Is rail-bound crude oil a disaster waiting to happen?

The U.S. shale oil and gas boom has brought business to railroads still reeling from declining coal shipments. But as freight operators such as Warren Buffett's Burlington Northern Santa Fe LLC (BNSF) breathe a sigh of relief, some are feeling uneasy about oil companies' rush to the train tracks.

"The Northeast has old, dilapidated infrastructure. We have neglected it for decades, and now, all of a sudden, there's this renaissance of railroads coming back with oil," said Fadel Gheit, managing director and senior analyst covering the oil and gas sector at Oppenheimer & Co. Inc. "When you increase the traffic, you increase the chances of accidents."

A slew of train derailments is raising questions about how safe and reliable oil trains are until aging tracks along the East Coast are upgraded. The latest train wreck happened shortly after 2 p.m. on Tuesday outside of Baltimore, when a CSX Corp. freight train hauling chemicals hit a truck and derailed, caught fire and sent a ball of flame into the air. The explosion blew a hole in a nearby industrial building. Last year, a coal train jumped the tracks in Ellicott City, Md., and killed two women.

Still, railroad companies tout their safety record. The Association of American Railroads (AAR), an industry trade group, notes that 99.9 percent of all rail-bound hazardous materials shipments reach their destination without incident. Over the past 10 years, the number of hazmat rail cars damaged or derailed fell by 38 percent, according to the Federal Railroad Administration, part of the U.S. Department of Transportation (Greenwire, May 30).

But while overall rail accident rates have declined, crude oil shipments have shot up, prompting increased media scrutiny and calls for more regulation. On May 21, a 575-barrel oil leak in Saskatchewan marked the third crude spill for rail operator Canadian Pacific Railway Ltd. in three months (EnergyWire, May 23)

"It's something that the industry has to look into," Gheit said, or else "it's going to give them a black eye."

Oil-by-rail surge

A record 97,135 carloads of crude oil were shipped across the United States in the first quarter this year, the AAR reported yesterday. That's a 166 percent increase over the 36,544 carloads originated over the same period in 2012.


Much of the growth is concentrated in the U.S. Northeast, where refineries lining the corridor from the Delaware River to New York Harbor have displaced imports with railed-in domestic crude. East Coast refineries, including Phillips 66's Bayway facility in New Jersey, have limited access to pipeline infrastructure and barge in the majority of their oil. In January, Phillips 66 announced a five-year deal with energy supplier Global Partners LP to rail in about 50,000 barrels per day of Bakken crude on a take-or-pay basis to lessen dependence on foreign Brent oil.

Barged Brent crude trades at a premium compared to the U.S. benchmark West Texas Intermediate, although the gap narrowed to $8.48 as of yesterday. But for refiners used to razor-thin profit margins, that price differential is big enough to turn heads. With rail oil terminals cropping up all over the country to meet demand, refiners have taken to the tracks en masse.

"In the coal market, railways have certainly proven their ability to move enormous quantities of that commodity," said Jack Galloway, president of Canopy Prospecting Inc. "So they said [to refiners], 'Hey, look us over carefully. See if we make sense.'"

Canopy has joined Canadian midstream company Enbridge Inc. to build a rail terminal on top of an old power plant in Eddystone, Pa.

"I think they've justifiably earned their position in the sun," Galloway added.

Galloway's Eddystone Rail Co. venture is expected to move as much as 80,000 barrels of rail-bound crude per day by the third quarter of this year, feeding nearby refineries in Philadelphia.

While rail transport has offered a lifeline to East Coast refiners and boosted options for oil producers in the remote Bakken Shale in North Dakota, the industry has had a bumpy ride to prominence.

A Canadian Pacific Railway train derailed on March 27 in western Minnesota (Greenwire, March 28). Another Canadian Pacific oil train left the tracks the following week in a remote area of Ontario, leaking roughly 400 barrels.

"Operating safely has, and always, will be first priority at [Canadian Pacific]. That focus is not going to change," said spokesman Ed Greenberg. The railway is spending $75 million to $100 million for additional track infrastructure upgrades in 2013, on top of $1.1 billion in previously planned capital spending, he said.

Trouble on the tracks

CSX's accident Tuesday spotlights concerns about hazardous materials. While the train wasn't hauling crude, CSX reported that the 45-car train was carrying sodium chlorate, classified as a hazardous material by the Transportation Department.

Devorah Ancel, an attorney with the Sierra Club, said it might take a similar disaster featuring a mile-long oil train to prompt further oversight of the budding crude-by-rail sector.

"Hopefully, it won't have to happen, but maybe we'll have to wait until a big spill occurs in a community to get federal agencies to truly evaluate the risks associated with transporting crude by rail as it expands," she said.

"Seeing the magnitude of spills and the lasting impact to communities, I think that's what gets the public's attention," she added, citing the recent pipeline spill in Mayflower, Ark. That line, operated by Exxon Mobil Corp., leaked between 4,000 and 7,000 barrels of diluted oil sands crude that bubbled up in people's yards (EnergyWire, April 15).

Railroads' proponents point to the fact that crude spills from tanker cars, while more frequent than pipeline ruptures, are almost always much smaller in volume. The AAR said that 94 out of the 129 crude spills that occurred on U.S. railways between 2002 and 2012 involved less than 5 gallons of oil.

"Most railways and pipelines are safe, and the risk of accidental release of a product is extremely low for both," said Mark Hallman, spokesman for Canadian National Railway, the largest freight railroad in Canada. He said that shipping via rail has "never been safer."

The Federal Railroad Administration echoed Hallman's assessment in a statement yesterday, noting that "transporting crude oil via rail or pipeline requires shippers and operators to adhere to stringent safety protocols."

U.S. rail operators are required to conduct a safety assessment when plotting routes for hazardous materials such as crude oil, taking into account factors such as trip length, proximity to population centers and traffic density. FRA, in conjunction with other federal agencies, can force railways to use alternate routes if necessary.

But rail companies can take advantage of their extensive existing networks, a fact that Gheit said can give them an edge over fixed pipelines (EnergyWire, Jan. 22).

"It gives [oil] companies a lot more flexibility," he said.

And despite his misgivings about the possibility of a spill, Gheit said that producers and refiners would not stop moving crude by rail anytime soon.

"Rail transport is still very economical and very attractive," he said.

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