Runaway Train Calamity Underscores Crude-By-Rail Concerns

September 2013, Vol. 240 No. 9

Michael Reed, Managing Editor

When a train carrying 72 tanker cars of Bakken crude oil derailed in the Quebec town of Lac-Mégantic, killing 47 people and destroying 40 buildings, it powerfully rekindled the debate over the merits of rail vs. pipeline delivery throughout the industry.

With rail increasingly seen as at least a logical way to alleviate some of the problems created by the dearth of available pipelines that followed the shale boom, producers now find themselves faced with growing public scrutiny and the potential regulatory changes spurred by the accident. Nonetheless, many analysts expect the fastest and most effective remedies to safety problems will come from within the industry, itself.

“Shippers’ likely response to the Quebec accident will be to place additional requirements and safety audits on those that transport the crude,” said Bruce Bullock, director of SMU’s Maguire Energy Institute. “The industry doesn’t want an accident any more than the public does. It’s going to put in place more pressure to reduce those kind of accidents – probably more so than the regulatory authorities.”

Bruce Bullock

Though generally not falling within the classification of “serious” under the Pipeline and Hazardous Materials Safety Administration’s (PHMSA) criteria – at least not until the Quebec tragedy – the number of crude oil spills occurring along rail lines has grown significantly in recent years. Last year, there were 88 such accidents vs. one or two annually during each year of the previous decade, PHMSA reported.

While the number of oil-filled rail cars have increased significantly in recent years (See, “Rail Delivery Continues To Increase, But Pace Slows”) and federal law requires railroads to report spills that are smaller than the 5-gallons-or-more pipeline requirement, recent studies have shown pipelines have far fewer accidents in scenarios that consider total volume and shipping distance.

A recent Manhattan Institute study, for example, found that for every billion-ton-miles traveled, an average of less than one incident is recorded involving pipelines, while there are 19.95 incidents over the same distance involving rail transit. And, while pipeline incidents were found to spill more oil than rail incidents, rail accidents had a higher likelihood of deaths or injuries.

Still, according to Bullock, rail offers some significant advantages to producers, including speed to market, and the ability to put infrastructure in place and ramp up capacity quickly, though he contends the current years-long backlog for rail cars makes some of this argument more “theoretical” than the railroad operators would like to admit.

“I don’t know that at the end of the day it [the accident] will have a huge short-term impact on rail use,” he said. “At the same time, the pipeline industry is dealing with the *Pegasus situation, so my guess is, it will help force a broader look at the transportation of crude in general.”

The jump in crude production from the Bakken in North Dakota and Montana, where there is not enough pipeline, accounts for the largest share of increased delivery by train. More oil moving to market by rail has helped narrow the difference between the spot prices from Bakken crude and international benchmark Brent crude in recent months to less than $5 a barrel.

It is estimated that roughly 75% of Bakken oil extraction from North Dakota moves by rail to refineries in eastern Canada, on the Gulf Coast or elsewhere. The crude oil being shipped at the time of the Quebec accident was en route to a St. John, New Brunswick refinery that, according to its owner Irving Energy, sends more than half of its 300,000 bpd to the northeast U.S.

The Keystone Question

Sandy Fielden, RBN Energy director of energy analytics, also said he doubts the accident will have much of a short-term effect on the rail use, although the media spotlight could lead to stricter regulations for rail cars over the long term, potentially hindering growth of the business.

Sandy Fielden

“What’s going to be more pertinent to the overall stricter regulation question is whether the Keystone pipeline gets approved by the State Department, and if it does get approved, then what is their discussion in issuing that approval regarding pipeline safety,” Fielden said.

While the train disaster in Quebec may have restarted the pipeline vs. rail debate, the top official behind the proposed Keystone XL project warns there’s no spinoff benefit for anyone in the wake of such a grim event.

TransCanada’s chief executive officer Russ Girling said during a recent conference in Calgary that there’s “no good news here for anybody,” and the argument that the pipeline industry will somehow benefit from the tragedy makes no sense.

“This is a tragic event that shakes everybody and shakes all of us that are in the business,” Girling said.

Aside from the Keystone XL, another Bakken pipeline option for producers could come in the form of the 250 MMbbl Koch pipeline, which began an open season July 1. It would run to Hartford and Patoka, IL and could connect to St. James, LA on the Gulf Coast via the proposed Energy Transfer/Enbridge joint venture Gulf Coast Crude Access pipeline. It would come into service in 2016.

In recent years, proposed Bakken pipelines have failed to garner enough interest from shippers due to the flexibility of rail, but rail rates from the Bakken to the coasts are currently underwater due to the narrowing spreads. Also, unlike oil sands developments, which are expected to produce for several decades, oil wells in the Bakken formation only produce for about 10 to 12 years, so it is not always economical or easy to connect them to the existing oil pipelines in the U.S.

However, TransCanada confirmed plans to move forward with plans to repurpose its Mainline gas pipeline to carry as much as 1.1 MMbopd to eastern Canadian refineries and export markets.

“I think the Koch has a good chance to succeed,” said Fielden. “But the main reason is the crude oil price spread for inland crude and the coast – between WTI and Brent – have narrowed considerably in the last few months. The coastal pipeline is offering a less expensive route to market now than rail.”

Time To Act
Following the Quebec accident, the U.S. Department of Transportation’s Federal Railroad Administration (FRA) issued an emergency order to safeguard against trains operating on mainline tracks or sidings from moving unintentionally.

Among the provisions going into effect Sept. 1:

• Trains transporting hazardous materials cannot be left transporting unattended on a mainline track or side track outside a yard or terminal, unless specifically authorized.

• Employees responsible for securing trains must tell dispatchers the number of hand brakes applied, the tonnage and length of the train or vehicle, the grade and terrain features of the track and other relevant information.

• Railroads must implement rules ensuring that any employee involved in securing a train participate in daily job briefings prior to the work being performed.

In the wake of the Quebec derailment, Transport Canada (TC), which regulates the nation’s rail, issued an emergency order requiring at least two crew members work on trains carrying dangerous shipments, which include crude oil, and that no locomotive attached to a dangerous shipment be left unattended on a main track. The directive took effect immediately.

Nonetheless, the industry needs to right its own ship where rail is concerned north of the border. As train shipments of crude in Canada increase sharply, the government has cut funding to TC by 30% to $1.5 billion for fiscal 2013 and 2014. (The Quebec accident occurred only 22 miles from the Maine state line.)

Canada has been hit with several train accidents recently, several involving petroleum shipments. The Canadian Pacific Railroad (CP), Canada National Railway’s smaller rival, has been involved in five derailments in a three-month period that began in April.

In June, a CP freighter loaded with diluent derailed on a Calgary, Alberta bridge amid flooding. Earlier, a CP train bound for Chicago spilled 357 bbl of oil in Minnesota. As it turns out, those accidents were minor by comparison.

“The rail shippers have always argued that because these are containerized [crude oil shipments], if you have an accident it tends to be smaller,” said Bullock. “I think this accident probably shows that argument doesn’t hold water.”

*The Pegasus Pipeline spilled about 5,000 bbl of heavy Canadian oil sands crude in Mayflower, AR in March. Owner Exxon said an independent assessment concluded the leak was caused by manufacturing defects in the form of hook cracks near the seam.

Accident Specifics

The logistics leading up the derailment:

• The train stopped at Nantes at about 11 p.m. July 5 for the only engineer’s required break and shift change with another engineer.

• At about 11:30 p.m. witnesses report there was a fire on board.

• At about midnight investigators said the engine was turned off and the fire put out.

• After firefighters left the scene, at about 1 a.m., the unmanned train began rolling toward Lac-Mégantic, about 8 miles away, due to a steep incline.

• The train derailed at a bend in the track at about 1:15 a.m. July 6 and began to burn.

Human Factor
Evidence that opportunities were available to avert this disaster:

• Owner and CEO Ed Burkhardt of Rail World, which is the parent company of train operator Montreal Main & Atlantic Inc., said the engineer set the brakes on the running locomotive before departing. (Keeping the locomotive running is what kept the air brake pressurized.)

• Technicians were told the engine was shut off when the initial blaze was put out, but Burkhardt said the technicians would not necessarily have known the engine needed to stay on to keep the brake functioning. He said the engineer should have been contacted at his hotel but was not.

• Safety officials say the train should still have been secured by a number of hand brakes on its four other locomotives and on several of the crude cars.

• Burkhardt said hand brakes on all locomotives were on, and he believed “five or six” on the tankers were also engaged.

• Canadian regulations leaves the decision on when and how many brakes must be engaged up to the operator, based on number of cars and the slope of the track.

• Burkhardt said he will no longer allow trains carrying hazardous materials to sit unattended.

• In the wake of the disaster, Montreal, Maine and Atlantic railway filed for Chapter 11 bankruptcy protection in the U.S. and Canada, citing debts to more than 200 creditors. The company now faces lawsuits and massive cleanup expenses.
• Montreal, Maine and Atlantic was stripped of its operator’s license on Aug. 13 by Canada’s transportation agency, which said it was not satisfied by the company had demonstrated its third-party liability insurance was adequate for ongoing operations.

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