magazine 2019)

To protect the price of oil, the Government of Alberta temporarily limited production to match export capacity to prevent Canadian crude from selling at substantial discounts. Due to continuing pipeline delays, oil production limits will remain necessary through 2020. The curtailment policy has also been adjusted to give industry more flexibility to make timely business decisions. As such, effective December 2019, operators can apply, monthly, to increase oil production – if the additional product is moved by new rail capacity –to meet growing demand.

Railways Before the First World War, there were four dominant independent railways in Canada: Canadian Pacific (CP), Canadian Northern Railway (CNoR), Grand Trunk Railway (GTR) and Grand Trunk Pacific (GTP). By the end of the War, however, fierce competition among the railways burdened CNoR, GTR, and GTP railways with heavy debt loads. As a result, CNoR, GTR and the GTP, as well as the Intercolonial Railway (ICR) and the National Transcontinental, were amalgamated into Canadian National (CN) by the federal government between 1917 and 1923 (CN 2017).

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Nearly a century later, CN and CP remain the pillars of Canada’s rail industry. Both CN and CP are considered Class I rail carriers in Canada. CN and CP merged their passenger services in the mid-1970s to create VIA Rail that is also considered a Class I railway. Also, there are over 50 regional and short-line railways, operating feeder and lower density rail lines in Canada, and other passenger railways (excluding urban rail transit), including Trains de Banlieue AMT, GO Transit, Rocky Mountaineer and the West Coast Express.

In terms of revenues, in 2018 the top railway companies in North America were Burlington Northern Santa Fe (BNSF) (US$23.9 billion), Union Pacific Railway (UP) (US$22.8 billion), CSX Transportation Inc. (CSX) (US$12.3 billion), Norfolk Southern (NS) (US$11.5 billion), CN (US$9.7 billion), CP (US$5.4 billion), and Kansas City Southern Railway (KCSR) (US$2.7 billion) (Statista 2018). These are considered Class I rail carriers, with earned gross revenues exceeding US$447.6 million in 2018 (AAR 2018). Figure 2.4 illustrates the rail networks of the eight Class I railways in North America.

Figure 2.4: Class I Railways in North America

Source: Association of American Railways (AAR 2014)

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As of 2019, there were 41,465 kilometers of main track in Canada, Canadian National (CN) owns 52.8 percent (21,879 km), Canadian Pacific (CP) owns 30.7 percent (12,709 km), other railways own 16.6 percent (6,812 km). Including parallel, yard, and siding trackage, there are 61,859 kilometres of total track operated (StatCan 2019a). Measured by distance, the Canadian railway track is the fifth-longest in the world, preceded by the US, China, Russia and India (Railway Technology 2014).

Canada and the US share 22 border rail crossings. Rail companies work closely with the Canada Border Services Agency (CBSA) and the US Customs and Border Protection (CBP). Figure 2.5 illustrates the rail crossings, indicated by blue dots. The figure also shows the rail networks of North America’s Class I railways.

Figure 2.5: Rail Crossings in North America

Source: United States Department of Transportation (US Department of Transportation 2014)

There are eight international rail border crossings in Western Canada. There are four ports between British Columbia and Washington (Blaine/White Rock, Sumas/Huntingdon, Laurier/Billings, and Boundary/Waneta) and a single crossing between British Columbia and Idaho (Eastport/Kingsgate). A fifth border crossing existed at Danville/Grand Forks but was abandoned by the Kettle Falls International Railway south of the border. There is only one crossing between Alberta and Montana (Sweetgrass/Coutts), as well as a single crossing between Saskatchewan and North Dakota (Portal/North Portal). CN abandoned a second border crossing between Saskatchewan and North Dakota at Northgate in 2001. Manitoba has one crossing with North Dakota (Pembina/Emerson).

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There are 14 rail border crossings with the US in Eastern Canada. Ontario shares five rail crossings with the US: three with Michigan (Sault Ste. Marie/Sault Ste. Marie, Detroit/Windsor, and Port Huron/Sarnia), a single crossing with Minnesota (International Falls/Fort Frances) and a single crossing with New York (Buffalo/Niagara Falls). A second border crossing between Ontario and New York at Niagara Falls was closed in 2000 and is only used for passenger trains. Quebec shares six rail crossings with the US: two with New York (Trout River/Fort River/Elgin and Rouses Point/Cantic), three with Vermont (Highgate Springs/Carnesville, Richford/Abercorn and Norton/Stanhope) and a single crossing with Maine (Jackman/Lac-Mégantic). There are three rail crossings between New Brunswick and Maine (Van Buren/St. Leonard, Vanceboro/St. Croix and Calais/St. Stephen).

According to the Bureau of Transportation Statistics, the busiest four rail crossings are at International Falls, Port Huron, Detroit, and Blaine. Three of these crossings service Ontario. Nearly 60 percent of rail containers cross through crossings in Ontario, followed by 12.9 percent in British Columbia and 11.1 percent in Saskatchewan. The top crossings account for approximately 90 percent of rail traffic, intermodal and non-intermodal alike.

Total non-intermodal traffic in 2018 was 307.5 million tonnes, while total intermodal traffic was 36.2 million tonnes (Statcan 2018). Figure 2.6 illustrates a CN train with a double-stack intermodal load.

Figure 2.6: A CN Intermodal Train

Source: CN (CN 2019)

Different commodities require different types of railcars. Despite the differences, all railcars are built to specific standards set by Transport Canada (TC) in Canada and the Department of Transportation (DOT) or the Association of American Railways (AAR) in the US. These regulations are in place to ensure standardization across the transportation industry (rail, road, marine). Types of railcars are described in Appendix C.

The types of rail services required vary with the type of rail operations. Different shippers rely on various rail services based on their requirements. Rail services are generally categorized into three primary types:

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unit trains, manifest trains, and intermodal trains. Different train types are described in more detail in Appendix C.

The following subsections discuss CN and CP, and their rail networks and relevant corporate information.

Canadian National (CN) Incorporated in June 1919, CN has the most extended rail network in Canada. In fact, following a series of acquisitions since its privatization in 1995, the Montreal-based company possesses one of the longest railway systems in North America. CN’s network in Canada reaches from the Pacific coast in British Columbia to the Atlantic coast in Nova Scotia; it is Canada’s only transcontinental railway.

CN operates 21,879 kilometres (km) of the total first main track, of which CN owns 20,258 km, and the rest is operated by CN either under a lease, contract, trackage rights or joint ownership. Including the first main track, second main track and other track, and industrial track, yard and sidings, CN owns and operates a total of 36,565 km of track (Government of Canada 2018b). By province, CN’s largest first main track rail network is in Ontario (4,688 km), followed by Alberta (4,421 km) and British Columbia (4,362 km). The only provinces and territories not served by CN are Newfoundland & Labrador, Prince Edward Island, Yukon, and Nunavut. CN operates a stretch of track servicing Hay River, Northwest Territories, making it the second most northern railway network in North America.

Figure 2.7 illustrates CN’s North American rail network. CN operates in 8 provinces and 16 US states, serving most of Canada and the mid-western and southern US, including approximately 75 percent of the US population and all major Canadian markets.

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Figure 2.7: CN’s Rail Network

Source: CN (CN 2019)

Figure 2.8 illustrates CN’s main lines (dark red) and its feeder lines (light red) and shortline partners (blue). In Canada, the railway begins in Vancouver and Prince Rupert on the Pacific coast and runs east through every major western Canadian city, including Edmonton, Calgary, Saskatoon, Regina, and Winnipeg and expands to the Thunder Bay port in Ontario. It reaches many resource-rich areas in Hay River of Northwest Territories, Fort Nelson in BC, and Fort McMurray in AB. CN’s main terminals in the US include Auburn, Chicago, Chippewa Falls, Detroit, Indianapolis (via Indiana Rail Road), Jackson, Joliet, Memphis, Minneapolis, New Orleans and Worchester (CN 2019).

CN-serviced ports include Port of Halifax, Saint John, Quebec, Montreal, Thunder Bay, Prince Rupert Port Authority, Port of Vancouver in Canada, and the Port of New Orleans in the US. CN also has links to other ports, including Port of Mobile, the Port de Québec, Port Saint John, and Port de Belledunes.

Figure 2.8 shows the CN rail network density map across Canada and the US with connecting ports on three coasts. Based on CN’s annualized rates in the second quarter of 2019 gross ton-miles (GTM) production, the share of track in the Global West is 26 percent of GTM production. The share of the track in the Global East is 4 percent of GTM production. The share of the track in domestic Canada is 17 percent, and transborder is 34 percent (Southbound 23 percent and Northbound 11 percent) of GTM production. It is important to note that the share of track in the Global South and US Domestic are 3 percent and 16

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percent of GTM production. CN is keeping more investment in the high-density western region and focusing on business opportunities for growth in the eastern and southern regions.

Figure 2.8: CN Rail Network Traffic Density Map

Source: CN (CN 2019)

CN has a robust supply chain agreement with its customers. On average, CN invests approximately 20 percent of annual revenues back into the company’s future growth, providing a steady and predictable level of CN investment. This investment is used in different ways - CN’s investments of approximately $850 million in long sidings and double track since 2000 have enabled 42 percent higher car velocity and 59 percent more revenue ton-miles (RTM). In 2018 CN invested a record of $3.5 billion in improving the safety, efficiency, and capacity of its network. CN stated in 2019, they plan to invest approximately $3.9 billion in its capital program, of which $1.6 billion is targeted toward track and railway infrastructure maintenance. CN invested over $600M across its North American network in 2018/2019 to improve its key operating metrics including, terminal dwell times, train speed and railcar services (CN 2019). Other CN investment plans can be found in the next section. Figure 2.9 illustrates the CN rail facilities in Western Canada. In terms of capacity investment, including equipment and track expansions projects, CN invested $1.1 billion across Canada in 2019 to provide better services, including intermodal, forest products, grains, and industrial products. Two new Port of Prince Rupert terminals for propane exports and Canadian coal expansion are parts of this investment.

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Figure 2.9: CN Rail Facilities in Western Canada

Source: CN (CN 2019)

CN’s investment in its facilities’ expansion in the Eastern Canada region amounts to more than $886 million in 2019, used to improve capacity and fluidity, specifically to increase commodities movement from Halifax to Chicago.

Figure 2.10 illustrates CN facilities in Central and Eastern Canada.

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Figure 2.10: CN Rail Facilities in Central and Eastern Canada

Source: CN (CN 2019)

An important part of CN’s rail network is its connection to the US Gulf Coast. As shown in Figure 2.11, Chicago is a strategic location for CN, as it links all the five main CN entering lines coming from different terminals.

Figure 2.11: CN Rail Facilities in the US

Source: (CN 2019)

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As part of CN’s 2019 investment, it is planning to invest more than US$95 million of its total US$2.9 billion capital investment on Louisiana’s critical rail infrastructure expansion. Based on CN’s new contracts with its customers, more traffic will come through different commodity sectors, so it needs to boost the capacity to meet extra traffic to the corridors across Louisiana. The CN Louisiana infrastructure investments connect the Port of New Orleans to the markets across the continent and link some of the most important businesses in the River Parishes and Baton Rouge to their customers and suppliers.

Automated inspection portals, enhanced use of distributed power operating practices, new locomotives, positive train control systems and autonomous track inspection programs are part of CN’s investment that will support a safe and efficient movement of goods to their end markets. CN has also planned investments for the growth moving over a two-mile-long bridge over the spillway near the southwest shore of Lake Pontchartrain in New Orleans.

Figure 2.12 shows CN’s planned expansion projects for new facilities, ports and terminals to offer end-to- end service to its customers.

Figure 2.12: CN Network Capacity Expansion

Source: CN

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Canadian Pacific (CP) While CP was Canada’s first transcontinental railway, it currently does not reach the Atlantic coast. Its rail network stretches from Vancouver to Montreal and as far north as Edmonton. The CP rail network serves several major US cities, such as Minneapolis, Detroit, Chicago, and New York. Key Canadian port cities include Vancouver, Montreal, Thunder Bay and Québec City.

Including first main track, second main track and other track, and an industrial track, yard and sidings, CP owns 16,299 km of track. CP owns and operates 13,509 km of the total first main track. Also, CP operates an additional 4,756 km of track that is under a lease, contract, trackage rights, or jointly owns. In total, CP owns and operates 21,055 km of track. CP’s largest first main track rail network is in Ontario (3,782 km), followed by Saskatchewan (3,524 km) and Alberta (2,391 km) (StatCan 2017). The only provinces not served by CP are Newfoundland & Labrador, New Brunswick, Nova Scotia, and Prince Edward Island. CP does not own and operate any track in the three territories. Figure 2.13 illustrates the CP’s rail network. The CP’s intermodal terminals are depicted in yellow. The mainline is shown as a red line while the red- dotted line shows the track in which CP has principal haulage or trackage rights, which give assess to terminals that would otherwise be unreachable for CP.

Figure 2.13: CP’s Rail Network

Source: CPR (CPR 2019a)

CP’s rail network is divided into four primary corridors: Western, Southern, Central and Eastern. The Western Corridor is the portion connecting Vancouver and Saskatoon and includes main rail yards at Calgary, Edmonton, and Vancouver. The rail network connects with Union Pacific (UP) at Kingsgate, BC and the Burlington Northern Santa Fe (BNSF) at Coutts, AB and Huntingdon, BC. The Southern Corridor connects Saskatoon and Chicago and Kansas City, running track through main rail yards in Minneapolis

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and Milwaukee. With the purchases of the Dakota, Minnesota, and Eastern Railway (DM&E) and the Iowa, Chicago and Eastern Railway (IC&E) in September 2007, CP’s rail network extends into the US Midwest. Additionally, CP connects with Kansas City Southern (KCS), NS and UP at Kansas City and connects with UP at Minneapolis and Minot, North Dakota. CP also connects with BNSF, UP, NS, CSX, and CN at Chicago.

The Central Corridor connects Moose Jaw and Toronto and has access to the port at Thunder Bay. The main feeder line connects Edmonton, Saskatoon, Winnipeg, and Sudbury.

The Eastern Corridor connects major population centers of Eastern Canada, the US Midwest and the US Northeast, including Montreal, Detroit, Chicago, Philadelphia, and Buffalo. As shown in Figure 2.14, CP connects with NS and CSX at Detroit and Buffalo.

Figure 2.14: CP’s Rail Connections with NS and CSX

Source: (CPR 2006)

Several agreements and commercial arrangements with other Class I railways, as well as other regional and short-line railways, extend CP’s network further. Examples include the Chicago to Buffalo Haulage Agreement between CP and CSX to move intermodal traffic from NS trackage rights between Chicago and Detroit onto the Chicago-Buffalo track. It is not clear, however, whether that means seamless transportation from a shipper perspective or whether the shipper needs to engage with multiple rail carriers.

Figure 2.15 illustrates CP’s current rail network against the backdrop of the location of various oil and natural gas plays. Included in the figure are the oil sands, the Bakken Shale Formation, the Marcellus Shale, and the ethanol-producing areas in the US Midwest.

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Figure 2.15: CP’s Rail Network and Various Oil and Natural Gas Plays

Source: CPR (CPR 2019)

In addition to investments near the oil sands, CP announced plans to expand its crude oil trans-loading facility at Estevan, Saskatchewan, serving the Bakken Formation in Saskatchewan, to better handle the expected 70,000 annual carloads in the future. Also, as part of its three-year program to improve 1,400 km of its North Main Line between Winnipeg and Edmonton, CP enhanced 250 km of track. These investments by CP include $680 million for track infrastructure, $200 million for volume growth, productivity initiatives and network enhancements, $80 million to upgrade its information technology systems, and $40 million principally in train control and other regulated capital. Figure 2.16 illustrates a rail density map along CP’s rail network, showing the traffic density expressed in terms of gross ton-miles per route mile. The thick red line indicates track with gross tons per mile above 45 million and is CP’s mainline connecting Vancouver to Toronto, via Calgary. The other high-density track is between Glenwood, Minnesota, and Chicago. The average density from Vancouver to Calgary is 73.5 million GTMs per route mile, followed by Glenwood, Minnesota to Chicago (54.4 million of GTMs per route mile) and Calgary to Winnipeg (53.0 million of GTMs per route mile). The stretch of track between Winnipeg and Toronto is 32.5 million GTMs per route mile.

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Figure 2.16: CP Rail Network Density Map

Source: CP (CP 2018)

Ports One of the critical factors influencing the growth of rail transportation has been its close integration with maritime shipping. Ports are a crucial connection to international markets for Canadian economic activities. By the end of 2018, Canada had 557 port facilities. The vital Canadian ports are shown in Figure 2.17. Forty-four port facilities are operated and owned by Transport Canada (TC), and 18 port facilities are managed independently by Canada Ports Authorities (CPAs). The CPAs are governed by a board of directors chosen by port users and the municipal, provincial and federal governments.

CPA invests in projects that diversify and expand new and existing port infrastructures. More than $270 million was invested in 16 infrastructure projects at eight Canadian ports in 2018. For example, St. John’s Port Authority has invested $12.8 million in its facilities to expand the capacity to meet industry needs, with half of this investment committed by the Government of Canada.

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Figure 2.17: Main Canadian Ports

Source: Transport Canada (Transport Canada 2018a)

Canadian railway networks serve different ports from east to west and down through the southern US to the Gulf of Mexico. The main Canadian and US ports are Prince Rupert, Vancouver (Deltaport, Centerm & Vanterm), Montreal, Saint John, Halifax, New Orleans and Port of Mobile. Port of Prince Rupert: The Port of Prince Rupert is one of the fastest-growing ports in Canada. It is an integral part of railway supply chain growth through the northern corridor. In 2018 Port of Prince Rupert handled more than 25 million tonnes of freight.

The Prince Rupert Port Authority in collaboration with CN and Pembina plans for a new small-scale rail terminal for Liquefied Petroleum Gases (LPGs) export to be located on Watson Island, British Columbia, in addition to the existing export terminal currently exporting 20,000 bpd of propane. As shown in

Figure 2.18, the new terminal, with a capacity of 25,000 bpd, will be used for LPG exports destined for international markets. This terminal is estimated to be in service by the end of 2020.

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Figure 2.18: Prince Rupert New LPG Terminal

Source: Pembina Corporation, 2018

Vopac Development Canada Inc. and Alta Gas intend to build storage facilities on Ridley Island to ship propane, methanol, and diesel to Asian markets by the end of 2022.

Also, the Prince Rupert Port Authority's expansion plan, combined with a CN infrastructure investment in the Vancouver Fraser Port Authority in BC, is intended to maximize the use of rail to help support export demand. Figure 2.19 provides an overview of volumes of cargo shipped through Port of Prince Rupert in 2018 and a forecast for the next ten years (2019-2028). The volumes are broken down by type of containers, agriculture products, coal, and petroleum coke, forest products, and bulk liquids (CN 2019).

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Figure 2.19: Port of Prince Rupert Volume Forecast

Source: CN (CERI 2019)

Port of Vancouver (Centerm & Vanterm, GCT Deltaport): The Port of Vancouver is Canada’s busiest port, handling 147.1 million tonnes of freight in 2018, 4 percent more than in 2017. Nearly 80 percent of that weight was outbound cargo (Transport Canada, 2018b). Similarly, CN is well connected to marine terminals, including Centerm & Vanterm, Fraser Surrey Docks, GCT Deltaport, Delta BC and Thornton yard of Vancouver (see Figure 2.20). As part of CN’s critical capacity expansion across its network, CN has made a significant investment to increase the terminal capacity in this area.

Figure 2.20: CN Intermodal Expansion – Port of Vancouver

Source: CN (CERI 2019)

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Port of Montréal: The Port of Montréal is Canada’s second-largest container port, mainly serving Québec, Ontario and the US Midwest. In 2018, the port handled more than 38.9 million tonnes of cargo from around the world (Transport Canada 2018). Its strategic location with the major North American markets makes it one of the principal gateways on the east coast of North America. The port capacity has been raised by current and future terminal expansion.

Port of Halifax: The Port of Halifax is the largest container port in Atlantic Canada, with 4.8 million tonnes of total cargo in 2018. Moving petroleum products and vehicles are an integral part of the port’s activities (Transport Canada 2018). As one of the major east coast gateways to the North American markets, and with its proximity to Europe and the Mediterranean, it is a strategic port. It connects to the intermodal hubs in Toronto, Chicago and the Midwest through a short line railway.

Port of Saint John: This port is located 109 km from the US border and serves New England, Eastern Canada, and the Midwest. The Saint John Port Authority, along with its stakeholders and rail partners, is looking to increase the port’s capacity to deal with congestion in the US Northeast and Eastern Canada. In 2018, the Port of Saint John handled more than 25 million tonnes of freight.

Port of New Orleans: This is the second-largest port in the Gulf of Mexico with service to Asia and to and from Latin America. Plastic resins are one of the top commodities transported through this port. Freight expansion capacity is planned.

Port of Mobile: This port is a crucial transportation gateway to the west and east coasts in the US. It is a deep-water harbour so that it can serve markets in Asia via the Panama Canal. Due to its strategic location, there is a plan to expand its capacity in two phases: the first phase will increase the capacity to 650 thousand TEU and the second phase to 1 million TEU.

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Chapter 3: Rail Traffic and Investment

• In 2018, agricultural products, coal, minerals, miscellaneous, and plastic and chemical products were the top 5 commodity groupings that represented 77.5 percent of all commodities moved by rail. • Total freight demand for all commodity groupings is expected to grow throughout the forecast period except for the minerals category, which is expected to remain flat. The total freight volume in Canada and to US/Mexico markets is foreseen to increase by 11.2 percent. • The Prairies region will continue to dominate the rail traffic, with the top two destination markets – Western region and the US/Mexico markets. • Crude and other fuels transported on rail would grow from 280,000 bpd in 2019 to 360,000 bpd by 2025. In a scenario where no new pipelines are operational, the crude fuel volume is expected to reach almost 1.4 million bpd by 2025. • The rail-based supply chain, including both Class I railways, ports, short lines, and shipper facilities, would need additional investment to realize the increased rail traffic. • Forecast total capital investment will reach over $5 billion by 2025, with half of that directed towards track and roadways, followed by building and machinery, rolling stock, and signals and power systems.

This chapter presents the current rail traffic and CERI’s outlook for future rail traffic. While the focus of this report is on resource commodities and petrochemicals, to analyze these two commodity groupings, we need to model all the commodities.

Current Rail Traffic in Canada This section of the report describes the current rail traffic within Canada and commodities that move in and out of Canada. The twelve commodity groupings that were evaluated in CERI’ forecast are presented in Table 3.1.

Table 3.1: Standard Classification of Commodity Groupings AGRI Agricultural products BMETL Base metals and articles of base metals COAL Coal FOOD Food products FRPAP Forest products FUELS Fuel oils and crude petroleum MISC Miscellaneous productsa MNRLS Minerals OTHMF Other manufactured goods PLCHM Plastic and chemical products TRANS Automobiles and other transportation equipment WASTE Waste and scrap a Miscellaneous products include but are not limited to manufactured goods, manufacturing

SOURCE: Statistics Canada, CERI

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Table 3.1 (the left column in Table. 3.1 are acronyms of the commodities that are used in the Figure legends). These groupings were created based on over sixty different commodities that are classified based on the Standard Classification of Transported Goods (SCTG) system (FTR Transportation Intelligence 2019) and presented in Table 3.2.

Table 3.2: Transported Commodities Commodity Commodity 1 Alumina 35 Machinery 2 Aluminum, primary or semi-finished 36 Meat, fish, seafood, and preparations 3 Animal feed, cereal straw, eggs, and 37 Metallic waste and scrap other animal products 4 Animal or vegetable fats, oils, and flours 38 Milled grain products and preparations, and bakery products 5 Articles of base metal 39 Mixed loads of unidentified freight 6 Automobiles and minivans 40 Newsprint 7 Beverages 41 Nickel ores and concentrates 8 Cement 42 Non-metallic waste and scrap 9 Coal 43 Other basic chemicals 10 Coal coke and petroleum coke 44 Other cereal grains 11 Colza seeds (canola) 45 Other chemical products and preparations 12 Copper ores and concentrates 46 Other manufactured and miscellaneous goods 13 Copper, primary or semi-finished 47 Other metallic ores and concentrates 14 Fertilizers and fertilizer materials 48 Other non-ferrous metal, primary or semi- (excluding potash) finished 15 Freight motor vehicles 49 Other non-metallic minerals 16 Fresh, chilled or dried fruit and nuts 50 Other oil seeds and nuts, other agricultural products 17 Fresh, chilled or dried vegetables 51 Other refined petroleum and coal products 18 Fuel oils and crude petroleum 52 Other transportation equipment 19 Gaseous hydrocarbons, including liquid 53 Other vehicles petroleum gas (LPG's) 20 Gasoline and aviation turbine fuel 54 Other wood products 21 Gypsum 55 Paper and paperboard, except printed products 22 Iron and steel, primary or semi-finished 56 Parts and accessories for motor vehicles

23 Iron ores and concentrates 57 Phosphate rock 24 Lead ores and concentrates 58 Plastic and rubber 25 Less-than-carload shipments 59 Pool car traffic of freight forwarder and ship associated 26 Logs and other wood in the rough 60 Potash 27 Lumber 61 Prepared foodstuffs 28 Prepared foodstuffs 62 Sulphuric acid 29 Products made of non-metallic minerals 63 Wheat 30 Salt 64 Wood chips

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31 Sand, gravel, stones and crushed stone 65 Wood pulp 32 Sugar 66 Zinc ores and concentrates 33 Sulphur 67 x.Total cross border 34 z.MEMO: Containers (COFC) 68 z.MEMO: Trailers (TOFC) Source: FTR Transportation Intelligence

Historical data on Canadian rail traffic is presented for different transported commodities. Figure 3.1 illustrates the contribution (by percentage) of the tonnage for each commodity grouping moved by rail across Canada from 2015 to 2018. The trend of the contribution of transported tonnage for each commodity stayed consistent in the last few years, with increases in coal, petrochemicals, fuel, and miscellaneous shipments and a reduction in minerals. In 2018, agricultural products, coal, minerals, miscellaneous, and plastic and chemical products were the top five commodity groupings that represented 77.5 percent of all commodities moved by rail.

Figure 3.1: Total Rail Tonnage by Commodity Grouping (%, 2015-2018)

15 % 10

0 AGRI COAL MNRLS MISC PLCHM FRPAP FUELS FOOD BMETL WASTE TRANS OTHMF

2015 2016 2017 2018

Source: Canadian Freight Analysis Framework (StatsCan, 2019); CERI

Regional Rail Traffic The following section reviews freight rail movements within different geographical regions in Canada, the next section discusses export volumes to markets in the US/Mexico. The total freight data was broken down to show the origin of 12 aggregated commodity groupings. This data shows annual rail movements, measured in tonnes, by commodity grouping, origin, and destination. The origin and destination of commodities are sub-divided into the following regions: Atlantic Region (Nova Scotia, New Brunswick, Prince Edward Island, and Newfoundland & Labrador), Central Region (Ontario and Quebec), Western Region (British Columbia and Northwest Territories), and Prairies Region (Alberta, Saskatchewan, and

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Manitoba). The rail transport to and from Canada within North America is also included. Due to data unavailability on specific corridor traffic, we could not conduct a quantitative current and future rail traffic analysis for specific corridors and hence present the data at the regional and provincial levels.

Figure 3.2 illustrates the 2018 rail traffic by commodity grouping and origin region. The Prairies region dominates the rail traffic among all the other regions, transporting a multitude of various commodities totalling over 221 million tonnes. Specifically, the top five commodity groupings originating in the Prairies are agricultural products (42.3 million tonnes), plastic and chemical products (15.8 million tonnes), fuel oil and crude petroleum (9.0 million tonnes), minerals (5.1 million tonnes), and food products (3.9 million tonnes). About 40 percent of rail traffic originating in Prairies is destined for domestic markets within Canada.

Figure 3.2: Canadian Rail Traffic by Commodity and Origin, 2018

220

Millions 200 Waste 180 Transportation 160 Plastic Others 140 Minerals 120 Miscellaneous

Tonnes 100 Fuels Forest 80 Food 60 Coal 40 Base Metals Agricultural 20

0 Western Prairies Central Atlantic Source: Canadian Freight Analysis Framework (StatsCan, 2019); CERI

Other regions use rail to transport commodities, but in lesser volumes than the Prairies. The Western region is the second-largest originator of rail traffic with volumes roughly four times less than Prairies or almost 53 million tonnes shipped in 2018. Coal (31.1 million tonnes), forest products (8 million tonnes), miscellaneous products (7.9 million tonnes), minerals (2.6 million tonnes) and plastic and chemical products (1.3 million tonnes) are the top commodity groupings moved out of the Western region. About 20 percent of rail volumes originating in the Western region are moved to Prairies, Central and Atlantic regions.

Central region’s moved 16.5 million tonnes of volume in 2018, with the top 5 commodities transported are miscellaneous (10.6 million tonnes), fuel oil and crude petroleum (4.3 million tonnes), base metals (4.2 million tonnes), forest products (3.1 million tonnes), and plastic and chemical products (2.5 million tonnes). The Central region moves about 70 percent of rail volumes to regions in Canada. Whereas the

April 2020 Ribbons of Steel 2: Ensuring an Economic Future for Petrochemicals and Petroleum Fuels 35

Atlantic region moved 21.5 million tonnes with the majority being the minerals grouping, about 90 percent of total rail traffic is destined for domestic regions within Canada.

Table 3.3 summarizes the 2018 freight data, expressed as percentages of the total tonnage moved on the rail networks from different regions within Canada. For example, it can be observed that coal with almost 60 percent share dominates the rail traffic in the Western region, whereas agricultural products grouping with nearly 50 percent share is the largest commodity grouping in Prairies Region; other significant groupings include miscellaneous products with a 35.6 percent share in Central Canada and minerals with a 90.9 percent share in the Atlantic Region.

Table 3.3: Commodity Flow Percentage (%) by Region, 2018 (Within Canada)

Commodity Western Prairies Central Atlantic Agricultural products 0.9 48.7 1.0 0.1 Automobiles and other transportation 0.5 0.2 1.3 0.8 equipment Base metals and articles of base metals 0.7 0.6 14.0 0.4 Coal 58.8 3.7 0.0 0.0 Food products 0.4 4.5 6.1 0.4 Forest products 15.1 3.6 10.5 1.7 Fuel oils and crude petroleum 0.6 10.4 14.6 0.2 Minerals 5.0 5.9 6.2 90.9 Miscellaneous products 14.9 3.0 35.6 4.3 Other manufactured goods 0.4 0.1 1.0 0.1 Plastic and chemical products 2.4 18.1 8.3 0.6 Waste and scrap 0.2 1.2 1.5 0.5 Total 100 100 100 100 Source: Canadian Freight Analysis Framework (StatsCan, 2019); CERI Note: Columns add to 100 percent.

Rail Traffic by Region in North America Given the Canadian rail network connectivity to other regions in the North American continent, it is not surprising that the leading destinations for international exports by railway originating in Canada are markets in the US/Mexico.4 Figure 3.3 illustrates the percentage shares of Canadian rail traffic to the US/Mexico by the Canadian region of origin in 2018. More than half of rail traffic destined for the US/Mexico originates in the Prairies region.

4 Data for the US and Mexico are shown at the aggregate level.

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Figure 3.3: Canada’s Rail Traffic Exports to US/Mexico by Region

Source: Canadian Freight Analysis Framework (StatsCan, 2019); CERI

Figure 3.4 shows the total provincial export breakdown to the US/Mexico in million tonnes over the 2015- 2018 period. The volume of exported commodities from Canadian provinces has increased since 2015, with Alberta and Saskatchewan having not only the larger shares of total Canadian exports to the US/Mexico but also the highest growth rates. The recent increases from Alberta and Saskatchewan are the result of higher volumes of crude oil products being transported on rail due to a lack of export pipeline capacity out of Western Canada.

Alberta shipped about 23 million tonnes, accounting for a 29 percent share of Canadian exports by rail to the US/Mexico in 2018. Saskatchewan comes second, with 21.6 percent and British Columbia with 15.6 percent.

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Figure 3.4: Canada’s Commodity Exports to US/Mexico

Source: Canadian Freight Analysis Framework (StatsCan, 2019); CERI

Canada not only exports commodities to these markets but also imports various products. Figure shows total imports into Canada from the US/Mexico in million tonnes by province over the 2015-2018 period, and Figure 3.5 shows the 2018 percentage share of volumes imported into various Canadian regions. British Columbia imported the most volumes, with just over 14 million tonnes, followed by Alberta and Ontario.

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Figure 3.5: Canada’s Commodity Imports to US/Mexico

Source: Canadian Freight Analysis Framework (StatsCan, 2019); CERI

As shown in Figure 3.6, in 2018, the US/Mexico rail traffic directed for the Western region accounts for 36.1 percent of the total freight, followed by the Central region (34.3 percent) and the Prairies region (27.6 percent).

Figure 3.6: Canada’s Rail Traffic Imports from the US/Mexico by Region

Source: Canadian Freight Analysis Framework (StatsCan, 2019); CERI

April 2020 Ribbons of Steel 2: Ensuring an Economic Future for Petrochemicals and Petroleum Fuels 39

Forecast of Rail Traffic

This section presents a detailed forecast of rail traffic in Canada and the associated capital investment in the rail-based supply chain discussed in Chapter 2 for the 2019-2025 period. Rail freight transportation demand for various origin-destination corridors in Canada and the US/Mexico is developed using multivariate regression with inter-jurisdictional GDP and rail freight data. Provincial GDP forecasts from the Canadian Energy Futures 2018 publication (NEB 2018) and OECD forecasts of the US and Mexico GDP are the sources of the GDP data. Rail freight data reported in the Canadian Freight Analysis Framework (StatsCan, 2019) provides the other inputs into the models. The annual investments are forecast based on the 2017 breakdown of annual investments by category based on the actual history of all investments made by members of the Railway Association of Canada (RAC) (Railway Association Of Canada 2018). The model description and its methodology are provided in Appendix D.

Rail traffic is forecasted by province except for the Atlantic region, which is aggregated to include Nova Scotia, New Brunswick, Prince Edward Island, and Newfoundland and Labrador.

This baseline forecast scenario is based on the economic conditions as per “business-as-usual,” in other words, the forecast depends on the prevailing market, social, geopolitical, and trade environments. The uncertainty of this forecast is the current global events. At the time of publication of this report, the world was battling a COVID-19 pandemic, which resulted in an immediate energy demand drop resulting in the oversupply of crude and, consequently, a sharp reduction in oil prices. These events already have had global and domestic impacts, and depending on the duration, it could result in a further negative impact on energy demand, economic growth and rail traffic demand.

This baseline forecast scenario assumes that the industrial projects that have entered an FID (Final Investment Decision) or construction phase will be operational by the announced onstream dates; also this scenario assumes that the three export oil pipelines – expansion of TMX, Line 3, and the Keystone XL are operational within the period evaluated in this study. An alternative scenario of crude by rail forecast is presented at the end of this chapter.

Commodities Forecast

Figure 3.7 shows the total freight in Canada and US/Mexico markets is foreseen to increase from 312.2 million tonnes in 2019 to 370.4 million tonnes in the year 2025, growing by 11.2 percent. In comparison to the 2015-2018 period levels, the growth will amount to almost 19 percent. Agriculture products, plastic and chemical products, and coal account for half of the total freight moved by rail. In a scenario where none of the oil pipelines are operational by 2025, we assume that the fuels category, which includes fuel oils and crude petroleum, will also be among the top commodity groupings transported by rail. The volume of additional crude transported by rail in the absence of additional pipeline capacity is presented as a separate case at the end of the chapter.

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Figure 3.7: CERI’s Rail Volume Growth Forecast

Source: CERI

April 2020 Ribbons of Steel 2: Ensuring an Economic Future for Petrochemicals and Petroleum Fuels 41

Based on the modelling results, Table 3.4 summarizes the growth rates for all commodity groupings for the forecast period of 2019-2025. Except for minerals, each grouping will experience some growth in the forecast period. For the 2019-2025 period, on average, the fuel oils and crude petroleum and plastic and chemical products rail traffic will increase by 1.7 percent and 1.9 percent, respectively.

Table 3.4: Commodity Growth Rates (%)

2019 2020 2021 2022 2023 2024 2025 AGRI 1.85 2.11 2.13 1.70 1.71 1.63 1.52 BMETL 2.19 2.07 1.74 1.75 1.78 1.69 1.92 COAL 1.90 2.35 1.92 1.83 1.66 1.98 2.50 FOOD 2.00 2.14 1.83 1.68 1.74 1.63 1.76 FRPAP 2.05 1.88 2.17 1.96 1.85 1.80 1.88 FUELS 0.20 1.32 1.77 2.22 2.24 2.05 2.08 MISC 1.88 1.97 1.78 1.75 1.69 1.83 2.14 MNRLS 4.67 -1.10 3.37 1.58 2.17 1.03 -0.24 OTHMF 1.20 3.57 1.15 2.22 0.00 2.17 2.13 PLCHM 1.71 2.24 2.08 1.91 1.80 1.85 1.70 TRANS 2.44 2.12 1.69 1.51 1.73 1.82 1.67 WASTE 1.85 2.08 1.78 2.20 1.68 1.89 1.62 Source: CERI Rail Volume Forecast by Region The section presents the aggregated commodity volumes broken down by province and region. Figure 3.8 displays the volumes are broken down by origin and destination for all Canadian provinces, the aggregated Atlantic region and the US/Mexico market based on the weight in million tonnes (Mt). According to CERI’s forecast model, similar trends witnessed in the 2015-2018 period will be prevalent in the forecast period.

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Figure 3.8: Rail Volume Forecasts by Province or Region (in million tonnes)

Source: CERI

Note: the province or region in the title of each box represents the origin of the shipment, whereas the legend describes various destination markets.

When it comes to destination markets, the Prairies region will continue to dominate the rail traffic, with the top two destination markets – Western region and the US/Mexico markets. Together these two destination markets make up more than 75 percent of freight volumes originating in Alberta.

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Table 3.5 shows CERI’s forecast for total commodity flow percentages of the total tonnage on the rail networks from different Canadian provinces and regions and US/Mexico in 2025.

Table 3.5: CERI’s Rail Commodity Flow Forecast by Region, in 2025 (%) From/To AB AT BC MB ON QC SK US/Mexico Total % AB 5.76 3.15 45.36 1.55 5.25 3.94 1.61 33.38 100 AT 0.69 9.84 0.30 0.16 4.00 76.25 0.07 8.69 100 BC 4.96 0.39 59.02 0.51 9.03 4.29 0.37 21.44 100 MB 0.90 0.90 22.48 0.45 35.71 11.50 0.98 27.07 100 ON 13.03 6.61 10.40 3.98 5.57 12.76 3.00 44.66 100 QC 6.53 9.88 6.00 2.58 22.23 13.06 1.13 38.60 100 SK 1.88 3.46 51.85 1.42 8.97 4.98 0.84 26.59 100 UM 16.41 2.80 23.57 1.68 17.30 12.98 3.62 21.63 100

Source: CERI

Rail Volume Forecast by Commodity Figure 3.9 illustrates the same rail traffic forecast as in the previous section but broken down by a commodity grouping for all Canadian provinces and regions and the US/Mexico based on the weight in million tonnes (Mt). The rail demand will be driven predominantly by traffic from resource-based sectors, such as agriculture, petrochemicals, petroleum and coal.

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Figure 3.9: Rail Volume Forecasts by Commodity (Million tonnes)

Source: CERI

Note: the province or region in the title of each box represents the origin of the shipment, whereas the legend describes various commodity groupings.

By 2025, top commodities (by volume tonnage) originating in the Western region are coal, forest products, miscellaneous, minerals and plastic and chemical products. Coal predominantly originates in BC, with a 35.7 percent share. Forest products with higher percentages mainly come from BC and QC.

April 2020 Ribbons of Steel 2: Ensuring an Economic Future for Petrochemicals and Petroleum Fuels 45

The Prairies region will experience growth in agriculture products, fuel oil and crude petroleum, plastic and chemical products, and forest products. Agriculture products make up the highest share in MB with 66.2 percent, whereas fuel oil and crude petroleum have the highest share originating from AB (20.2 percent). Plastic and chemical products have dominant shares in AB and SK.

The top commodities originating in the Central region include forest products, miscellaneous, plastic and chemical products, metals, and fuel oil and crude petroleum. Base metals and articles of base metals make up the most significant shares in this region – provinces of ON (11.5 percent) and QC (15.5 percent).

The top commodities originating from the Atlantic Region are minerals, forest products, fuel oil and crude petroleum, and agriculture products, albeit in significantly lower volumes than all other regions in Canada.

Canada will continue to import products from the US/Mexico. The top commodities originating from the US/Mexico are agriculture products, plastic and chemical products, coal, food, and automobiles and other transportation equipment.

Table 3.6 also details CERI’s forecast by commodity percentage shares of the total tonnage on the rail networks from different Canadian provinces and the US/Mexico in 2025. It can be observed that various commodity groupings make up different shares depending on the location.

Table 3.6: CERI’s Commodity Flow Share Forecast (%), in 2025 Commodity AB AT BC MB ON QC SK US/Mexico 26.5 0.2 0.8 66.2 3.7 1.1 48.6 16.3 AGRI BMETL 2.0 0.4 1.5 2.3 11.5 15.5 0.6 6.6 COAL 7.2 0.0 35.7 0.0 0.0 0.0 0.1 13.4 FOOD 2.9 1.0 0.3 8.4 4.9 2.1 4.3 7.6 FRPAP 10.9 6.1 18.9 2.9 14.1 22.5 1.8 4.4 FUELS 20.2 1.2 0.6 2.9 8.0 11.3 4.5 10.3 MISC 3.0 4.4 13.3 3.4 22.2 21.5 0.9 7.3 MNRLS 8.8 84.9 3.3 2.2 7.1 4.1 2.0 10.5 OTHMF 0.1 0.0 0.2 0.2 0.7 0.4 0.0 0.7 PLCHM 16.7 0.6 2.4 9.3 12.1 19.9 36.6 15.3 TRANS 0.5 0.7 0.6 0.3 11.6 0.5 0.2 6.5 WASTE 1.4 0.5 0.5 2.0 4.2 1.2 0.4 1.0 Total % 100 100 100 100 100 100 100 100 Source: CERI

Figure 3.10 demonstrates 2018 vs. 2025 comparison for fuels and petrochemical and chemical groupings, highlighting a similar growth trend as for the rest of the commodity groupings. Significant rail traffic for these two commodities is expected in resource-producing provinces.

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46 Canadian Energy Research Institute Figure 3.10: Regional Fuels and Petrochemicals Inflow/Outflow Comparison (2018-2025)

Source: CERI

April 2020 Ribbons of Steel 2: Ensuring an Economic Future for Petrochemicals and Petroleum Fuels 47

Baseline crude by rail volumes assumes completion of three main export pipelines that are in various stages of construction – Line 3, Trans Mountain Pipeline System (TMX) and the Keystone XL Pipeline (KXL). In addition, in the summer of 2019, pipeline companies have made several announcements on their plans to add additional pipeline capacity to alleviate some egress issues (CERI 2019). Enbridge announced how it proposes to add 450,000 bpd to its existing pipeline system without building new pipelines with several adjustments. Some adjustments still require regulatory approval, such as reversal of the Southern Lights, and some will take effect as early as 2022. Another Canadian company, Plains Midstream Canada, announced an expansion on its Rangeland pipeline for additional delivery capacity both north to Edmonton, south to the border at Carway. This expansion is subject to receiving sufficient commitments from shippers and receipt of necessary permits and regulatory approvals. CERI’s baseline rail forecast does not incorporate these debottlenecking projects, as some of them remain uncertain.

It is expected that if none of the three pipelines are onstream within a relatively short time frame (2020- 2025), additional crude by rail volumes are expected. Another factor that plays into increasing crude by rail volumes is that the Government of Alberta exempts the crude barrels transported via rail from the ongoing provincial crude production curtailment. The additional volume of crude to be moved by rail and bitumen is estimated to increase substantially, depending on whether one, two or all three pipelines are operational.

CERI built three possible scenarios of what crude by rail volumes might be. Figure 3.11 displays these scenarios against the baseline forecast (yellow line). In the case of all three operating pipelines (i.e., baseline scenario presented above), the crude and other fuels transported on rail would grow from 280,000 bpd in 2019 to 360,000 bpd by 2025. In a scenario where no pipelines are operational, the crude fuel volume is expected to reach almost 1.4 million bpd by 2025. The other two scenarios present cases of various degrees of available incremental pipeline capacity – with Line 3 and no TMX or KXL scenario, volumes will reach just above a million bpd; with Line 3 and TMX and no KXL, volumes will be less, averaging around 400,000 bpd in 2025.

Given that fuel oil and petroleum commodity grouping accounts for a relatively small amount of traffic currently, how easily can the rail network accommodate higher volumes of crude if the need arises? The crude by rail terminal capacity in Western Canada is sufficient to accommodate higher volumes. Still, an additional investment might be needed for receiving terminals to expand capacity and for additional railcars and locomotives that are capable of transporting crude.

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48 Canadian Energy Research Institute Figure 3.11: Crude by Rail Scenarios

1,600.0

1,400.0

1,200.0

1,000.0

800.0 ('000 bpd) 600.0

400.0

200.0

- 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Line 3 and TMX, no KXL Line 3, no TMX and KXL No Pipelines Baseline - All 3 pipelines

Source: CER, CERI

Capital Investment The rail supply chain is vital for the Canadian economy, and the rail network’s infrastructure investment has been growing over the last decade. The rail-based supply chain, including both Class I railways, ports, short lines, and shipper facilities, would need additional investment to realize the increased rail traffic. Overall, the investment covers maintaining, modernizing, and expanding the system with significant track and bridge replacement projects, signalling systems, capacity upgrades, train controls and many more. As the railway infrastructure is a complex and multi-disciplinary engineering system, investment modelling and the detailed forecast is challenging.

As seen in Figure 3.12, the total annual capital investment is forecast to grow from $2.5 billion in 2019 to $4 billion in 2020, reaching almost $5.3 billion by 2025, representing a 26 percent growth in the short term from 2020 to 2025. Approximately half of the investment is directed towards track and roadways, followed by building and machinery, rolling stock and signals and power systems. Other elements, such as terminals and fuel stations, will account for a smaller share of investment. In comparison, in 2018, close to $2.4 billion was invested into Canadian rail-based network, up 30.6 percent from the previous year and 37.1 percent from the 2013–2017 average (Railway Association Of Canada, Pre-budget 2019 n.d.).

Given scenarios for crude by rail presented in the previous section, there might be an incremental investment the railways (relative to their baseline capital investment forecast) would need to incur in each of these scenarios if more crude required to be shipped by rail.

April 2020 Ribbons of Steel 2: Ensuring an Economic Future for Petrochemicals and Petroleum Fuels 49

Figure 3.12: Railway Investment Forecast, 2019-2025

5000

4000 Work_RoadwayTools Track_Roadway 3000 Terminals_FuelStations Signals_PowerSystems

2000 Rolling_Stock $ CAD $ (Millions) Other_Equipment Intermodal_Equipment 1000 Building_Machinery

0 2019 2020 2021 2022 2023 2024 2025 Year

Source: CERI

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50 Canadian Energy Research Institute

April 2020 Ribbons of Steel 2: Ensuring an Economic Future for Petrochemicals and Petroleum Fuels 51

Chapter 4: Alberta’s Industrial Heartland (AIH) Case Study

• Alberta’s Industrial Heartland (AIH) is presented as a case study to analyze the rail transport of petrochemical and chemical products, and fuel oil and crude petroleum. • Fuel oils and crude petroleum and plastic and chemical products are considered the two major transported commodities from Alberta, and by inference, from the Alberta Industrial Heartland. • Shippers and the railways are currently working together to assess growth projections and ensure adequate capacity is available for future freight tonnage in the region. • CERI’s investment model estimated that an additional investment of $339.2 million would be needed in the AIH to accommodate new facilities that will become operational in this period. As a result of additional investment, the AIH region will see additional economic benefits from the spin-offs of this investment. The GDP impact is measured to be almost $6.7 billion over the six years, more than a 10-fold impact. Background This chapter highlights the Alberta’s Industrial Heartland as a case study to illustrate how vital rail transportation is for the two commodity groupings in focus – petrochemical and chemical products and fuel oils and crude petroleum. CERI was constrained by the data availability and quality to illustrate the AIH’s rail movements and hence used provincial data for Alberta to show rail traffic in this province, highlighting petrochemicals and fuels groupings.

More than half of Canada’s petrochemical capacity and the largest share of Canadian crude oil production are in Alberta, making the province a significant supplier of petrochemical and crude feedstock. Annually producing billions worth of products, Alberta’s chemical and petrochemical industry is the second largest manufacturing industry in the province. In contrast, the oil and natural gas producing sector is the largest in the country. About half of Alberta’s chemical and petrochemical industry products are exported to markets domestically and internationally, and about 80 percent of crude oil is moved to the US.

Figure 4.1 shows the 2018 freight tonnage breakdown of different commodities that were moved on the rail network within the boundaries of AB and other provinces and regions. The intraprovincial rail traffic in AB is dominated by the minerals grouping, followed by fuels and petrochemicals. Nearly half of the 2018 rail traffic from AB to BC is agricultural products, followed by fuel oils and crude petroleum and coal, each taking up about a quarter of total volumes. Plastic and chemical products dominate the rail traffic moving from AB to SK and MB, representing over 75 percent of the total traffic, with the remainder being mostly waste and scrap in case of SK and fuel oils and crude petroleum in case of MB. The fuel oils and crude petroleum category dominate rail traffic from AB to ON and QC with about 40 percent of total traffic, followed by plastic and chemical products and forest products. More than 80 percent of rail traffic from AB directed to the Atlantic region is fuel oils and crude petroleum.

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52 Canadian Energy Research Institute Figure 4.1: Alberta’s Intraprovincial and Interprovincial Rail Traffic in 2018

30 Millions WASTE 25 TRANS PLCHM 20 OTHMF MNRLS MISC 15 Tonnes FUELS FRPAP 10 FOOD COAL BMETL 5 AGRI

0 BC AB SK MN ON QC AT Source Canadian Freight Analysis Framework (StatsCan, 2019); CERI

Fuel oils and crude petroleum and plastic and chemical products are considered the two major transported commodities from Alberta, and by inference, from the Alberta’s Industrial Heartland. For instance, the quantity of other transported commodities from Alberta is negligible compared to those two commodity groupings.

Figures 4.2 and 4.3 illustrate the percentage shares of the tonnage of two specific commodity groupings: fuel oils and crude petroleum and plastic and chemical products transported by rail inside Alberta and from Alberta to other provinces in Canada in 2018. In 2018, a total of 12.5 million tonnes of these two commodity groupings was moved by rail within Alberta and to other regions – 7.5 million tonnes of fuel oils and crude petroleum and 5 million tonnes of plastic and chemical products. As can be seen in Figure 4.3, 56 percent of the total tonnage of fuel oils and crude petroleum and 33 percent of the total tonnage of plastic and chemical products are transported to British Columbia, which is mostly moved for export. It confirms that rail corridors in Alberta and especially British Columbia are essential corridors for these products. The transported tonnage of these commodities to other regions in Canada and within Alberta, while significant, pale in comparison to movements of these two commodity groupings from Alberta to British Columbia.

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Figure 4.2: Alberta’s Fuel Oils and Crude Petroleum Rail Traffic in 2018

Source: Canadian Freight Analysis Framework (StatsCan, 2019); CERI

Figure 4.3: Alberta’s Plastic and Chemical Products Rail Traffic in 2018

Source: Canadian Freight Analysis Framework (StatsCan, 2019); CERI

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54 Canadian Energy Research Institute Table 4.1 shows Alberta’s share in the Prairies region for imports and exports from/to the US/Mexico market. More than half of total exports to the US/Mexico originate in Alberta, and close to three-quarters of Prairie's imports come from the US/Mexico. This highlights the fact that besides access to ports in British Columbia via rail, the US/Mexico market is an important outlet for Alberta-made products as well as imports into Alberta.

Table 4.1: Alberta’s Share for the Prairie Region’s Exports and Imports (%, 2018) Alberta Share in the Prairie Region

Exports to the U.S. and Mexico 53.3%

Imports from the U.S. and Mexico 73.9%

Source: Canadian Freight Analysis Framework (StatsCan, 2019); CERI

Alberta’s Industrial Heartland Global demand for petrochemical products is increasing as the world’s population expands, and emerging economies build capacity. Alberta’s Industrial Heartland is an attractive location for investment in petrochemicals, chemicals, and hydrocarbon processing. The AIH is the largest industrial zone in Canada and is a critical element in the rail-based supply chain in Canada.

Alberta’s Industrial Heartland is located northeast of Edmonton, Alberta, with a geographic footprint of 582 square kilometres (Figure 4.4). The industrial-zoned land part of the AIH extends into five different municipalities. This includes 533 square kilometres within the City of Fort Saskatchewan and the Counties of Lamont, Strathcona, and Sturgeon, in addition to 49 square kilometres in the City of Edmonton (the industrial area known as the Edmonton Energy and Technology Park).

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Figure 4.4: Alberta’s Industrial Heartland

Source: Alberta’s Industrial Heartland Association.

There are over forty companies located within AIH, representing various sectors, including petroleum refining, propylene production, bitumen upgrading, fertilizer production, nickel and cobalt refining, pipeline terminal and storage, natural gas fractionation & processing, ethylene, mono-ethylene glycol, and polyethylene production, and a range of other petrochemical and specialty products (JWN 2019), with over $40 billion invested to date (CBRE 2019). Going forward, AIH has additional opportunities to build new petrochemicals capacity within its borders and to supply feedstock for a growing number of operators worldwide.

Beyond the close proximity to natural resources, additional location benefits may include secure petroleum and petrochemical feedstock; a road, rail, air and pipeline connectivity to global markets; access to a skilled workforce; competitive operating and tax environment and proximity to one of North America’s fastest-growing metropolitan areas.

The Heartland is represented by an association of member municipalities – the Alberta’s Industrial Heartland Association (AIHA). The AIHA is dedicated to the development of the AIH and supports a proactive and cooperative approach to the infrastructure, services, and land-use zoning that make the region investment-ready. The AIHA actively works with industries and companies thinking of locating and or expanding in the region.

Often considered an extension of the oil and gas industry, the petrochemical industry also plays an important role in the overall prosperity of the AIH. Members of the petrochemical industry are primarily responsible for converting oil, natural gas, ore and minerals into products that are used for a variety of different applications. For instance, some of the products produced by the petrochemical industry within the Heartland include, but are not limited to, various plastics, paints, rubbers, fertilizers, detergents, dyes, textiles, and solvents, etc.

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56 Canadian Energy Research Institute The viability of the province’s current petrochemical industry is based on access to a long-term secure and economical supply of natural gas liquids (NGLs) feedstock – especially ethane and propane – and the ability to develop suitable competitively priced products for international markets.

The petrochemical industry within the AIH is also heavily dependent on the extensive network of pipelines and rail terminals located within the area, where, for example, Petrogas EnergyCorp’s Fort Saskatchewan Terminal is responsible for receiving, storing and transporting petrochemical products produced within the Heartland to various distributors and suppliers across the province. Other critical terminals within the Heartland include Keyera’s Josephburg Rail Terminal and Cenovus’s North American Terminal Operations in Lamont County. Some of the larger petrochemical companies within the AIH include Dow Chemicals Canada, Pembina Pipelines, and Inter Pipeline.

For the AIH, facilities and organizations within the industry can be broken down into the following two groups - midstream and downstream, each of which contributes to a variety of other sectors.

The midstream sector includes pipelines, pumping stations, tank trucks, and rail tank cars responsible for the transportation or storage of crude oil and natural gas before they are processed into the industry- and consumer-related goods.

The downstream sector includes facilities that process oil and gas condensates into marketable products with defined specifications such as gasoline, diesel or feedstocks. For example, some of the major oil and gas facilities located within the AIH include the Shell Scotford upgrader and manufacturing facility in Strathcona County, and the Plains Midstream fractionation and storage facility in the City of Fort Saskatchewan. The Scotford upgrader is responsible for converting bitumen, a viscous mixture of hydrocarbons that contains high levels of sulphur and nitrogen compounds, into synthetic crude oil. The Shell Scotford manufacturing facility uses this processed bitumen to produce various by-products, which are then used as inputs for other industries located within the region. Some of these processed products include gasoline, low sulphur diesel, jet fuel, propane, styrene monomer (the primary ingredient in hard plastics) and ethylene glycol (the primary ingredient in the production of soft plastics, polyester fabric, and antifreeze). The Plains Midstream fractionation facility brings in and treats NGLs, which are then distributed both locally and provincially to petrochemical facilities as feedstock.

The manufacturing sector in the AIH is closely linked with other sectors throughout the hydrocarbon value chain. Companies in the manufacturing sector are responsible for providing a wide range of goods and services such as:

• Processing agricultural commodities and specialized food ingredients to a wide range of consumers in the livestock, poultry, food processor, food service and bakery industries. • Grades of polymer-modified asphalt technologies for road construction and maintenance. • Recycled rubber products for industrial, municipal, commercial, agriculture, and residential applications. • Chemical technologies widely used in the pulp and mining industries and environmental applications; and

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• Modules and components for the petrochemical, pulp & paper, and other industries. One of the larger manufacturing companies within the AIH is Sherritt International, which is in the City of Fort Saskatchewan. The facility is part of the company’s larger integrated nickel business. It produces high- purity nickel and cobalt for international markets, as well as ammonia-based fertilizers and sulphuric acid for internal use and sale into local and domestic markets. Another manufacturing company is Nutrien, which operates the largest fertilizer complex in North America, producing nearly 680,000 tonnes of ammonium phosphate and 1.4 million tonnes of nitrogen-based nutrients per annum.

New Industrial Development Projects The shortage of pipeline capacity and the relatively low transportation costs make rail the transportation mode of choice for new projects slated to be operational within the Heartland region. The AlH’s industries are working with the railways to ensure that their forecasted growth can be accommodated. Improvements in simplicity, quality, and transparency of the railways and associated services are desired and needed to move products to domestic and international markets. The new rail infrastructure will play a significant role in efficiently helping move products to planned destinations.

Government Incentives One of the key economic drivers for AIH is the various provincial incentive programs that have been put in place over recent years. These programs included the Petrochemicals Diversification Program (PDP), the Petrochemicals Feedstock Infrastructure Program (PFIP) and the Partial Upgrading Program (PUP). Collectively, these programs could have offered companies associated with the AIH upwards of $3 billion in loans and royalty credits, which in turn attract capital investment to the area. However, only one program – the PDP went into effect, whereas the other two were cancelled.

The PDP has set aside approximately $1.1 billion in royalty credits to encourage companies to build facilities that turn feedstocks such as ethane, methane, and propane into value-added products.

As of today, funds from the PDP have gone towards the following projects located within the Heartland, which should generate positive economic outcomes in the form of increased investment spending, job creation, expanded market reach, and an increase in the diversification of Alberta’s economy:

• Under the PDP, Pembina Pipeline received $300 million in royalty credits to build a $4.5 billion dehydrogenation and polypropylene facility in Sturgeon County. • Inter Pipeline received $200 million in future royalty credits to build an integrated petrochemical complex that will be used to process propane into value-added plastics products. The initial capital investment amounts to approximately $3.5 billion. Inter Pipeline also received $70 million in credits to build an acrylic acid facility near the City of Fort Saskatchewan.

From a taxation perspective, AIH will also benefit economically from the recent changes to Alberta’s corporate tax structure, and under the federal jurisdiction, the introduction of the Accelerated Investment Incentive (AII). The AII has made substantial alterations to the rules set forth under Canada’s Capital Cost Allowance, which required businesses to deduct the costs of various capital investments (i.e., buildings, machinery, and equipment, etc.) over a time that corresponds to the expected return of the asset itself.

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58 Canadian Energy Research Institute Under the AII, however, businesses will now be able to write off a larger share of their costs in the year in which the investment is made, which will make it more attractive to invest in these assets and free up funds to support other business-related needs.

Heartland Petrochemical Complex Inter Pipeline is constructing the Heartland Petrochemical Complex, a world-scale integrated propane dehydrogenation (PDH) and polypropylene (PP) facility in Strathcona County, shown in Figure 4.5. Construction of the complex began in early 2018, with completion scheduled for late 2021.

The facility is designed to convert locally sourced, low-cost propane into 525,000 tonnes per year of polypropylene, a high-value, easy to transport plastic used in the manufacturing of a wide range of finished products. The facility will consist of a PDH facility designed to convert propane into propylene; a PP facility designed to convert the propylene from the PDH facility into various grades of polypropylene; a cogeneration plant designed to produce steam, electricity, and other utilities for the Heartland Petrochemical Complex; and a railyard to facilitate the transport of polypropylene to markets. Inter Pipeline is proposing to build and operate the railcar loading facility and railcar storage yard, consisting of up to 11 km of track across 26 onsite tracks. It will include rail-supporting facilities such as a locomotive shop, an operations building, and a railcar loading/railcar cleaning building. The rail storage area will consist of rail infrastructure able to support the loading of up to 24 cars per day, with the capacity to store over 200 loaded and empty cars. Designated exchange sidings will facilitate the exchange of empty and loaded cars between Inter Pipeline operations and potential rail service providers (Government of Canada 2018a; Inter Pipeline Propylene Ltd. 2018).

Figure 4.5: Inter Pipeline Propylene Ltd. Project Facilities

Source: (Inter Pipeline Propylene Ltd., 2018)

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Canada Kuwait Petrochemical Corporation (CKPC) Similar to the Inter Pipeline’s Heartland Petrochemical Complex, Canada Kuwait Petrochemical, which includes Calgary-based Pembina Pipeline Corp, is planning to build a $4.5 Billion propane dehydrogenation and polypropylene (PDH/PP) facility in Sturgeon County. A propane dehydrogenation facility will convert 23,000 barrels of Alberta-produced propane a day to 550,000 tonnes/year of propylene, which then will be transformed into 1.2 billion pounds/year of polypropylene. Canada Kuwait Petrochemical/Pembina will receive $300 million in future royalty credits to build the facility and complete it in 2023.

CKPC plans to build, own and operate the Sturgeon Petrochemical Rail Yard in support of a propane PDH/PP facility. The polypropylene plastic pellets will be loaded into railcars for transport to international and local markets, either through railcars or transferred to bags at an on-site bagging facility for transport by container trucks. The project also includes a Pembina Pipeline Corporation Rail Line, which will connect the rail yard to an existing CN rail line.

The project will comprise of 42-yard tracks with approximately 25 kilometres total length of track and includes tracks for railcar loading, railcar storage for both empty and full railcars, a building for railcar loading with associated railcar washing, and a transloading/bagging facility. Up to 40 percent of loaded railcars will be sent to an on-site transloading/bagging facility, whereas the remaining 60 percent will be sent to on-site railcar storage (CBRE 2019). CN will provide its services to CKPC by moving its products to the US markets, through the Pembina Rail Line, which will connect to the CKPC rail yard at the southwest PDH/PP facility boundary to the existing CN rail line (CKPC 2018). As a result of several new facilities, the CN rail loading capacity will be significantly increased.

The development of transportation infrastructure plays an essential role in the AIH’s economic growth. Public and private investors should collaborate to expand the rail system and develop new facilities in response to moving large volumes of bulk commodities. The immediate priority should be given to investments in rail infrastructure supporting economic growth.

The two leading rail companies already have plans for expansion. CP has planned for 25 km of a right of way that allows direct rail service to industries located on either side of the North Saskatchewan River. While already providing rail freight service to the area through Scotford Yard, CP is also proposing to expand its transloading capability with the construction of the Strathcona Logistics Centre. This expansion is shown in Figure 4.6. The solid red line indicates the existing CP rail route while the spotted red line indicates the new routes. The red hashed areas illustrate land purchased by CP for the project.

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Figure 4.6: CP’s Industrial Heartland Expansion Project

Source: CPR (CPR 2019)

Capital Investment and Economic Impact This section provides an overview of rail investment required within the AIH to accommodate the new facilities and their requirements for rail services. As seen in

Figure 4.7, CERI’s investment model estimated that an additional $339.2 million would be needed from 2020 to 2025 in the AIH specifically to accommodate new facilities that will become operational in this period. As a result of additional investment, the AIH region will see further economic benefits from the spin-offs of this investment. The GDP impact is measured to be almost $6.7 billion over the six years, more than a 10-fold impact.

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Figure 4.7: Rail Investment for New AIH Projects and the GDP Impacts (2020-2025)

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Chapter 5: Australia and European Case Studies

• The Australian transport reform, occurring in 1998, separated the rail system vertically. The below rail portion is made up of the physical track and is government-run. The above rail portion comprises the rolling stock, machinery and other equipment and is privatized. • Work is ongoing to increase the productivity and safety of the rail network. The Advanced Train Management System (ATMS) uses advanced technologies to optimize scheduling and reduce human error. • The Australian government is investing heavily in infrastructure with a plan to increase connectivity between the largest cities. • Britain implemented a railway reform in 1995 that vertically separated the system and creating a private entity called Rail Track. This company was liquidated in 2002 and was replaced with a state-owned enterprise called Network Rail.

This chapter explores lessons learned from other railway business models practiced in Australia and the United Kingdom (UK).

Australia The Australian railway system was historically state-owned, controlled, and managed. Before 1998, the national government-subsidized railways and competition between states resulted in a non-standard rail gauge that constrained the connectivity of the railway system and limited productivity. In 1998, reforms resulted in the creation of the Australian Rail Track Corporation (ARTC), a statutory corporation with the facilities to control, manage, and supervise the interstate railway system (NTC Australia 2009).

An effect of the Australian transport reform of 1998 was a vertical separation in the railroad market (John Hearsch Consulting Pty Ltd 2008) into the above and below rail operators; above are responsible for the manage, control, and use of the rolling stock, machinery, and equipment, while below operators manage, supervise, and maintain the rail tracks. Certain parts of the Australian freight railroad remain integrated. For example, one operator is the owner of both the rail tracks and rolling stock in the mineral-rich state of Western Australia ("Trainline 6, Statistical Report," n.d., 131).

Australian Rail Freight Productivity

As a consequence of the rail reform in 1998, the rail freight movements grew by 10 percent per year between 1990 to 1998 (DIRD 2018). The Australia rail reform consisted of corporatizing the national rail system, create a government below rail operators frame and privatize the above rail operators. Since then, the Australian freight rail market has been evaluated continuously. For example, in 2009, the Australian government ordered a study to assess the national freight rail system and found productivity impediments such as (NTC Australia 2009):

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64 Canadian Energy Research Institute • Governmental funding decisions are not part of a consistent framework. Recommendation: The requirements and procedures for government funding of both national and private rail corporations should be clearly defined.

• Inconsistent access to intermodal terminals is impeding rail competition. Recommendation: The National Transport Commission should implement a country-level regulatory model, eliminating differences between different intermodal terminals, ensuring that each terminal is regulated, giving regulated open access.

• Regulation of safety and environmental standards is inconsistent across states. Recommendation: Bodies like the Rail Industry Safety and Standard Board should design a consistent environmental framework, applying the same rules across the rail industry to the entire country.

Currently, the Australian freight rail system has experienced several changes. ARTC, along with Lockheed Martin, signed an agreement on a project called Advanced Train Management System (ATMS) for use in the ARTC network in both passengers and freight railway systems (DIRD 2018). This program works with an autonomous satellite train controlled remotely, and software to reduce human error and increase productivity through adjusting the schedule according to the peak or regular hours or to react in case of a service interruption. The project has the intention to commence on the Sydney Metro North West in the case of the passenger line and the Pilbara Region for the freight line. As well, the program wants to increase the use of technology to track compliance, gas emissions, safe driving behaviours, location, and route.

In 2016, the Australian government unveiled a national infrastructure plan for the next 15 years, and one target is to increase the connectivity between Australia's five largest cities (Infrastructure Australia 2016). As part of the national infrastructure plan, the government included the national rail plan to help coordinate rail activities across multiple organizations to improve planning for the rail industry reform priorities, minimize duplication, and target government activities for supporting. The rail plan also has the intention to consult with the stakeholder of the railways' system to increase efficiency, reduction in costs, generalize transportation fees, and avoid the particularization and duplication of fees and expenses. Also, the mobility between corridors is a topic included in the plan to increase productivity. The corridor from east to west and vice-versa has more flow than the south to the north corridor; a proposed solution is to promote and incentivize the flow in the entire country can help to cost to reduce the cost of goods transportation.

The United Kingdom and Europe In the 1990s, global railways' systems transformed, either changing or privatizing or corporatizing the system. Similar to in Australia, in 1995 the British government implemented a railroad reform to vertically separate the railway system in the United Kingdom (UK) resulting in the creation of Rail Track, a private company, listed on the London Stock Exchange, with permission to control, manage and operate the rail tracks in the country. In 2002, Rail Track faced financial problems, and the UK government decided to liquidate it and created a state-owned enterprise named Network Rail. The government transferred some

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assets from the liquidated company to the new enterprise. Network Rail is in charge of controlling, managing, and maintaining almost all rail tracks in the UK (Abbott and Cohen 2017).

The rest of Europe has implemented reforms in their railway systems. Some countries such as Sweden, Finland, Denmark, or the Netherlands have separated train and rail operators from state-owned companies. In Germany, the government vertically separated the railway system. The state-owned company, DB Netz, fully control and operate the rail tracks infrastructure of the entire country, leaving private companies to operate the rolling stock and machinery (Abbott and Cohen 2017).

While Canadian railways have been privatized, there are some points to take into consideration related to privatizing totally or partially the freight rail market of a country.

• Privatization gives the freedom to invest or disinvest in the business model that is not generating profits, but during certain economic conditions, the disadvantages surpass those advantages. During the 1990s, the UK's economy grew steadily for more than a decade, starting from 1989, resulting in a continuous and major expansion of the transportation systems of the country. Rail Track accelerated its investments to keep pace with UK's freight railroad expansion. Still, those investments would only be profitable in the long-term, affecting the cash needed to maintain the company's investments. As noted above, the UK government decided to liquidate it and created a state-owned enterprise named Network Rail.

• A series of fatal accidents took place between 1997 and 2000, damaging the reputation of Rail Track. Maintenance and the neglect of safety considerations between organizational boundaries were the main factors behind those accidents.

These case studies give a lesson of how quick and dynamic the movements of the market are. When economic cycles occur, the government might need to adjust and intervene, and the Australian and European cases have shown that a hybrid model of investments/control of the railroad market might be a reasonable option to managing the long-term infrastructure requirements of a rail network. This is not to say that Canadian railways should be operated similarly, rather this illustrates an alternative business model and examples. The Australia and United Kingdom examples of alternative strategies for how to fund and operate rail infrastructure are instructive but would be difficult to implement in North America.

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Chapter 6: Conclusions

Overall, freight weight moved by rail in Canada and to and from US/Mexico will increase by 11 percent between 2019 and 2025. In comparison to the 2015-2018 period, the growth will amount to almost 19 percent. Agriculture products, plastic and chemical products, and coal account for half of the total freight moved by rail. In a scenario where none of the new oil pipelines are operational by 2025, we predict that the fuels category, which includes fuel oils and crude petroleum, will also be among the top commodity groupings transported by rail.

One uncertainty we have noted is whether oil pipelines will be built such that much of the forecasted growth in this market will shift to pipelines and free up capacity on the rail system. That uncertainty will weigh heavily on any rail company seeking to invest in new infrastructure or rolling stock in Canada. Are there ways to reduce this uncertainty? Should longer-term rail transportation contracts be considered? It is difficult for rail service providers to plan for crude by rail shipments if they might disappear if pipeline capacity becomes available.

This outlook is based on the economic conditions as per “business-as-usual,” in other words, the forecast depends on the prevailing market, social, geopolitical, and trade environments. The uncertainty of this forecast is the current global events. At the time of publication of this report, the world was battling a COVID-19 pandemic, which resulted in an immediate energy demand drop resulting in the oversupply of crude and consequently, a sharp reduction in oil prices. These events already have had global and domestic impacts, and depending on the duration, could result in a further negative impact on energy demand, economic growth, rail traffic demand and, consequently, capital investment.

We have noted that the efficiency and competitiveness of a rail system are closely related to productivity and income in Canada’s economy. Additional investment is required in the rail supply chain system to accommodate incremental freight volumes. The most heavily relied on segments of Canada’s rail system for growth in traffic are the corridors between the Prairie region to the West Coast and the US/Mexico.

Alberta’s Industrial Heartland (AIH) is presented in this report as a case study to analyze the rail transport of petrochemical and chemical products, and fuel oil and crude petroleum. Fuel oils and crude petroleum and plastic and chemical products are considered the two major transported commodities from Alberta, and by inference, from the AIH. Shippers and the railways are currently working together to assess growth projections and ensure adequate capacity is available for future freight tonnage in the region. CERI’s investment model estimated that an additional investment of $339.2 million would be needed in the AIH to accommodate new facilities that will become operational in this period. As a result of additional investment, the AIH region will see additional economic benefits from the spin-offs of this investment. The GDP impact is measured to be almost $6.7 billion over the six years, more than a 10-fold impact.

The study also presented key challenges and opportunities for the rail-based supply chain. The critical rail challenges that were identified during CERI’s interviews with rail-based supply chain participants include delays and congestion, lack of metrics, yard and terminal capacity, planning and forecasting, and communication. The key opportunities include employing a holistic approach among all members of the supply chain to address problems facing the entire network, adopting standard metrics and indicators,

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68 Canadian Energy Research Institute integrating the performance measurement system into the decision-making process, and embracing new technologies.

This study also reviewed different approaches to how rail networks are managed in Australia and Europe. When economic and market cycles occur, the government might intervene, and the Australian and European cases have shown that a hybrid model of investments/control of the railroad market might be a reasonable option to managing the long-term infrastructure requirements of a rail network. This is not to say that Canadian railways should be operated similarly, rather provide an alternative business model and examples.

Data remains a challenge. Attempting to understand any system and determining how it might respond and change over time becomes exceedingly challenging without that basic information that can be shared with all stakeholders. While this study was able to forecast commodity flows and investment, there is remaining research to be done. Potential future research might include:

• Establish rail supply chain performance metrics – the type of service and impacts on service quality are unknown without a better understanding of the current levels of performance offered by the many service providers. Establishing standard metrics and reporting on them will allow service providers and customers to better plan for their activities.

• Measure the rail capacity and congestion areas – while some of this work is being done, one example being the last mile work being done by the Port of Vancouver, are there other areas being missed? Can network operators and rail service companies react in short time frames to emerging issues, or is the lead time needed to respond before the congestion issues arising? How do customers work with service providers to provide mutual assurances that the networks and rolling stock will be available when needed?

• Examining the feasibility of extending the current supply chain – if the existing rail network in Canada is fundamental to the economic health of the nation, should more be done to enhance it and increase capacity? How can prospective customers work with the rail service companies to look beyond incremental growth to something that provides logistics support for new economic activities?

• Create a National Demand Growth Model – CERI’s work clearly shows that the planning of the rail network is a multi-stakeholder initiative. Canada lacks a national growth model and underlying data to see beyond a few years to what is needed. That means a competitive market is not likely possible without significant guidelines for how every service provider operates.

This study has shown that the rail network provides a vital service to support overall economic activity in Canada. There remain areas where more work could be done to improve that service. The above-noted follow-on research questions are just some of the areas that should be considered. Above all, stakeholders working together with active and frequent communications can help identify and solve issues before they impact Canada’s economy.

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70 Canadian Energy Research Institute FTR Transportation Intelligence. 2019. “Movements Flow.” Government of Canada. 2018a. “Project Description of a Designated Project.” 2018. https://ceaa- acee.gc.ca/050/evaluations/document/124376?culture=en-CA. ———. 2018b. “Railway Investigation Report.” November 2, 2018. https://www.tsb.gc.ca/eng/rapports- reports/rail/2016/r16t0111/r16t0111.html. Infrastructure Australia. 2016. Australian Infrastructure Plan: Priorities and Reforms for Our Nation’s Future : Report. Inter Pipeline Propylene Ltd. 2018. “Description of a Designated Project Heartland Petrochemical Complex Rail Yard Project.” https://ceaa-acee.gc.ca/050/documents/p80126/124376E.pdf. JOC. 2019. “Challenges Mount for US Intermodal Rail.” 2019. /rail-intermodal/class-i-railroads/analysis- 2019-offers-us-intermodal-opportunity-challenges_20190121.html, https://www.joc.com/rail- intermodal/class-i-railroads/analysis-2019-offers-us-intermodal-opportunity- challenges_20190121.html. John Hearsch Consulting Pty Ltd. 2008. “Rail Productivity Information Paper.” JWN. 2019. “Alberta Oil and Gas Quarterly Summer 2019,” 2019. https://s3.amazonaws.com/media.angi/2019/Alberta-Oil-and-Gas-Quarterly-Summer-2019.pdf. MRC. 2019. “Railcar Types | MRC Rail.” 2019. https://www.mrc-rail.com/railcar-types/. NEB. 2017. “Canadian Crude Oil Exports by Rail – Monthly Data.” National Energy Board | Government of Canada. November 29, 2017. https://www.neb- one.gc.ca/nrg/sttstc/crdlndptrlmprdct/stt/cndncrdlxprtsrl-eng.html. ———. 2018. “NEB – Canada’s Energy Future 2018: Energy Supply and Demand Projections to 2040.” October 25, 2018. https://www.neb-one.gc.ca/nrg/ntgrtd/ftr/2017/index-eng.html. NTC Australia. 2009. Freight Rail Productivity Review Draft Position Paper. Oil Sands Magazine. 2019. “Crude-by-Rail Loading & Offloading Terminals.” Oil Sands Magazine, 2019. https://www.oilsandsmagazine.com/projects/crude-oil-rail-terminals. Railway Association Of Canada. 2018. “Rail Trends 2018.” Railway Association of Canada (RAC). https://www.railcan.ca/wp-content/uploads/2018/12/2018-Rail-Trends.pdf. Railway Association Of Canada, Pre-budget 2019. n.d. “Rail Trends 2019.” Accessed September 17, 2019. https://www.ourcommons.ca/Content/Committee/421/FINA/Brief/BR10007201/br- external/RailwayAssociationOfCanada-e.pdf. Railway Technology. 2014. “The World’s 10 Longest Railway Networks.” Railway Technology (blog). 2014. https://www.railway-technology.com/features/featurethe-worlds-longest-railway-networks- 4180878/. SlideShare. 2011. “Advanced Powertrain Technologies and the North American Locomotive Ma….” Technology. https://www.slideshare.net/FrostandSullivan/advanced-powertrain-technologies- and-the-north-american-locomotive-market. StatCan. 2017. “Railway Transport Survey, Inventory of Equipment in Service Summary of Regional Railways.” 2017. https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=2310005901. ———. 2019a. “Railway Industry Length of Track Operated at the End of the Year by Area, by Company.” https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=2310005201.

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———. 2019b. “The Daily — Rail Transportation, 2017.” 2019. https://www150.statcan.gc.ca/n1/daily- quotidien/190408/dq190408b-eng.htm. Statista. 2018. “Revenue of North American Railroads 2018.” Statista. 2018. https://www.statista.com/statistics/271613/leading-north-american-railroad-companies-based- on-revenue/. The Globe and Mail. 2018. “Opinion: The New Parliament Must Act to End Rail Strike to Prevent Further Economic Losses.” 2018. https://www-theglobeandmail- com.cdn.ampproject.org/c/s/www.theglobeandmail.com/amp/business/commentary/article- the-new-parliament-must-act-to-end-rail-strike-to-prevent-further/. Transport Canada. 2016. “List of Regulations.” Government of Canada | Transport Canada. May 2, 2016. http://www.tc.gc.ca/eng/acts-regulations/regulations.htm. ———. 2018. “Transportation in Canada 2018.” https://www.tc.gc.ca/eng/policy/transportation-canada- 2018.html. US Department of Transportation. 2014. “Bureau of Transportation Statistics.” 2014. https://www.bts.gov/topics/rail.

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Appendix A: Canadian Freight Transport Governing Bodies and Policies

Transport Canada The implementation of various transportation policies and programs is the responsibility of Transport Canada. Transport Canada is a government body that is responsible for executing several Canadian legislations, including the Railway Safety Act, Motor Vehicle Safety Act, Aeronautics Act, Transportation of Dangerous Goods Act, Canada Transportation Act, Canada Shipping Act, and the Marine Transportation Security Act amongst others (Transport Canada 2016).

Transport Canada's role in railways includes:

• Surface and intermodal security • Safety of railways • Safety of federally regulated railways bridges • Rail grade crossing warning system, traffic control signals inspection, and related tests • Rules for rail operating • Accessibility to rail transportation strategies • Standards, regulations, and services for dangerous goods transportations • Assist any emergency response and conducting any emergencies for dangerous goods • Security and safety of U.S and Canada international tunnels and bridges.

Besides, Transport Canada’s Rail Policy Group is focused on rail freight and has been looking at rail supply chain issues for the last several years. Part of that assessment was a comprehensive study, which addressed issues relevant to recent Transport Canada’s study, Collaborative Forward Planning Initiative based on 2017/2018 rail-based supply chain stakeholders’ responses, including shippers, railways and ports/terminals. The reviews discuss major issues around supply chain raised challenges in three topic areas:

• Lack of clarity in forecasting and planning processes across the supply chain; • Contingency options for short-term surge demand; • Best practices for communicating when things go wrong.

To outline and address challenges in the rail supply chain and identify possible solutions and opportunities, an effort was made to explain and categorize challenges into four main groups, as shown in Table A.1:

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74 Canadian Energy Research Institute Table A.1: Transport Canada Challenges Best Practices

Communications During Disruptions • Lack of responsiveness during disruptions • Take stock of existing communications tools being • Limited coordination between supply chain partners used • Insufficient quality of operational information • Adopt more proactive and coordinated information- • Degradation of data accuracy and viability over time sharing practices • Increase access to useful data through digitalization • Identify and understand triggers of service disruptions • Improve information available to railways Supply Chain Capacity Mapping • Lack of transparent methodologies for capacity • Take stock of existing communications tools being measurement used • Lack of data needed to support and verify those • Adopt more proactive and coordinated information- capacity measurements sharing practices • Insufficient confidentiality to increase information • Increase access to useful data through digitalization sharing • Identify and understand triggers of service disruptions • Lack of interactions between various partners in • Improve information available to railways integrated networks • Lack of supply chain performance metrics First mile/Last mile Issues • Lack of communications • Sharing information to determine network-wide • Switch management capacity, demand, and performance • Impacts of First mile/Last mile on the rest of the • Improving switch management supply chain • Improving First/Last mile Metrics • Lack of metrics • Improving metrics • Lack of collaboration in first/last mile operations • Encouraging collaboration

Congested Areas • Lack of early identification of congestion measures • Measuring and identifying congestion through • Delays in railcar delivery and pick up proactive planning • Delays in loading and unloading shipments • Access to common metrics along with the rail network • Insufficient or ageing transportation infrastructure • Improving forecasts and shipping intentions • Congestion in the winter • Evaluating addressed congested areas • Encouraging collaboration • Maximizing resources & understanding capacity • Adding crew members, locomotives, cars and winter operating equipment • Defining the right metrics and open dialogue between network members to promote proactive planning • Utilizing additional capacity and resources to support the network in times of congestion • Infrastructure and equipment investments

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Canadian Transportation Agency

The Canadian Transportation Agency is an independent administrative tribunal of the Government of Canada that operates like a court. The agency is responsible for:

• dealing with and resolving disputes related to various aspects of transportation; • improving access to transportation services; and • making decisions on air, rail and marine transportation as an economic regulator.

Following the Canadian Transportation Act that applies to transportation matters under the legislative authority of Parliament, the agency, among other responsibilities, participates in the economic regulation of rail carriers under federal jurisdiction by:

• licensing rail carriers; • approving railway line construction; • setting railway revenue caps for moving grain products; • establishing financial and costing frameworks for certain railways; • setting inter-switching rates to increase competitive options available to shippers; and • determining the net salvage value of railway lines to facilitate their orderly transfer.

The Agency supports the goal of a competitive, efficient and accessible Canadian transportation system that meets the needs of those who provide or use transportation services. Specifically, for the freight rail, CTA handles disputes about rail transportation between industrial shippers, Class l railways, short-line railways and rail neighbours (CTA, 2017).

Recent Transportation Modernization Act (Bill C-49) changed the Canada Transportation Act to bring in new procedures associated with freight rail transportation to strengthen rate and service remedies and new requirements for freight rail performance services. Some of the new amendments include:

Long-haul Inter-switching: The new Long-haul Interswitching provisions enable certain shippers to make an application to the CTA requesting it to set a rate and the terms under which a local carrier must move the traffic to a connecting carrier that will perform the remainder of the movement. The nearest interchange in the reasonable direction of the traffic can be up to 1,200 km away, or 50 percent of the total haul distance in Canada, whichever is greater.

Rail Service and Performance Data: Class l railway companies are required by the amended Act to submit rail service and performance data. Started December 2018, Canada's major freight rail companies are required to submit specific data on their service and performance weekly. It improves transparency in the freight rail system in Canada, allowing shippers and the public to monitor the network, supporting the early identification of service challenges before they escalate. This increased transparency will also encourage railways to communicate openly with their customers when they become aware of system challenges.

Maximum Revenue Entitlement (MRE): The Maximum Revenue Entitlement (MRE) is a limit on the overall revenue that can be earned by CN and CP for shipping regulated grain from specified origins, generally

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76 Canadian Energy Research Institute within Western Canada, to specific export locations. The amendments are the establishment of individual Volume-Related Composite Price Indices (VRCPI) for each of CN and CP; changes to the determination of the railway companies' revenues that are subject to the MRE; the exclusion of containerized traffic; and the inclusion of soybeans.

Regulated (30 km) Inter-switching Rates: The regulated inter-switching rates were developed to support and help shippers within a 30 km catchment area of railways to be qualified for regulated inter-switching. The possibility of inter-switching gives shippers more leverage in their negotiations with the railway companies that serve them directly.

Final Offer Arbitration (FOA): In an FOA process, an arbitrator is mandated to resolve rates and service disputes between carriers and shippers who submit their final offers for decision. The process is confidential, and the arbitrator's decision is enforceable as if it were an order of the CTA.

Two aspects of the FOA process have been changed as a result of amendments to the Act:

• The shipper can request the FOA decision to apply for two years, instead of one. • The threshold for summary FOA has increased to $2 million. If the CTA determines that a shipper’s final offer involves freight charges in an amount of not more than $2 million, and the shipper did not indicate a contrary intention when submitting its offer, an expedited process will apply.

Level of Service Application: A railway company has service obligations for carrying traffic for shippers, which includes furnishing adequate and suitable accommodation for loading, receiving, carrying, delivering, and unloading traffic, Under the Canada Transportation Act (Act), the Canadian Transportation Agency (CTA) determines whether a railway company is fulfilling its service obligation.

Furthermore, according to the new Canadian Impact Assessment Act, 2019, the railway projects requiring assessments include the following (Canadian Transportation Agency 2019):

• a railway line in a wildlife area or migratory bird sanctuary; • a railway line that can carry freight or passengers between cities and requires a total of 50 km or more of new right of way; • a new railway yard with a total area of 50 hectares or more; • a railway yard expansion if it results in an increase of its total area by 50 percent or more and a total area of 50 hectares or more; or • an international or interprovincial bridge or tunnel.

The new Canadian Impact Assessment Agency will assess these projects with final approval, ultimately residing with the federal Environment and Climate Change Canada Ministry. The Canadian Transportation Agency requires a favourable decision that the project is permitted to proceed before they can decide about the project’s construction application. The Agency may consider any relevant parts of the impact assessment in its own decision.

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Appendix B: Supply Chain Dynamics

• Interviews with Canadian rail supply chain representatives in four categories (shippers, rail companies, port authorities and terminals, and government and regulatory bodies) explore challenges and opportunities for the Canadian rail supply chain. • The key rail challenges identified are delays and congestion, lack of metrics, yard and terminal capacity, planning and forecasting, and communication. • The key opportunities include employing a holistic approach among all members of the supply chain to address problems facing the entire network, adopting standard metrics and indicators, integrating the performance measurement system into the decision-making process, and embracing new technologies. Supply Chain Interview Results Methodology This section presents challenges and opportunities for the Canadian rail-based supply chain based on background literature review and interviews with a range of stakeholders. The interviewees represented four areas of activity that, taken together, comprise the end-to-end rail supply chain. The interviewees represent:

1. Rail Shippers: Agricultural, energy and commodities producers that are dependent upon a railway to move their product. 2. Rail Transportation Companies: Employees of Class I rail transporting companies (CN, CP) as well as short line railways. 3. Port Authorities and Terminals: Operators that manage the movement of cargo containers between freight trains and cargo ships and optimize the flow of goods. 4. Government, Regulatory Bodies and Associations: Interview participants from a range of organizations, including government, regulatory bodies, as well as professional and industrial associations.

CERI’s study scope, as well as representative questions, were circulated to participants in each group. The number of responses was not adequate to draw any statistical inference and presented here qualitatively. A total of 25 interview requests were sent. Of the responses received, 13 interviews were accepted and completed. The interviews were conducted either through telephone, face-to-face meetings or written responses .

Figure B.1 shows the distribution of the interview responses, according to the interview groups discussed above.

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78 Canadian Energy Research Institute

Figure B.1: Distribution of Interview Participants

Regulatory Bodies Ports/Terminals

Railways

Shippers

Interview Results The purpose of the interviews was to identify challenges and opportunities along the freight rail transportation supply chain related to forecasting, communication, planning, and future capacity and growth. Given the diversity across the sectors, it is not surprising to see different barriers, challenges and growth opportunities in various sectors. This section of the report summarizes opinions expressed in the interviews. For confidentiality reasons and in accordance with agreements with interview participants, interview participants and responses are anonymized. Interview Results - Challenges It became apparent early on that challenges amounted to general issues with the rail systems as well as sector-specific issues. Engagement with the rail-based supply chain members offered new insights into the nature of concerns and how they might be overcome. CERI identified the key challenges, as shown in Figure B.2. Figure B.2: Top Rail Challenges

Other Delays & Communication Congestion

Planning & Forcasting

Lack of Metrics Yard/Terminal Capacity

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Lack of Appropriate Metrics for Railway Performance Variety of Metrics and Inconsistency of Measurement: A wide range of commodities move on Canadian railways, with individual products measured by various units of measure and used as supply chain indicators. This makes it difficult to define and measure current rail performance. For instance, capacity, velocity, and other measures face extensive data and measurement inconsistencies. While these metrics are essential, there isn’t any commonly accepted measuring system.

Recently, the grain sector developed a sector model for better estimation of terminal elevators’ capacity and reports these capacities to rail companies for precise planning of rail demand. This only occurs at an individual shipper level, while the system needs to understand better all members’ capacities and the total supply chain performance. Some shippers report projected product tonnage confidentially to the railways, which depends on the shipper’s activity level and affects demand for rail capacity.

Lack of Data: Freight transportation officials produce very aggregate measures and general statistics in the current reporting system called the “Freight Rail Service and Performance Indicators,” but there is insufficient detailed data to quantify actual railway performance. Analysis of freight transportation in general and railway transportation, in particular, is hindered by a lack of publicly available, detailed, and accurate data. This, in turn, impedes policy analysis for good public policy. Ongoing efforts exist at all levels of government to improve the collection and dissemination of freight transportation data.

Delays and Network Congestion Delays and Network Congestion: Delays cause fewer railcars to arrive in ports, demurrage charges resulting from waiting vessels and reduced space to manage freight from other ships, which may have to wait days to be filled or emptied.

First mile/Last mile: Improvements were desired concerning the First mile/Last mile operations. Many challenges come through the First mile/Last mile flows due to poor coordination of the full supply chain network and supply and demand of railcars.

A better tracking mechanism of railcars was suggested. As the rail track becomes more congested, capacity and resources need to be utilized more efficiently.

Yard Crowding: Interview participants described challenges related to rail congestion starting in yards where traffic from one rail carrier is being interchanged to another carrier’s network. Some ports/ terminals experience congestion due to inappropriate railcar allocation, leading to more congestion and causing movement through these yards to be unpredictable with increased railcar dwell time.

Railcars: It was indicated that due to the lack of available railcars, some shippers faced delays for hours, days or even weeks, significantly affecting the overall traffic. Some provinces, such as Alberta, would need additional railcars to be able to ship commodities such as crude oil and petrochemicals in larger volumes.

Productivity: All participants described reduced productivity when one of the supply-chain links is not operating efficiently.

Reliability: Congestion and delays reduce the reliability and predictability of supply chain logistics. When railways are congested (due to various factors such as train accidents, weather conditions, natural

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80 Canadian Energy Research Institute disasters, railway repairs or lack of enough railcars), the flow of traffic is unstable, system recovery time increases exponentially, and reliability disappears.

Dwell Time: The dwell time magnitude affects a train's operational efficiency and causes delays and network traffic congestion. Inconsistent or extended dwell times lead to delays, longer trips, and irregular freight headways. Limits in yard capacity are one of the main reasons for train dwell times.

Winter: Canada’s cold weather and harsh winters have a significant impact on the operations of the whole supply chain system: some ports lose their export capacity, railways reduce rail capacity due to shortened train length, speed and service restrictions, and shippers experience losses of productivity due to yard congestion. Rail operations in the winter are dependent on temperatures - the colder it gets, the shorter the length of the train becomes because the brake performance is reduced; the fewer products get shipped. Canadian railways have invested in additional facilities such as rolling stock and more experienced crews to improve the network for winters and peak seasons.

Unreliable Forecasting and Planning Forecast and Planning: Despite the planning systems that Class I railways have put in place, they are still only within their networks. Many supply chain members want more transparency, visibility, and accuracy when it comes to planning, especially the certainty around the First mile-Last Mile system planning. More collaboration is needed and requested, especially when time horizons for forecasts and planning are different for shippers and railway operators. Railways want to see reliable forecasts from shippers’ months in advance rather than days or weeks. However, shippers raised concerns about economic conditions as a significant external risk for their plans and forecasts, increasing uncertainty.

Unreliable Capacity Commitments: Supply chain participants need more transparent information about railway capacity, railway forecasts, and capacity requirement assessment to be sure that the railways deliver their forecasted capacity. Ports/terminals also expressed a desire to receive detailed data from across the supply chain to better forecast and plan their operations.

Data Sharing: The exchange of information is a critical success factor in supply chain management. Railways are complex systems consisting of interconnections and interactions of several subsystems such as tracks, rolling stock, yards, and terminals. The composition of each subsystem and its behaviour makes it hard to predict the overall performance of a railway network. To ensure that the railway delivers desirable results, all system components need to be carefully examined, including infrastructure, timetable, trains, crew, etc. Data sharing and real-time information should apply to all rail supply chain participants, not just railways.

Communication Interview participants raised many concerns about communication across the whole supply chain regarding delays, disruption, or service changes and a lack of transparency in the communication. It is challenging to balance the entire supply chain demand efficiently when there is a delay or disruption.

Communication: Interview participants expressed that there are limited effective responses to a disruption in the supply chain system. Participants acknowledged that they need to communicate across the supply chain by sharing information on network disruptions, delays or unexpected changes effectively.

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Shippers, ports/terminals and short line operators need to know more about rail service resumption, network status and the next steps following disruption from railways on a real-time basis. Railway participants acknowledged the existence of various tools available to improve communication; they are looking for more digitalized and easily accessible data.

Managing unplanned disruptions: Railways should be encouraged to use a range of channels to inform customers during a disruption to ensure that the full network is well informed. Where a variety of channels is being used, railways need to be coordinated so that they all distribute consistent information at regular intervals.

There are multiple examples of unplanned disruptions. Recent examples include the rail blockades along Class I railway routes and locations in protest of Coastal Gas Link pipeline in early 2020 and a non-related union strike in one of the railway companies in late 2019. Different industries and supply chain partners expressed concerns about how the strike could impact their businesses and the overall economy. While the strike only lasted a few days, the impact on rail traffic was significant - a backlog of shipments that took 3 or 4 times the length of the strike to clear.

Another complicating factor highlighted in these examples is that many commodities do not have an alternative mode of transportation. For example, very few chemical shipments travel via road transportation. The quantities involved and the need to traverse mountains in winter make road shipments inefficient and uneconomic. In some cases, road transit is also unsafe for certain chemical products such as chlorine, which is widely used to treat drinking water in major Canadian municipalities. Chlorine is a highly dangerous substance that must be shipped only in specially designed, impact-resistant rail containers.

A small number of chemical manufacturing facilities have access to service from both railways. However, it is complicated to move shipments from one carrier to another. Contracts need to be negotiated, and rail workers need to be trained on the safe handling of new products. In the example of the labour strike, the other rail company was unable to take on cargo affected by the strike due to its own capacity constraints.

The strike made 2019 the third straight year with significant rail service disruptions in Canada. This affects Canada’s reputation as a reliable supplier of commodities to global markets. Disruptions also have profoundly adverse effects on Canada’s reputation among global investors. (The Globe and Mail 2018).

Yards/Terminals & Ports Capacity Capacity Increment: Capacity is more constrained at terminals than between terminals. However, trains may be delayed outside a terminal (in some cases, a long distance from the terminal) waiting to get to the terminal, and this may not identify as a terminal-related delay. Once trains start to back up waiting to get into a terminal, they impact the flow of trains moving in the other direction, especially in the case of a single main track route.

Infrastructure: As railway infrastructure tends to be both expensive and long-lived, railway companies are generally reluctant to invest in additional capacity for what may be a short-term increase in traffic.

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82 Canadian Energy Research Institute Railways often reduce capacity through line abandonments if there is no immediate need for that capacity. Canada has no national rail transportation policy that considers the long term needs nationally.

The Canadian federal government has, however, signed an agreement with some of the critically congested ports/terminals to upgrade infrastructure to increase capacity. The Port of Vancouver and Port of Prince Rupert are part of these rail supply chain improvements. Once the work is complete, it will improve efficiency across the whole rail supply chain.

Confidentiality of Capacity Data and Information: One of the major obstacles encountered when estimating the current capacity and plans for extra capacity in the supply chain is the confidentiality of data and information.

Other No Competition between Railways: Typically, privatization leads to more service efficiency and improvements in competitive environments. However, interview participants perceived unfair costs and service problems due to a lack of effective competition between the two Canadian Class I railways. It was recommended that a regulatory regime be put in place to support a more competitive system.

Short Lines: Those supply chain members that are dependent on short lines to move their products to markets acknowledge the benefits of lower traffic volume, congestion, and delay; however, there is still an opportunity to improve lines of coordination and communication.

Priority and Seasonality: Some of the agricultural commodities, such as grain, have challenges tied to seasonality. The grain is moved during the harvest season. Grain shippers communicated that railway delays and disruptions influence how much grain is shipped. On the other hand, grain and agriculture products can add to seasonal congestion on the railways. Congestion from grain shipments is mostly felt on the West Coast. Ports also reported that in the winter, grain shipments cause congestion in the terminals that are not equipped with grain feeder facilities.

Increasing shipments of certain commodities, such as resins, petrochemical products, and crude oil, were stated to cause shipping delays and yard congestion. Due to current export pipeline capacity constraints in Western Canada, rail, however, remains the best alternative for crude oil producers, and the market sees more demand for rail capacity. Still, railway capacity to handle this growth is limited.

Delay in Pipeline Projects: Most rail stakeholders are aware that there is an increased amount of crude oil to be transported by rail due to pipeline constraints on the major export pipelines and delays in completing new pipeline projects. Some shippers increasingly see oil-by-rail as a permanent component of the Canadian energy sector. According to the Canadian Energy Regulator, crude by rail exports have increased in recent years, with volumes growing by 14 percent from 242 bpd in 2018 to 280 bpd in 2019.

The Government of Alberta has initiated the process of transferring the rail contracts to the industry that were put in place by the former administration. The contracts are worth an estimated $3.7 billion to lease 4,400 railcars. Crude started moving in July 2019; the plan includes crude by rail volumes up to 20,000 bpd ramping up to 120,000 bpd by the middle of 2020 (JWN 2019). However, given the ongoing global

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situation with the COVID-19 pandemic and OPEC/Russia price war, and depending on the duration of each, the plans might be delayed.

Rail Transportation Cost: The relative attractiveness of crude by rail and its associated transportation costs are a function of the West Texas Intermediate (WTI) and Western Canadian Select (WCS) oil price differential. In other words, the price differential needs to be wide enough to accommodate higher crude- by-rail tolls than would be experienced with pipeline tolls.

Since Alberta implemented the oil curtailment program, the WTI-WCS differential narrowed, making crude-by-rail costs uneconomic. However, crude oil companies identified some advantages of moving their products by rail compared to the pipeline, such as their ability to transport more products by using added trains on tracks, access to more destinations, so they have more flexibility with faster delivery times for numerous local and regional markets.

New Standards for Rail Tank Cars: Transport Canada announced updated safety requirements for new tank cars; existing car retrofits should be done by 2020. These standard requirements will take time to be adopted, potentially limiting crude by rail capacity.

Regulations: Government and regulators should consider the performance of the railways as part of a whole supply chain, which is dependent on other elements that make up the rail network such as shippers, ports, and terminals. Interview responses stated that regulations prioritizing one type of traffic over others is counter-productive and generally results in a reduction in overall capacity.

Labour Code: Some modifications to the railways’ labour codes were suggested, which would impact railway performance; for example, an addition of more shift rotations will improve the railways' services. Canada's Railway Safety Act could be adjusted to revise the work/rest rules for the railways' labour to improve the railway performance.

Table B.1 shows a summary of the significant rail transportation supply chain challenges and the corresponding interview participants.

Table B.1: Summary of Rail Supply Chain Challenges

SHIPPERS RAILWAYS

Railways Shippers

Performance metrics Forecasting actual demand

Data sharing/Real-Time information flow Planning

Shortage of railcars Respect their commitments

Harsh weather Use CN/CP shipment tools

Captive shippers Use CN/CP customer station services

Lack of experienced labour Use CN/CP communication

Extra Equipment Investment for railcars

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84 Canadian Energy Research Institute Competitiveness Data sharing/Real-Time information flow

Unreliable/Unpredictable Understand disruptions

Transit Time Adopt their operating hours

Consistency/On-time delivery Yards/Ports/Terminals

New technologies for real-time data Effective communication

Delays First mile/Last mile

Capacity Congestion

Effective communication during disruption Empty railcars

Railcar Location System Infrastructure/Equipment

Double tracks Data sharing/Real-Time information flow

Additional costs More Storage

No competition Adopt their operating hours

Discrimination & seasonality Regulators

More short lines Unfair penalties/Embargoes

Railcars tracking system Attract investment

Ports/Terminals

Data sharing/Real-Time information flow

First mile/Last mile issues

Empty railcars information

Congestion

New technologies for real-time data

Regulators

More Penalties

Modification of labour code

PORTS/TERMINAL GOVERNMENTS

Shippers Shippers Effective communication Railways Railcars information system Yards/Ports/Terminal Railways Data sharing/Real-Time information flow Data sharing/Real-Time information flow Effective communication Effective communication Forecasting and Planning

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Interview Results - Opportunities Holistic Approach: All members within the supply chain need to work together more holistically to address problems across the entire infrastructure network, increase investment and initiate opportunities to improve the performance of the freight rail transportation system. For example, implementing a structure of penalties on rail companies for their delays and late deliveries is unfair as the current regulatory focus is only on rail services, and the roles of other supply chain partners are not considered.

Common Metrics & Indicators: The whole rail supply chain could benefit from developing common indicators to establish a monitoring system for the ports, terminals and railways performance. This would serve as a tool in rail supply chain improvement and work to identify system breakdowns and responsibilities. Appropriate rail performance indicators and estimations of current capacity would allow the government and regulators to assess if railways provide adequate services and highlight potential issues.

Reliable Data Sharing System: Policymakers, regulators, and all users of the railway system need sufficiently detailed data on a timely basis to make evidence-based decisions, to introduce common performance indicators and to support planning activities.

Communication System: The supply chain needs better communication and effective response methods for service changes (disruptions, delays, and planning), appropriate dispute resolution mechanisms, electronic notification systems, and better communication and escalation protocols.

For example, shippers should be able to report changes to their production levels that would impact their rail transportation needs on a real-time basis. Short lines should receive more accurate and timely information during delays and disruptions of Class I railways. Ports/Terminals should increase their communications with other supply chain members about labour availability and be able to provide operation hours aligned with the supply chain needs.

New Technologies and Innovation: Rail companies and yards need to embrace new technologies to better communicate to shippers about their disruption, delays and any planning changes in real-time; however, making technological improvements requires planning and capital investment.

Network-wide Capacity Information: Developing a transparent capacity database for all supply chain partners, from origin to destinations, would highlight network bottlenecks and areas of sufficient capacity. It would highlight the role of every participant in the whole supply chain and support their planning activities.

Infrastructure: The current infrastructure that is owned or operated by the different supply chain partners should be assessed, and on-going strategic plans for infrastructure upgrades and growth should be developed. Increasing the supporting infrastructure capacity would alleviate some congestion and improve the flow of goods within the whole system. Shippers need to invest in more storage and railcars, while the railways need more crews and rolling stocks and longer trains.

Terminals: Many major existing terminals are in urban areas where there is little room to expand. Moving a large terminal would be very expensive, even if there were another suitable location. One strategy to

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86 Canadian Energy Research Institute improve terminal throughput is a redesign of train service to minimize the number of trains that need to stop or work (set off or pick up cars, change locomotives, etc.) at the terminal.

Pre-Winter Planning: Additional labour, railcars, and locomotives simultaneously deployed across the rail system, can be a key solution preparing for winters.

Management of Empty Cars: Empty car distribution throughout the whole rail network should be managed by forecasting demand. The repositioning of empty cars to locations that are readily available to serve the market would increase efficiency.

Railcars Tap System/Railcar Location Message: Being able to see where railcars are and when they are going to arrive, helps the shippers and railways prevent delays and congestion. The current system is not very effective.

Dual Tracks: Replacing single tracks with dual tracks will maintain traffic flow and fluidity of freight movements. In general, it lets two trains operate at the same time, which improves capacity and efficiency, and specifically, the dual track will address congestion in strategic locations.

Consistency/Ontime Delivery: The rail network needs reliable on-time and consistent services that could be achieved with improvement in operational practices such as shorter dwell times and more effective scheduling, and enhanced infrastructure and equipment capacities.

Plan for Future Demand: Capital investment that is strategically deployed within regulatory and financial means is needed along the rail-based supply chain to address the increased demand, particularly within Western Canada due to expanded oil and petrochemical production.

Experienced Labour: Increasing the number of skilled rail labourers will help railways to better serve their customers, even in winter months. For example, it was mentioned that when the oil market was doing well, railways hired more people, and their services improved.

Any problem in one component of the rail supply chain can quickly escalate to impact a wide range of activities linking shippers to their customers. The challenges and opportunities identified above are complex, and recommendations for change and their implementation will have to be carried out with care to ensure that the railway-based supply chain is improved for shippers, railways, terminal operators, and other members. One concern pertaining to opportunities is a lack of any acknowledgement of the cost implications for improvements. It was not clear from the interviews about the willingness of parties to accept higher rates for better, faster, and more flexible service.

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Appendix C: Canadian Railway Overview

Appendix C describes the types of trains and railcars used today by rail companies.

Railcars Different commodities require different types of railcars. Despite the differences, all railways cars are built to specific standards set by Transport Canada (TC) in Canada and the Department of Transportation (DOT) or the American Association of Railways (AAR) in the US. These regulations are in place to ensure standardization across the transportation industry (rail, road, marine).

Figure C.1 illustrates typical railcars for different commodities, including boxcars, hoppers, automobile carriers, flat cars, intermodal and gondola.

Figure C.1: Railcars by Type

Source: MRC (MRC 2019)

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88 Canadian Energy Research Institute Boxcars are generally used to transport wood pulp, metals, and bagged agricultural products and are commonly categorized by their single and double door designs.

Hopper railcars: standard covered, cylindrical covered and open. Each is utilized for specific types of cargo. The covered hoppers are used to transport products that flow smoothly, such as grains, fertilizers, potash, sand, and salt, while open hopper cars are used to transport bulk commodities, such as rock, stone, and some ores.

Automobile carriers are used to transport automobiles, light trucks or SUVs and are typically enclosed on the sides.

Standard flat railcars, on the other hand, offer no protection on the sides and generally are used to transport large vehicles or mechanical and structural equipment.

Centre-beam flat railcars are used to transport lumber and are typically 71-73 feet long.

Intermodal railcars are used to carry trailers and containers and are designed for both - international containers (40 ft.) and domestic containers (53 ft.).

Gondola railcars: There are open and covered coil gondola railcars. The former is used to carry commodities such as coal, coke, and some metal and mineral ores and concentrates, while the latter are specialized and can be used to transport coal steel.

Tank railcars are used to transport petroleum fuels (gasoline, diesel, aviation fuels, fuel oil, and lubricants), chemical products (ethylene glycol, chlorine, ammonia, vinyl chloride, and caustic soda), and liquefied petroleum gas (LPG) products (propane, butane, and pentanes). Due to the potentially flammable nature of the cargo, tanker cars are required to follow specific design codes.

Just as different types of railcars are utilized for different types of loads and commodities, the number and types of locomotives used to depend on the type of traffic, weight, and length of the train, maximum grades over the train’s route and the ratio of locomotive horsepower to total train tonnage. The management, distribution, and allocation of locomotives are critical to a railway company’s rail capacity and overall efficiency.

While there are many models of locomotives used in Canada and the US, they are generally divided into three types: yard engines, road switchers and mainline. Yard engines are lower horsepower, 4-axle units used for switching cars in rail yards and marshalling trains. Road switchers are larger locomotives than the yard engines and are typically used in branch line service. Mainline locomotives are high horsepower locomotives that are the most modern and efficient in a railway fleet. Most have over 4,000 horsepower and 6-axles.

Freight locomotives, or mainline freight locomotives, account for 75 percent of the locomotive market segment, with switchers accounting for 21 percent and passenger locomotives with only 4 percent in North America. In North America, the locomotive market share is dominated by diesel locomotives (99.4 percent); electric make up the remaining balance (SlideShare 2011).

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The largest rolling stock (including locomotives) manufacturers worldwide are China CNR Corporation, CSR Corporation (China) and Bombardier (Canadian company based in Berlin); 46 percent of Bombardier’s total revenue is generated in Europe, of which 22 percent was earned in the U.K. (Bombardier 2018). In North America, the largest locomotive manufacturers are General Electric (GE) and Electro-Motive Diesel (EMD). The former accounts for 60 to 70 percent of the locomotive market. The latter was previously owned by General Motors Corporation and is now owned by Caterpillar (through Progress Rail Services Corporation). While 500 to 1,000 freight locomotives are produced in a given year, the 1,000-level was exceeded by mid-2014. New emission requirements, regulatory changes, and an ageing fleet may put pressure on GE and EMD to keep up with production orders.5

Train Types The types of rail services required are also varied with the type of rail operations. Different shippers rely on different rail services based on their requirements. Rail train services generally categorized into three primary types: unit trains, manifest trains, and intermodal trains.

Unit trains as part of freight trains carry just one type of commodities such as crude oil, grain or agriculture products, from origin directly to destination with different numbers of cars between 65 to 120 cars in length. This design allows for more efficient operations avoiding delays and complexities coming from assembling and disassembling trains or even switching of railcars at yards so that the duration of a trip is much shorter. It should be considered that unit trains require to ship more substantial volumes.

Figure C.2: Grain Unit Train

Source: (AASHTO 2018)

Manifest trains ship different groups of commodities, from small numbers of cars to larger groups with mixed origins and multiple destinations. Manifest train services are much slower due to variability in transit times and switching the cars between trains.

5 The Wall Street Journal, Caterpillar Falls Behind GE in Locomotives Race, http://www.wsj.com/articles/caterpillar- falls-behind-ge-in-locomotives-race-1405291739

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90 Canadian Energy Research Institute Figure C.3: Manifest Train

Source: (AASHTO 2018)

Intermodal service is almost exclusively provided over high-density Class I mainlines. Because intermodal is a premium service that requires faster train speeds than other services, these services are particularly dependent on Class I railway mainline capacity. Any disruption or congestion can slow these trains below the speed that is required. Intermodal service is also dependent on terminal capacity, both at truck/rail intermodal terminals and ports. Intermodal shippers are not only concerned with the timely arrival of containers at terminals, but also the ability to access those containers within terminals upon arrival, the ability to track containers and anticipate late arrivals, and the repositioning/availability of empty containers (AASHTO 2018).

Figure C.4: Intermodal Train

Source: (JOC 2019)

Canadian National Railway (CN) Additional Information CN has 1,039 freight locomotives and 253 yard-locomotives (NEB 2017), all diesel-fueled. CN does not own or operate any passenger locomotives. In 2018, CN stated it was purchasing 260 GE Tier 4 locomotives. CN also added 1,300 lumber cars and 1,000 boxcars to rejuvenate the fleet serving its forest products and metals customers. Additionally, CN ordered 1,000 new high-capacity hopper cars over the

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next two years to replace ageing equipment and meet the growing needs of its grain customers (Figure C.5).

According to Statistics Canada, CN owned 40,424 cars in total – 40,361 freight cars and 63 passenger cars. Of the freight cars, there are 14,233 hopper cars, 9,741 flat cars, 9,628 boxcars, 6,713 gondola cars, 25 categorized as other cars and 21 cabooses. The category of other includes specialty cars, such as livestock cars (StatCan 2017). In recent years, CN moved more cars than they own because many cars are leased or owned by shippers.

Figure C.5: Total Railcars moved by CN by Commodity Type

Source: (CN 2019b).

CN Additional Investment Activities CN has invested significantly to expand its services, including:

• Growth in Assets and Network for more Capacity: CN purchased 140 new high horsepower locomotives in 2019, and 55 locomotives in early 2020, to accommodate future growth opportunities and drive operational efficiency across the system.

• Deploying Key Technologies: CN plans to deliver a new level of service through a combination of business process innovation, automation, and optimization of key activities. Investing $500 million over five years will leverage technology and information systems to deliver improved safety, efficiency and service. Better data will help the CN system to bring improvement in core functions, including safety, mechanical, engineering, and transportation, among others. CN investments in technology will include basic applications to reduce manual and clerical work.

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92 Canadian Energy Research Institute • Long Haul Trains for Crude by Rail: CN, working with InnoTech Alberta since 2017, has developed CanaPuxTM, a new way of transporting bitumen. CanaPuxTM is solid, dry pellets that meet strength requirements for bulk transport, float in water and don’t leak or dissolve, resulting in minimal risk of environmental contamination. CN has selected Toyo Engineering Canada Ltd. to design and build a pilot project demonstrating the commercial viability of transporting solid bitumen by rail. Toyo will participate in a closed-loop pilot project to create equipment that can solidify and re- liquefy up to 1,000 barrels of bitumen a day.

• Application of New Technologies: CN has committed to purchasing 200 new fuel-efficient locomotives over the next three years. These high-horsepower engines are equipped with advanced technologies to maximize sustainability. These include Trip Optimizer™, an energy management system that processes real-time information on train characteristics, performance, and terrain, and continuously computes the most efficient way to handle the train. These new locomotives will also be equipped with distributed power, which allows a locomotive to be placed anywhere along a freight train and be remotely controlled from the lead locomotive to improve train handling and fuel utilization.

Many of CN old and new locomotives are also equipped with wireless telemetry systems that collect data to drive locomotive and train performance, including fuel conservation. CN Horsepower Tonnage Analyzer uses the data to optimize a locomotive’s horsepower-to-tonnage ratio. Between 2008 and 2016, fuel efficiency gains have translated into more than 4 million tonnes of carbon saved (CN 2018).

• Expansion of Services: CN has invested in expanding its service offering at Toronto, Detroit, Memphis, and Joliet intermodal terminals, and is planning for expansion in its Milton Logistics Hub. Together with CN, the Port of Prince Rupert has expanded its Fairview Container Terminal’s capacity from 850,000 TEU (twenty-foot equivalent unit) to 1.35 million in the year 2017. Also, one of CN’s long-time logistics partners recently opened the only transloading facility for grain unit trains, and a major North American energy producer has built the first propane export terminal in Prince Rupert. Other examples include new frac sand production and unit train loading and unloading facilities in Wisconsin and Alberta, new and expanded petrochemical plants near Edmonton, reopening of shuttered coal mines in northeastern BC, new efficient loop track grain elevators in Western Canada and a new high-throughput grain terminal at the Port of Vancouver.

• Creating a network advantage in Chicago: CN’s investments after the acquisition of the Elgin, Joliet, and Eastern (EJ&E) railways include multi-million-dollar upgrades to the EJ&E’s infrastructure, interchange points, and yards. This has created an outer belt around the congested corridors of Chicago, through which more than 25 percent of US rail traffic passes. This belt provides a key competitive advantage for CN, with a seamless route around Chicago that is the fastest of any Class I railway operating in that location.

• CN is currently expanding its intermodal terminal located in Chuka Creek Business Park in Regina to connect southern Saskatchewan to the global market. Also, CN is constructing a new container terminal port in Quebec City.

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Canadian Pacific Railway(CP) Additional Information In terms of locomotives, CP has 1,389 locomotives in total: 994 freight locomotives, 14-yard locomotives, 7 total passenger locomotives, and 20 locomotives categorized as “associated equipment.” Besides, CP owns 22,084 freight cars and 23 passenger cars. Of the freight cars, there are 2,687 boxcars; 7,305 covered hoppers; 3,749 gondola cars; 1,325 intermodal; 1,439 flatcars; 2,788 multi-level; 2,265 company service; 312 open-top hoppers; and 214 tank cars (CP 2018).

At the end of 2018, total carloads totaled 2,751,327, comprised of international intermodal (1,024,786 carloads), coal (304,396 carloads), grain (430,466 carloads), metals, mineral, and consumer products (258,035 carloads), chemicals and plastics (338,374 carloads) (CPR 2019).

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94 Canadian Energy Research Institute

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Appendix D: Model and Methodology

CERI’s Rail Transportation and Investment Model Rail freight transportation demand for various origin-destination corridors in Canada and the US/Mexico is developed using multivariate regression with inter-jurisdictional GDP and rail freight data. Provincial GDP forecasts from the Canadian Energy Futures 2018 publication (NEB, 2018) and OECD forecasts of the United States and Mexico GDP are the sources of GDP data. Rail freight data reported in the Canadian Freight Analysis Framework (StatsCan, 2019) provides the other inputs into the models. As shown in Figure D.1, there are two primary outputs from the models: various commodity flows and Canadian annual rail investment forecasts.

Information on freight transportation demand for various origins and destinations is used to model freight commodity growth across provinces/regions, using the R programming language as follows;

Figure D.1: CERI’s Rail Transportation and Investment Model

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96 Canadian Energy Research Institute

,( , ), = , + 𝑡𝑡+1 , , , + 𝑡𝑡+1 , , , + , ,( , ), + , ,( , ),

𝑚𝑚𝑖𝑖 𝑗𝑗 𝑘𝑘 𝑡𝑡 𝜃𝜃𝑖𝑖 𝑗𝑗𝑗𝑗0 � 𝜃𝜃𝑖𝑖 𝑗𝑗𝑗𝑗1 𝑡𝑡𝐺𝐺𝐺𝐺𝐺𝐺𝑗𝑗 𝑡𝑡 � 𝜃𝜃𝑖𝑖 𝑗𝑗𝑗𝑗2 𝑡𝑡𝐺𝐺𝐺𝐺𝐺𝐺𝑘𝑘 𝑡𝑡 𝜃𝜃𝑖𝑖 𝑗𝑗𝑗𝑗3𝑅𝑅𝑖𝑖 𝑗𝑗 𝑘𝑘 𝑡𝑡 𝜃𝜃𝑖𝑖 𝑗𝑗𝑗𝑗4𝑉𝑉𝑖𝑖 𝑗𝑗 𝑘𝑘 𝑡𝑡 𝑡𝑡−1 𝑡𝑡−1

Where ,( , ), is the volume of commodity , originating from region to destination region , during year . is shipment revenue for rail carrier, and is the supply value of the commodity. US and Mexico 𝑚𝑚𝑖𝑖 𝑗𝑗 𝑘𝑘 𝑡𝑡 𝑖𝑖 𝑗𝑗 𝑘𝑘 are categorized as one region to capture export and import flows of commodities from and into Canada. 𝑡𝑡 𝑅𝑅 𝑉𝑉 Canadian provinces are represented as separate regions.

Although StatsCan reports shipment revenues and values through the Canadian Freight Analysis Framework (CFAF), these data may not be reasonably estimated to use them as predictors in the model. This warrants reformulating the equations in terms of the shipping ( )and supply costs ( ), as follows:

, + , , , + 𝑐𝑐 , , , 𝑝𝑝 = ,( , ), 𝑡𝑡+1 𝑡𝑡+1 1 ( ) 𝜃𝜃𝑖𝑖 𝑗𝑗𝑗𝑗0 ∑𝑡𝑡−1 𝜃𝜃, 𝑖𝑖 𝑗𝑗𝑗𝑗1 ,𝑡𝑡𝐺𝐺𝐺𝐺𝐺𝐺, , 𝑗𝑗 𝑡𝑡 ∑, 𝑡𝑡−1 𝜃𝜃,(𝑖𝑖 ,𝑗𝑗𝑗𝑗)2, 𝑡𝑡𝐺𝐺𝐺𝐺𝐺𝐺𝑘𝑘 𝑡𝑡 𝑚𝑚𝑖𝑖 𝑗𝑗 𝑘𝑘 𝑡𝑡 − 𝜃𝜃𝑖𝑖 𝑗𝑗𝑗𝑗3𝑐𝑐𝑖𝑖 𝑗𝑗 𝑘𝑘 𝑡𝑡 − 𝜃𝜃𝑖𝑖 𝑗𝑗𝑗𝑗4𝑝𝑝𝑖𝑖 𝑗𝑗 𝑘𝑘 𝑡𝑡 Annual investments by Canadian railways are estimated at the national level using past, present and future national GDP projections including U.S. and Mexico GDPs, as follows:

, = + 𝑡𝑡+1 , , + 𝑡𝑡+1 , ,

𝐼𝐼𝐼𝐼𝐼𝐼𝑡𝑡 𝐶𝐶 𝛽𝛽0 � 𝛽𝛽𝑎𝑎 𝑡𝑡𝐺𝐺𝐺𝐺𝐺𝐺𝑡𝑡 𝐶𝐶 � 𝛽𝛽𝑏𝑏 𝑡𝑡𝐺𝐺𝐺𝐺𝐺𝐺𝑡𝑡 𝑈𝑈𝑈𝑈 𝑡𝑡−1 𝑡𝑡−1

Where subscripts indexes the historical and forecast GDP data for Canada ( ) and US/Mexico ( ).

Figure D.2 shows 𝑡𝑡the breakdown of annual investments by category based𝐶𝐶 on the 2017 data𝑈𝑈𝑈𝑈 of all investments made by members of the Railway Association of Canada (RAC) and as presented in their Rail Trends (Railway Association Of Canada 2018). CERI allocates the estimated annual investments using updated RAC data.

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Figure D.2: Breakdown of Canadian Historical Annual Railway Investments by Segments

Figure 2: Breakdown of Canadian historical annual railway investments by segments (RAC, 2018). Other Assumptions • GDP data and all calculations are done at 2018 cost basis using CPI data from the Bank of Canada; • Commodity shipping and supply costs estimated as average revenue and shipment values from CFAF database; • Rail freight demand forecast based on 2018 commodities shipping and supply costs; • GDP input data capture current and on-stream future capital projects in various sectors of the economy across provinces; • For a given commodity, variation in estimates of rail freight transportation demand may not be equally accounted for by all predictors when different origination and destination jurisdictions are involved; • All commodities grouped under a common category in CFAF have the same shipping and supply costs; • Effects of seasonal variations of rail operations, freight charges and market value of products are not implicitly observed; • Both origin and destination market conditions affect rail freight commodity flows; • Railways are operating at their maximum capacities, as captured in reported volume flows; • Terminals and rail corridor operations follow their recent historical trends; • Future investments enable capacity growth along existing rail corridors.

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