Crude Oil by Rail: The Industry is Changing

Crude Oil by Rail: The Industry is Changing

July 25, 2014  | Carter Templeton

BY STEVEN R. DITMEYER
Adjunct Professor of Railway Management, Michigan State University

An old adage says the railroad industry is slow to change. The rapid growth of the shipment of crude oil by rail, however, challenges the railroads as well as the accuracy of that adage. In 2008 fewer than 10,000 tank carloads of crude oil moved by rail; in 2013 nearly 400,000-tank carloads of crude oil moved by rail. However, safety concerns have been raised. A serious crude oil train accident that killed 47 people occurred in July 2013, and nine more crude oil train accidents including several near misses in cities, have occurred since.

The causes of these accidents and the accompanying public concerns about the safety of hauling of crude oil by rail are complex due to the number of issues and players involved.

The first issue is the crude oil itself. Railroads were not alone in failing to recognize that all crude oil is not the same. In fact, there was a mistaken belief that crude oil does not explode. Crude oil comes from the ground as a mixture of hydrocarbons in a variety of forms. It ranges from heavy crude (a black, highly viscous fluid with low volatility) to light, sweet crude (a light colored, low viscosity, highly volatile liquid). Failure to recognize these different properties by government regulators and the industry—combined with the failure of the oil production companies and refiners to properly label these different varieties of crude oil—all contributed to the problems.

The tremendous growth of crude oil shipments by rail can be attributed to the application of hydraulic fracturing (or “fracking”) technology for the drilling of oil and gas in shale formations. Fracking has resulted in major increases in production from the Eagle Ford Field in Texas and the Bakken Field in North Dakota. The Eagle Ford Field is well connected by pipelines with refineries on the Texas Gulf Coast. Very few pipelines, however, serve the Bakken Field. (The proposed Keystone XL pipeline, which will pass through the Bakken Field, is being designed to carry the heavy crude from the Alberta tar sands to Texas, not the light, sweet crude from the Bakken Field.)

East and Gulf Coast refineries, some built to refine light, sweet crude from the North Sea and Nigeria, were being idled due to decreasing U.S. oil imports, and are not served by crude oil pipelines. The owners of these refineries decided to purchase crude oil from the Bakken Field and have it shipped in by rail.

Even though the cost of shipping crude by rail is more expensive than by pipeline, the shipment of crude by rail requires less capital, is more flexible, and does not require long-term contracts.

This looks like a good situation for railroads, but risks could change it for them, including: Environmental restrictions and limits on fracking could be imposed; Macroeconomic effects causing a downturn in the economy; Changes in the price and availability of alternative energy sources such as coal and natural gas; and Accidents involving crude oil shipments by rail resulting in regulations that could significantly raise the cost of shipping crude oil by rail.

Railroads are being cited for having accidents caused by track defects in some cases and poor operating practices and a poor safety culture in others. Railroads, in turn, are blaming the DOT-111 non-pressurized tank cars used to carry crude oil as being insufficiently strong to prevent rupture and fires. Railroads do not own these tank cars; they are owned by tank car leasing companies that lease the cars to the companies that produce and/or refine the crude oil. The Pipeline and Hazardous Materials Safety Administration (PHMSA) writes the specifications for these tank cars, as well as for all highway, railroad, and barge tanks carrying hazardous materials.

Following some derailments and fires in 2009 involving DOT-111 tank cars carrying ethanol, the Association of American Railroads’ (AARs’) Tank Car Committee worked with tank car builders to develop a stronger tank car to replace the DOT-111. This new tank car, known as the CPC-1232 (Casualty Prevention Circular) has a thicker shell, a thermal jacket, and an outer shell, and has been in production and service since 2012. AAR and the tank car builders proposed PHMSA issue a federal rule requiring these stronger tank cars for the haulage of flammable and/or explosive commodities.

The crude oil and refiners, as well as the owners and lessors of tank cars, were not in favor of standards requiring new, stronger tank cars. They believed the standards would increase the cost of tank cars, reduce the cars’ carrying capacity, and thereby increase the cost of transporting crude oil and the cost of refined product. As a result, PHMSA took no action until recently on changing the standards for tank cars hauling crude oil and ethanol.

A major tipping point in the movement of crude oil by rail occurred on July 6, 2013, when a runaway train on the Montreal, Maine & Atlantic Railway carrying crude oil in DOT-111 tank cars derailed in downtown Lac-Mégantic, Quebec. The tank cars ruptured, causing explosions and fires that destroyed the center of the town and killed 47 people. The public was suddenly aware that crude oil was moving by rail in substantial quantities, and could present a major risk to communities throughout North America. Communities realized their emergency response services could handle incidents involving a small number of carloads of hazardous materials, but not trainloads.

As rail safety regulators in Canada and the U.S. began tried to determine what could be done to reduce the risk associated with shipments of crude oil by rail, nine additional accidents occurred in the following months, putting more pressure on the regulators. Some accidents involved significant releases of crude oil and fireballs; some involved evacuations of communities; some involved injuries; and two occurred near city centers, the others occurred in rural areas.

On September 6, 2013, PHMSA issued an Advance Notice of Proposed Rulemaking (ANPRM) announcing its intent to issue rules on the design of tank cars, replacement of tank cars, speeds of trains hauling hazardous materials, and other railroad operating practices. By the end of the comment period, PHMSA received over 150,000 comments on the ANPRM.

On January 16, 2014, Transportation Secretary Anthony Foxx brokered a deal to put an end to inter-industry disagreements between the railroad and petroleum industries on how to improve the safety of crude oil by rail shipments. The railroad industry agreed to study the rerouting of trains around high-risk areas, and work on speed reduction plans in riskiest areas as well as reducing derailments. The petroleum industry agreed to do a better job of identifying the type of crude oil being moved in tank cars. Both industries agreed to try to reach agreement on new tank car standards.

On April 9, the Federal Railroad Administration (FRA) announced plans to issue a Notice of Proposed Rulemaking (NPRM) to address additional rail safety matters: two-person crews would be required on crude oil trains, railroads would be prohibited from leaving unattended freight trains on main tracks and sidings, locomotive cab must be locked and reversers removed and secured, and railroads must obtain advance approval from FRA on situations where unattended cars may be left. The railroad industry opposed the requirement for two-person crews on crude oil trains but agrees with the other matters.

On May 7, the U.S. Department of Transportation (USDOT) issued an Emergency Order requiring all railroads operating trains containing large amounts of Bakken crude oil to notify State Emergency Response Commissions (SERCs) about the operation of these trains through their states. The railroad industry is still wrangling with states regarding the information they need to provide. The same day, FRA and PHMSA issued a joint Safety Advisory strongly urging shippers of Bakken crude oil to use tank car designs with the highest level of integrity available in their fleets, and, to the extent possible, avoid the use of older DOT-111 tank cars for the shipment of Bakken crude oil.

On July 23, after reviewing the large number of comments on its ANPRM, PHMSA issued an NPRM in which it announced its intent to issue rules that would require crude oil tank cars to be upgraded by 2017 and ethanol tank cars by 2018. The rules might specify that the cars could be either new or refurbished (and possibly the CPC-1232 cars) with thicker shells, full head shields, and stronger valves. The NPRM also proposes rules that would set a maximum 40 mile per hour speed limit for trains with DOT-111 tank cars, and, once they were replaced with new or refurbished cars, the trains hauling them would have a 50 mile per hour speed limit. There will be a 60-day comment period on these proposed rules, and then the final rules are expected in early 2015.

Tank car builders have expressed concern that they will not have the capacity to build new tank cars rapidly enough to meet the implementation deadline, and railroads question the ability of contract shops to do refurbishments at a reasonable cost.

Growing shipments of crude oil by rail are causing congestion on some rail lines. Shippers of grain and automobiles claim their shipments, which are also growing, are being delayed. The Surface Transportation Board ordered BNSF Railway and Canadian Pacific Railway to disclose plans to address the backlogs. Slower train movements and increasing traffic are causing car shortages. Freight car leasing companies are increasing their lease rates, thereby increasing the cost to shippers to move their commodities by rail.

Finally, there is the matter of crude oil exports. An export ban was imposed in 1975 in response to the Arab oil embargo. With increasing production of crude oil in in the US, there is pressure on Congress to lift the crude oil export ban. Doing so would enable the US to ship its light, sweet crude to Europe where refineries are well equipped to process it. The export crude oil from the Bakken Field to East Coast ports could bring about further increases in the shipment of crude by rail.

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