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Two groups vie for the risk/possible rewards of building a 1,500-mile Alberta, Canada, to the middle of Alaska railroad – primarily to export resources.
This week’s rail market view commentary asks, “Where is the deep pro forma assessment?”
In the summer of 2019, Railway Development Corporation A2A negotiated what it called a master agreement of cooperation that together with the Alaska Railroad targets eventual construction of approximately 1,500 miles of new railway line that would link part of Alaska with the Canadian railroads in Alberta province.
This is an institutional agreement. It is not a financial agreement.
Under the terms, the two railroad companies will cooperate in applying for regulatory access permission. The two organizations will also develop a joint operating plan that will specify the track engineering details and the final location for the tracks.
Figure 1 shows the generalized rail route map.
Early estimates cite a capital price tag of approximately $13 billion (C$ 17 billion). But the actual cost is still uncertain.
Three things must happen before construction begins.
First, it appears that there are two railway organizations seeking regulatory permission for the one rail corridor.
Illustrative paint scheme of a locomotive that is used to promote the A2A business proposal. However, no locomotive fleet yet exists. (Photo credit: A2A)
A second plan is proposed by the G7G group (Generating for Seven Generations).
Both organizations appear to be relying upon the same pre-feasibility study researched independently by Calgary’s Van Horne Institute.
Secondly, there are regulatory hurdles. Both state and provincial authorities and multiple Canadian and U.S. federal regulatory agencies need to review and then issue permits or supportive findings.
Third, the First Nations, indigenous groups and Alaska Native entities – whose traditional lands are crossed by the route – also have a role in approvals and/or denials.
A more detailed project description for this Alaska-to-Alberta rail route might not be publicly released until early in 2020.
Here is what we know now and what’s missing.
On the positive side, Sean McCoshen, CEO of A2A Rail, touts that the project “will help assure global investors that obtaining a right-of-way in Alaska is achievable.” There is a process underway.
Yet, what is the market outlook?
Future markets for this rail route are only broadly suggested by A2A’s current statements.
The actual rail volume that might be moved, by commodity type, isn’t yet clear. The focus appears to be on moving crude oil out of Alberta for Pacific Rim nation export. A2A doesn’t appear to be too concerned with possible pipeline competition.
In contrast, investors should note that the big American and Canadian railroads are always concerned about the long-term competitive threat of new pipelines eventually being approved by regulators. The fear is that the more efficient pipelines would later divert the crude oil from the railroad routes and tank cars.
Under that threat, the initial rail advantage might become a pyrrhic business victory.
In military terms, a pyrrhic victory is a competitive single battle win that in the long run is tantamount to defeat as other variables and subsequent events “decide the war’s outcome.”
How real is the likelihood of a pipeline market entry? No one is sure.
However, the big Canadian and U.S. railroads are taking prudent measures to not become over-invested in what might later become “stranded rail assets.”
Two other important competitive risks are not yet documented for the A2A corridor proposal.
The first is the strength of distant source competition. The second is land versus sea competition and the modal price differences in setting transport rates.
Source competition will come from distant global markets and even from emerging liquified natural gas (LNG) suppliers. Source competitors can be identified in Australia, Indonesia, the Middle East, Siberia, and even along the Gulf of Mexico in oil- and gas-rich states like Texas.
Some of these competitor commodity providers are located closer to the buyer markets than is the Alberta crude oil to be exported under the A2A concept.
Many of these international energy sources will have the advantage of lower sea transport costs while the Alberta and Alaska resource-origin locations will have to rely on much longer distance of land movement at much higher rail price levels.
How much of a price difference could there be? It could be as much as three to four cents per ton-mile. That is a significant cost delta.
To understand what a rail-competitive price will be, the A2A sponsors will have to first identify what the railroad’s engineering specs will be. Is the new Alaska-to-Alberta railroad going to be robust at perhaps 35- to 40-metric ton axle loads for the freight cars? Or just a 30- to 33-metric ton axle loads?
Will unit trains operate with 10,000 to 13,000 net tons per train – or instead be designed and built to a much larger 20,000 or larger tonnage train size? These facts are not yet in evidence.
Figuring all of this out is complex. Change the tra