Crude Oil Transportation by Rail: More than the Industry Bargained For?

By
April 30, 2015

An announcement by the US Energy Information Administration (EIA) about the new set of oil statistics missed the spotlight. Really, what’s so special about adding another data report that only expands on the list of transportation options for the same commodity? We’ve had data on barges, tankers, and pipelines; now we also have information on railroads added to the modes of transporting oil within the United States and across the Canadian border. There seems to be nothing special about this, and the reason is that there has been a consistent growth in the oil moved via train tracks over the last several years. However, there are some submerged boulders here that are worth being dug out.

The first datasets provided by EIA to the public communicate a straightforward message: more oil travels by rail now. Over the last four years, the volume of crude moved via railroads increased seven-fold for deliveries inside the country, and five-fold of those arriving from Canada.

Figure 1: Crude Oil by Rail (Data Source: EIA)<br /><br /><br /><br /><br /><br /><br />

Figure 1: Crude Oil by Rail (Data Source: EIA)
 

According to Statistics Canada, Canadian oil recoveries sustained an increase in the load from oil similar to the US counterparties.

Figure 2: Oil by Rail (Data Source: Statistics Canada)

Figure 2: Oil by Rail (Data Source: Statistics Canada
 

The explanation for such growth is less simple:

1)      Shale oil production continues boosting deliveries, which, despite consistently dropping market prices, have sustained at high levels.

2)      With environmentalists focused strictly on blocking oil pipelines from being built and expanded in the United States and Canada, the industry turns to alternative transportation solutions.

Pipelines have been operating at their highest capacity as is. Any increase in production makes it challenging for producers to decide on the midstream mode. Railroads have become one of the options that absorb incremental supply increases. According to EIA, Bakken oilfield production has increased by more than 1 million barrels per day since 2010, with 70% of it being transported by rail. Rails actually have several benefits over pipelines. The rate at which train loading terminals can be built (6-12 months) is much faster than pipeline construction. There is also more flexibility in contract terms. As well, oil moves faster on rails, even though it is in smaller volumes. Rail routes also offer more variety in destination points.

Railroads now allow for oil to move from the Midwest to the East and West Coasts. Rail is also considered a viable solution for landlocked Canadian oil. Oil movement in these regions is restricted by the pipelines’ capacity; proposed expansion solutions in form of the Keystone XL, Energy East, and Trans Mountain pipelines have been delayed by public and political opposition.

Now things get more complicated. An increased utilization of rail transportation means an increased rate of accidents. Multiple derailments of oil-loaded trains throughout Canada and the United States exposed the unpreparedness of the system to meet this demand. Aside from many incidents that draw attention mainly from local media outlets, the major ones gained global coverage recently:

  • The July 2013 derailment in the heart of the Quebec town of Lac Megantic that burned down more than 30 buildings and killed 47 people.
  • The April 30, 2014, derailed train that that caught fire in Lynchburg, Va, forcing an evacuation of the community.
  • The derailment of 29 tank cars in Ontario, Canada, on February 14, 2015, which started a fire that took several days to extinguish.
  • The derailment in West Virginia on February 16, 2015, which endangered lives by creating a fireball as well as spilling oil into the local river thereby polluting the drinking water supply for a nearby community.

The growing number of railroad oil accidents is exacerbated by the complexity of emergency response. The majority of these accidents can be divided into two groups, according to the origin of the crude: North Dakota and Alberta. Each one of these sources has different properties requiring a different emergency response approach. North Dakota oil is light and highly volatile, turning into flames easily. Alberta crude is a heavy bitumen, which sinks when spilled into water, needing recovery techniques different from light crude (which floats on the water surface).

Meanwhile, the public is set almost deaf to all of these railroad accidents while remaining fixated on news about pipeline approvals and protests in front of the White House. It almost seems like the railroad industry is using this break trying to patch up regulatory ruptures. Only during the last month, a lineup of these fixes emerged on both sides of the border.

    • The Canadian government proposed tough new standards for oil rail tank cars that would phase out the existing, highly criticized tank cars by 2025.
    • The US National Transportation Safety Board on April 3, 2015, issued a set of “urgent” recommendations for replacing oil train cars more quickly than federal regulators require.
    • On April 24, 2015, Washington state passed the oil-by-rail safety legislation that requires advanced notice to the Department of Ecology and emergency services before oil shipments.
    • On April 27, 2015, the North Dakota Legislature approved funding for a state-run rail safety pilot program intended to supplement federal oversight of oil train traffic.
    • Also on April 27, the Federal Railroad Administration issued a rule restricting trains carrying substances to not exceed 40 miles per hour when travelling through high-threat urban communities.

Governments and railroads seem to be quite committed to ensuring that oil transportation by rail passes the mark. Whether oil industry lobbyists have anything to do with this or not is not of such a high importance. What is impressive is that, no matter what, oil keeps moving to the intended destinations in continuously increasing volumes. And as long as oil leads the energy resources pack, there will be new data reports, which reflect innovative industry solutions to glitches in political circles.

 

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