Recent Crude Oil Train Derailments Intensify the Spotlight on Rail Safety and the Value of Oil Pipelines

Few of us can erase from our memories the imagery of fires blazing at the scenes of crude oil train derailments in West Virginia in early February and in Illinois earlier this month. The fact that these trains carrying Bakken crude oil from North Dakota derailed in the midst of the intense standoff between Congress and the White House regarding approval of the Keystone XL pipeline ignited declarations that the Keystone XL pipeline, and other pipeline projects, are the key to reducing the safety threats posed by shipping crude oil via rail. Whether or not framing the debate regarding approval of the Keystone XL pipeline against the safety concerns raised by these Bakken crude oil train derailments was apposite, the President’s February 24 veto of the pipeline approval act being bookended by the derailments certainly intensified the discussion surrounding crude oil rail safety and the value of oil pipelines. On March 24, 2015, a U.S. Department of Energy commissioned report was released examining the properties of tight crude oil that may contribute to combustion during a train derailment. And although a final rule regulating safety of crude oil rail transport is expected in the next couple of months from the Department of Transportation, Pipeline and Hazardous Materials Safety Administration (“PHMSA”), on March 25, 2015 several Senators introduced S. 859: The Crude-By-Rail Safety Act, which would go further than the anticipated PHMSA rule. We highlight several of the key issues that inform the rail safety discussion.

Crude Oil Transportation by Rail Has Increased Substantially

According to PHMSA analysis, the U.S. experienced a drastic increase from 10,800 to 400,000 carloads of crude oil rail shipments between 2009 – 2013. PHMSA reported that the production of crude oil in the Bakken Shale tripled between 2010 and 2013, with more than a million barrels per day being produced in March 2014 and shipped mostly by rail. The Association of American Railroads (“AAR”) 2014 rail traffic data reflects that rail shipments of petroleum and petroleum products increased by 12.7% over 2013 shipments. And the latest 2015 AAR rail traffic report reflects a continued increase of petroleum/petroleum product shipments YTD over 2014 – although shipments for that particular week were down 2% from last year, YTD we have seen an increase of 1.5%. As of March 21, 2015, 159,925 rail cars have carried shipments of petroleum and petroleum products in the U.S.

The DOT Projected a Significant Number of Additional Derailments Without Additional Regulation

Reports circulated late last month of an unreleased Department of Transportation (“DOT”) analysis that projected a substantial number of additional derailments over the next twenty years, with several $ billion in projected damages. The DOT prediction is found in the July 2014 Draft Regulatory Impact Analysis prepared by PHMSA in Docket No. PHMSA-2012-0082 (HM-251) Hazardous Materials: Enhanced Tank Car Standards and Operational Controls for High-Hazard Flammable Trains; Notice of Proposed Rulemaking. In estimating the benefits of the proposed rule, PHMSA provided a low-end and high-end estimate of derailments and associated damages that would occur without the rule. PHMSA predicted 15 derailments of crude oil or ethanol trains would occur this year, with a reduction to roughly 5 incidents per year by 2034 and the possibility of 10 more severe events costing multiple $ billions. Table B3 in the analysis reflects the details of PHMSA’s derailment predictions by year, with a total of 207 derailments predicted by 2034. Table B8 in the analysis reflects PHMSA’s estimated damages to property and injury related damages by year, with a total of $4.47 billion in estimated damages by 2034. When introducing S. 859 last week, the sponsoring senators took note of this PHMSA data.

Is Bakken Crude Oil More Volatile Than Other U.S. Crude Oil?

Whether Bakken crude oil is more volatile than other crude oils has driven discussion regarding the need to condition or stabilize Bakken oil prior to rail shipment. PHMSA’s Operation Safe Delivery report, released in July 2014, concluded that the crude oil produced from the Bakken Shale “has a higher gas content, higher vapor pressure, lower flash point and boiling point and thus a higher degree of volatility than most other crudes in the U.S., which correlates to increased ignitability and flammability.” Other opinions addressing the comparative volatility of Bakken Crude have concluded that Bakken Crude is comparable to other light crude oils produced in the U.S. See, for example, the North Dakota Petroleum Council’s discussion and The American Fuel & Petrochemical Manufacturers (“AFPM”) comments to PHMSA that note its “survey data showed that the characteristics of Bakken crude oil are consistent with the hazard characteristics of other light crudes, making stabilization unnecessary,” particularly in light of the fact that “the relative volatility of Bakken crude would not make any material difference in the context of a multiple car breach of a crude oil shipment during a derailment” because “[o]nce ignited, the burning intensity of unstabilized and stabilized crude would not substantially differ.”

Given the substantial volumes of tight crude oils like Bakken crude that are currently shipped by rail, the U.S. Department of Energy tasked Sandia National Laboratories to study the properties of tight crude oils “as they relate to potential combustion events in the rail transport environment.” The Sandia Report, released on March 24, 2015, noted that there is a gap in relevant data and a lack of understanding of how crude oil properties influence the propensity for accidental ignition, combustion, or explosion. In its key findings, Sandia noted that while it is likely that crude oil properties could be used to predict combustibility, the study revealed no objective data linking any “known crude oil properties with the likelihood or severity of rail transport-related combustion events.” Further study was recommended.

Are the Keystone XL Pipeline and Other Pipeline Projects the Answer?

The notion that the Keystone XL pipeline or other pipeline projects targeted at moving crude oil out of the Bakken Shale have the ability to reduce the use of rail and increase safety has occurred to many who have watched the blaze of the recent train derailments. But, are oil pipelines the answer to increasing the safety of transporting crude oil from the Bakken? The majority of existing oil pipeline runs North and South. Bakken Shale producers have used rail to transport up to 70% of the crude oil from North Dakota to the East and West Coasts. Some argue that the Keystone pipeline must be approved because it is a safer alternative that will curb these rail accidents. TransCanada has clarified that upwards of 100,000 barrels per day (bpd) of Bakken light crude oil would be transported on its Keystone XL pipeline. Still, some have criticized the argument as disingenuous because they consider the amount of Bakken crude that would be carried on the Keystone pipeline de minimus compared to the less volatile, heavy Canadian crude oil it will transport.

Additional points of consideration include the desirability of pipeline transportation in the Bakken, and the costs and hurdles associated with building out new pipelines. Proposed pipeline projects that would have carried Bakken crude, but were abandoned in the last couple of years due to a lack of interest from Bakken producers, serve as an indication to some that Bakken producers prefer rail due to its access to the more profitable East and West coasts. Still, additional pipeline projects have been lauded as a method of transporting Bakken crude more safely. For example, in mid-February 2015, TransCanada reported that it completed open season for its proposed $600 million Upland Pipeline that will transport Bakken crude oil north into Canada to interconnect with the Energy East pipeline. Pending regulatory approval, TransCanada intends to have the pipeline in service in 2018. The costs and time involved in constructing and permitting new pipelines have been cited as impediments to the possibility of pipelines replacing rail transport of crude oil. Reports note that North Dakota industry officials do expect that the Upland Pipeline could reduce the use of rail to transport Bakken oil, and Bakken oil producers are eager for pipelines to be permitted.

Regulatory Efforts Addressing Crude Oil Rail Safety: North Dakota, PHMSA and Senate Bill 859

The North Dakota Industrial Commission has taken steps it believes will improve the safety of Bakken crude oil transportation. An order finalized by the Commission in December 2014 requires Bakken crude oil to be conditioned to temperature specifications and vapor pressure specifications using a gas-liquid separator, emulsion heater-treater or other authorized equipment that separates gaseous hydrocarbons from liquid hydrocarbons. Under the order, Bakken crude must have a vapor pressure of no greater than 13.7 psi or 1 psi less than the vapor pressure of stabilized crude oil as defined in the latest version of ANSI/API RP3000, whichever is lower. According to reports, the vapor pressure of Bakken oil carried by the train that derailed in Illinois earlier this month was 13.9 psi. Among other requirements, the order also prohibits the blending of the Bakken oil with natural gas liquids or liquids from natural gas pipelines prior to custody transfer. The order implementing these changes is set to take effect April 1, 2015.

A final rule from PHMSA regarding crude oil transportation originally was set for publication by March 31, 2015, but the agency pushed back the release date to May 12, 2015. The PHMSA rule would impose (1) enhanced tank car standards, (2) a program for classifying and testing crude oil and other hazardous liquids, (3) new operational requirements for trains, including braking controls and speed restrictions and (4) phasing-out or retrofitting older DOT-111 tank cars to meet new standards within two years. The draft “Final Rule on safe transportation of flammable liquids (including crude oil) by rail” was provided to the White House Office of Management and Budget on February 5.

On March 25, 2015, Senator Maria Cantwell and three other senators introduced S. 859, The Crude-By-Rail Safety Act, taking a broader approach than the expected PHMSA rule. The Act would require the DOT to establish national maximum volatility standards for crude oil vapor pressure, with an interim standard to be imposed while a study is conducted within two years to determine the safest standard for crude oil rail shipment. A final national standard would be required shortly after conclusion of the study. The Act also calls for an immediate prohibition on the use of “unsafe tank cars” to ship oil, including DOT-111 tank cars that do not meet standards of The Association of American Railroads’ Casualty Prevention Circular 1232, and any unjacketed CPC-1232 tank cars. Other key components of the Act include: new tank car design standards, including use of electronic pneumatic brakes; increased fines for railroads and energy companies; funding for emergency preparedness and inspections; requiring comprehensive oil spill response plans; establishment of anonymous reporting systems for railroad employees; and disclosure of crude-by-rail shipments to state and local emergency commissions. The bill, which currently has a 3% anticipated chance of being passed, has been referred to the Senate Committee on Commerce, Science, and Transportation.