With oil field output in the U.S. outstripping pipeline capacity, the booming business of moving crude oil by rail was a singular success story for railroads — until July 6.
Then came the derailment that turned the Quebec town of Lac-Mégantic into an inferno, killing 50 people. The investigation into the disaster will take months, as Canadian Transportation Safety Board officials comb through the ruined town.
There’s much the TSB must determine: How the 73-car Montreal, Maine & Atlantic Railway train parked seven miles away broke loose and rolled downhill at high speed into Lac-Mégantic; the role played by a fire reported on a locomotive earlier that night; what steps the engineer took to secure the train before leaving at the end of his shift; and how the massive explosions that decimated the town occurred.
One looming question is how the deadly accident will affect the transportation of crude oil by rail. Will public outcry result in new rail safety regulations in Canada or the U.S.? Although the accident alone isn’t likely to shift crude oil from rail in areas where there are few if any alternatives, new regulations could raise shipping costs.
“Any discussion of moving crude oil by rail now has to include discussion of the terrible disaster at Lac-Mégantic,” Larry Gross, a senior consultant for FTR Associates, said in July 11 webinar. “There will be some ramifications that come out of this both in the desirability of moving crude by rail and regulations.”
Moving crude oil by rail is not only desirable but necessary. U.S. crude oil production is at its highest point in two decades, according to the Energy Information Administration. Railroads transported close to 356,000 carloads of petroleum product in the first six months of 2013, a year-over-year increase of 48 percent.
Simply put, pipelines can’t handle the current level of crude oil production.
In some cases, pipelines just aren’t available to move the oil from oil and gas shale fields to coastal refineries. That’s the case in North Dakota’s Bakken Shale field, where the oil that burned Lac-Mégantic originated. The Canadian Pacific Railway transported the Bakken crude to Montreal where it was transferred to the MM&A for a trip back into the U.S. through Maine to a New Brunswick refinery. (Post-accident, pipeline operator TransCanada reportedly is considering converting a gas pipeline to oil to help supply refineries on Canada’s Atlantic Coast.)
The rapid increase in transporting crude oil by rail — carloads hauled by Class I railroads surged from 9,500 in 2008 to nearly 234,000 in 2012, according to the Association of American Railroads — is a direct result of the expansion of shale oil drilling by hydraulic fracturing in states such as North Dakota, Texas and Pennsylvania. In the first quarter of 2013, Class I railroads hauled 97,135 carloads of crude, the equivalent of 726,000 barrels of oil moving over the tracks each day.
Has the crude-by-rail business grown too rapidly, putting undue pressure on safety? Rail interests, led by the AAR, say no. “Hazardous materials accidents and spills from freight rail are exceedingly rare, with 99.997 percent of all hazardous materials shipments reaching their destination without a release caused by a train accident,” AAR President and CEO Edward R. Hamberger said in a July 9 letter responding to a Washington Post editorial calling for greater attention to rail safety and claiming “oft-ignored dangers” involved in moving crude oil by rail, including the use of outdated oil tank cars. “The truth is that the nation needs both railroads and pipelines to transport crude oil safely and reliably,” Hamberger said.
That’s true, but rail accidents involving hazardous materials draw much more attention, and cause more injuries, than pipeline spills. The Lac-Mégantic derailment is a prime example. In this case, it’s not the size of the spill, but the number of deaths driving headlines and potential legislative or regulatory action. In Canada, the derailment overnight turned rail safety into a national political issue.
Regulatory action may focus on DOT-111 tank cars. The oil cars in the Lac-Mégantic accident were an older design still commonly used but not up to tougher tank car standards issued by the AAR in 2011. Both the U.S. National Transportation Safety Board and the Transportation Safety Board of Canada found the older cars are prone to rupture and spill their contents in accidents.
A decision to require use of new cars built to tougher 2011 standards would force widespread replacement of existing fleets by shippers, exacerbating a current production backlog for tank cars and pushing up rail transportation costs. That would cut into crude-by-rail expansion the EIA notes is already slowing as the difference between spot prices for Bakken crude and foreign oil shrinks.