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Flash Point: New Oil-by-Rail Rules

Wednesday, August 20, 2014

Proposed regulations of oil-bearing trains pose several challenges and divert us from more important safety questions.

On July 6, 2013, a train carrying crude oil from the Bakken formation in North Dakota exploded in the middle of Lac-Mégantic, a small town in the Canadian province of Quebec. The incident was genuinely catastrophic, killing 47 people, and destroying half the town center. The derailment and explosion was the fourth-deadliest rail accident in Canadian history. Naturally, the Lac-Mégantic disaster set off a firestorm of protest, aimed at railroads, government, and the oil boom that is revolutionizing oil markets in the United States – the tremendous gusher coming from the Bakken formation, a gas-and-oil bearing shale formation that stretches from North Dakota, through Montana, and north into Saskatchewan and Alberta.

Yesterday, Canada’s Transportation Safety Board released a report on its investigation of the Lac-Mégantic disaster. The investigation suggests that the cause of the disaster was a combination of human error and insufficient safety protocols. “Accidents never come down to a single individual, a single action or a single factor. You have to look at the whole context,” said Wendy Tadros, chair of the TSB, in a news release. She continued:

In our investigation, we found 18 factors played a role in this accident. The TSB found MMA [the rail company involved] was a company with a weak safety culture that did not have a functioning safety management system to manage risks. The TSB also learned that Transport Canada did not audit MMA often and thoroughly enough to ensure it was effectively managing the risks in its operations. Furthermore, the Board found problems with training, employee monitoring, and maintenance practices at MMA; with industry rules for the securement of unattended trains; and with the tank cars used to carry volatile petroleum crude oil.

According to the report, the cause of the Lac-Mégantic disaster was not the construction of the rail cars (indeed, the report states that all of the cars were up to the existing standard), nor the nature of the oil inside the cars (though the cars did, not surprisingly, suffer considerable damage in the 65 mph derailment).

The U.S. Department of Transportation proposed new regulations this month aiming to reduce the risks of shipping oil by rail. The new rules would require the upgrading of existing rail cars (called DOT-111 cars) used to transport oil; impose speed limits on “high-hazard flammable trains” and oil-bearing trains; establish new braking practices; and mandate route-based risk-assessments. Tank cars used to transport oil would also have to be manufactured to much tougher standards than the existing DOT-111 fleet.

No one is against safety, of course, but the new regulations pose several challenges. First, they are going to be costly. Retrofitting each rail car to meet the new standards is estimated to cost between $30,000 and $40,000, and industry projections suggest there are about 78,000 cars that need to be retrofit, at a total cost of $2.3 to $3.1 billion. Complying with the new regulations will increase the cost of oil transport, and thus the cost of oil, gasoline, derivative products, and services provided through the use of those products for everyday consumers. And second, the proposed rules might aggravate an existing shortage in rail cars available for transporting crude oil. The Wall Street Journal suggests that:

Demand for replacement cars is likely to collide with the crude-oil industry's growing need for additional cars. The backlog of orders for new tank cars was 52,589 at the end of the second quarter, according to the Railway Supply Institute.

With production capacity for new tank cars about 35,000 cars a year, industry analysts say the railcar industry could have difficulty expanding production fast enough to accommodate the short time frames proposed by regulators for ushering out older tank cars for transporting flammable liquids. At current production rates, cars ordered today couldn't be delivered until 2016.

The Journal also observes that “Most rail car repair shops in the U.S. are regional operations intended for small-scale work,” meaning that the ability to retrofit the existing DOT-111 fleet is quite limited.

After the Lac-Mégantic disaster some people began to characterize Bakken crude oil as ‘uniquely flammable.’

Of course, there is the potential for good outcomes as well: in addition to reducing the risk of accidents, the new standards might engender savings through reduced insurance rates, though whether or not this will happen is questionable. After Lac-Mégantic, the United States Pipeline and Hazardous Materials Safety Administration effectively concluded that current insurance coverage levels were far too low to cover the potential costs of an accident. There will surely be higher insurance rates issued to cover the more expensive cars, further reducing the economic viability of moving large quantities of oil by rail. Adding to the complexity, there may not be sufficient resources in the rail-insurance sector to step up to the plate and offer more comprehensive coverage.

But setting matters of benefits and costs aside for the moment, what if the rationale for the new rules is wrong?

After the Lac-Mégantic disaster some people began to characterize Bakken crude oil as “uniquely flammable,” with an implication that new rail-car standards might be required to move the material. U.S. Transportation Secretary Anthony Foxx is said to have “stressed that crude from the Bakken is uniquely volatile, more than most fuels, and the problem is the infrastructure and process in North Dakota.” Indeed, the supposed uniquely flammable characteristics of Bakken crude were ultimately cited as a central reason for the recent Department of Transportation proposal to tighten rail-car standards in the United States. Secretary Foxx, in fact, doubled down on the uniquely flammable narrative, playing the “science says” trump card: “Our rule-making is supported by sound science,” Foxx said. “Bakken crude oil is on the high end of volatility compared to other crude oil.”

The Wall Street Journal “has reported that crude oil from North Dakota's Bakken Shale is volatile and contains large levels of combustible gases, and that the energy industry didn't install oil-field equipment to stabilize the crude. The federal government reported Wednesday that its own study had found Bakken oil is usually more volatile and flammable than other crude oils.”

But is it? A recent study of Bakken crude commissioned by the North Dakota Petroleum Council reveals that Bakken crude is… just regular crude oil that can be safely transported (never perfectly safe, to be sure, but generally so) in existing rail cars.

The study, conducted by Turner Mason & Company, sampled Bakken crude at 15 well sites across the Bakken formation, and at seven rail terminals, testing the oil for a broad range of physical characteristics. Summarizing the findings in plain language: Bakken crude is comparable to light sweet crude oil when it comes to its relative weight as compared to water, and it has very low levels of sulfur and corrosive acidic components. The vapor pressure of Bakken oil (a measure of how much outward pressure that Bakken oil would exert on a container such as a rail car) was found to be within a few pounds per square inch of other light sweet crude oils. The flash point of Bakken oil (that’s the lowest temperature at which the oil could vaporize enough to ignite in air) was found to be below 73°F, similar to other light sweet crudes. The initial boiling point (that’s the temperature at which bubbles form in a heated liquid) was found to be between 95°F and 100°F, which is also in the normal range for light sweet crude oil; and Bakken crude didn’t have unusually high concentrations of very light (and particularly flammable) hydrocarbons (known as “light ends”). And, contrary to suggestions that there might have been additions to Bakken crude that would make it uniquely flammable, the Turner Mason study found no evidence that Bakken crude was “spiked” with more flammable natural gas liquids prior to being shipped by rail.

Complying with the new regulations will increase costs of oil transport, and thus the cost of oil, gasoline, derivative products, and services.

Finally, the report notes that: “Bakken crude oil meets all specifications for transport using existing DOT-111 tank cars.” This conclusion is consistent with the recent AFPM Bakken Report, which stated “Bakken crude oil does not pose risks significantly different than other crude oils or other flammable liquids authorized for rail transport. Bakken and other crude oils have been classified as flammable liquids.... Bakken crude poses a lower risk than other flammable liquids authorized for transport by rail in the same specification tank cars.”

The “uniquely flammable” narrative has driven the ongoing process to develop new rail-safety regulations, and new standards have been proposed in the United States. The new rules offer potential benefits, as well as potential costs and unintended consequences. We may or may not be safer as a result of the proposed tank-car regulations, but it could well be that the “uniquely flammable” narrative of Bakken crude has led us to focus on the wrong problem. The problem may not be in the nature of the crude, or the nature of the cars, but rather in the ongoing war over pipelines. Rail and roadway transport of oil has always had (and will always have) niche applicability for the transport of oil, but the choice of transport mode has consequences. As I wrote last year in The American, so long as the demand for oil exists, the choice to oppose, resist, and blockade pipelines is, in effect, a choice to move oil by rail. And that choice is consequential: pipelines are safer than rail transport, which is safer than road transport. It would be unfortunate indeed if the proposed new rules divert us from the more important question: what’s the safest way to move oil to market?

Kenneth P. Green is senior director of natural resource studies at The Fraser Institute.

FURTHER READING: Green also writes “Can Obama Punt Keystone into 2016?” "More Pipelines in the Pipeline," and “The 'Science' of Global Warming, Part 1.” Benjamin Zycher contributes "The Efficiency of a Carbon Tax: Broadly Accepted and Broadly Wrong," “Keystone XL: Sachs Strikes Back,” “The Fact-free Opposition to Keystone XL,” and “LNG Exports: 'A Good-Faith Test' for President Obama.”


Image by Dianna Ingram/ Bergman Group


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