Last week, Transportation Secretary Anthony Foxx unveiled his department's proposed oil-by-rail regulations. How did the Transportation Department manage varying stakeholder interests and challenges in its proposal? During today's OnPoint, Kevin Book, managing director at ClearView Energy Partners, discusses the proposal's impact on industry and the politics surrounding the release of the proposed rule.
Monica Trauzzi: Hello, and welcome to OnPoint. I'm Monica Trauzzi. With me today is Kevin Book, managing director at ClearView Energy Partners. Kevin, always nice to have you on the show.
Kevin Book: Thanks for having me back, Monica.
Monica Trauzzi: Kevin, last week, Transportation Secretary Foxx unveiled his agency's proposed rule for crude-by-rail regulations. We've been waiting on this for some time now, but they were pretty quick in establishing this proposal. What's your big-picture take on how the Department of Transportation managed all the varying interests in this?
Kevin Book: Well, for the rule, essentially, the Transportation Department had to deal with three different items. There was the question of the rail cars and the specification of those cars, there's the question of crude composition, and there's the question of the operational guidelines they were going to give the railroads, and they dealt with them all at different levels. Some of these questions were closer to a final answer than others. So for rail cars, they're taking comment, for example, on a new design, and they're giving options. They haven't mandated or finalized a new design. For the crude composition question, they've decided that more testing is required, and for the operational guidelines, there are some things that are pretty close to what looked like they might be the final deal, and then there's some questions, like speed limits, where they've left a lot of room for discussion.
Monica Trauzzi: Does the two-year deadline that they've established to upgrade or retire high-risk tank cars, does that stymie investments and developments? That's something that we're hearing from industry.
Kevin Book: Well, Canada had already basically ruled out the DOT-111, which was the pre-2011 tank cars that were used for crude conveyance, by the end of 2016, and it's an integrated North American rail system, so it's not like the tank cars are just going to jump off the rails and walk when they cross the border. They're not going to be used for crude at all. So what do we have here? It's not a very big difference. The DOT-111s in the U.S. effectively start to phase out, really, in October 2017. It's the immediacy of the new standard certainly creates a lot of question; for the next rail car you buy, you're going to want to have some lead time and knowing what it is you need to buy.
Monica Trauzzi: So the big question here is about safety. Do the regulations go far enough in preventing future incidents like the one we saw in North Dakota?
Kevin Book: Well, there are a number of questions that you have to wrestle with, and the first is at what point are you creating a new problem because you've made your tank cars, effectively, into Sherman tanks, and displaced so much product that you now have more cars on the rails? So you can go too far and not get much yield. Then there's questions of whether you're actually even dealing with the right issue. What they've tried to do is, again, take sort of a pragmatic approach. They're asking for feedback and looking at different approaches. If you slowed down rail cars to the point where no accident would ever be a problem, you're not going to move any freight at all.
Monica Trauzzi: What's the verdict on Bakken crude and its comparative flammability? That's been a key sticking point in the discussion over this rule.
Kevin Book: It certainly has. The pipeline in Hazardous Materials Safety Administration started the year with a warning that Bakken crude was more dangerous, more flammable, than other crudes, and the question is still something of an unsettled issue. There need to be data that can back up that contention before the federal government will be in a position to prescriptively regulate and say that you must treat it differently, and, as you might imagine, the producers have a thought that maybe it isn't more dangerous, and this might be an overreaction. So what they've done is they've prescribed a testing regimen. They've set out, essentially, a requirement that is a data grab, and it means that the story isn't over when it comes to the composition question.
Monica Trauzzi: How does the proposal impact companies that are shipping ethanol?
Kevin Book: Well, ethanol got included as well, and if you think about it, there's a reason why. Actually, ethanol accidents on the rail were the progenitor of the policy discussion that we're having now. The rulemaking that's happening for crude by rail is an extension of accidents that happened with ethanol tank cars causing fires. But the requirement is that if you're going to carry crude or ethanol, you have to follow exactly the same rules. Ethanol producers aren't happy about it. They say, "We've got different kinds of fires." We'll see whether that's actually borne out in the federal government's final decisions.
Monica Trauzzi: Let's talk about timing. You say this is a politically urgent issue. Talk a bit about the politics and the political sensitivities surrounding it, and how that might impact how quickly we see that final rule.
Kevin Book: Well, we started the year with promises from the Transportation Department that this rule would be proposed in November and finalized in January of 2015. Here we are, with the last week in July, a proposal, and by all appearances we could have a final rule without extensions of a comment period by the fourth quarter, perhaps ahead of the elections. For the federal government, the politics in this are obvious in the Obama administration, and they're frankly obvious at some of the Senate seat levels as well. The federal government has to protect the federal rights of way and the common carriers that pass through people states, and that expectation has been reinforced through comments from senators to FMCSA and FRA, but also in many public forums as well. This is a political imperative. People don't re-elect politicians when they're feeling unsafe.
Monica Trauzzi: So as you mentioned, a 60-day comment period follows. What will you be looking for most closely as those comments start to come in?
Kevin Book: The feasibility of actually doing this. Throughout all this, there's been a constraint that has deserved discussion, which is you can't necessarily retire all the rail cars and keep all the oil flowing; otherwise, this would be a simple problem to solve, and the balancing act is to find by the availability of shop capacity, the technologies that exist today and in the near future, and the extent to which you could actually operationally manage some of these requirements and still move anything at all. I think most of the debate is going to be about feasibility. Could any of this still work?
Monica Trauzzi: How should midstream companies be focusing their investments right now, with many of them relying and focusing in on oil-by-rail transport?
Kevin Book: Well, there's a thinking that you probably want to wait before you make too many more rail car orders to figure out whether or not you have a retrofit obligation for the rail cars that you've already got, but for midstream companies, they've got a business to run. They need to have takeaway capacity and storage capacity, and they have to build and plan for it now. So one of the things that's really important from an investment perspective is getting to a decision, whatever decision that may be, quickly.
Monica Trauzzi: So in terms of the pipeline-versus-rail debate, does this proposal change the dynamic of that discussion?
Kevin Book: That's kind of an artificial dichotomy because freight is multimodal, generally speaking, here in the U.S., and oil's becoming increasingly multimodal too. The optionality that you get from sending crude on a train is valuable, and it doesn't necessarily disappear even if trains become slightly more expensive. In addition, there's still a lot of unknowns, for example, how durable the supply is in some of these producing regions. You don't want to sign a 20-year commitment before you have an understanding of what your production tails look like. So there's a lot of reasons why trains stay in the game, but pipelines and trains are going to be both players as they go forward.
Monica Trauzzi: All right. We'll end it there. Thank you for coming on the show. Nice to see you.
Kevin Book: Thanks for having me.
Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.
[End of Audio]