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The Growing Risk of Transporting Crude Oil by Rail

Robert Rapier's picture
Proteum Energy

Robert Rapier is a chemical engineer who works in the energy industry. Robert has over 20 years of international engineering experience in the chemicals, oil and gas, and renewable energy...

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  • Feb 24, 2015
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By now you have probably heard that a CSX (NYSE: CSX) train carrying Bakken crude from North Dakota’s shale oil fields derailed and caught fire. The oil was bound for a coastal oil shipping depot owned by the midstream Master Limited Partnership Plains All American Pipelines (NYSE: PAA) in Yorktown, Virginia. While the cause is still under investigation, the train was carrying 109 tankers of crude oil. 26 of the cars left the tracks, and several caught fire. Some reportedly ended up in a tributary of the Kanawha River.

Fortunately, there were no casualties from the accident, but one thing is certain: There will be more incidents like this, and it’s a matter of time before another incident like this happens in a more populated area. While there are safeguards in place to minimize the risks when these trains have to go through towns, the disaster in Lac-Mégantic, Quebec that claimed 47 lives emphasizes the risks of transporting flammable liquids.

Following the incident, someone asked me “Why do we transport something so dangerous via rail?” That’s a good question. Why do we do it?

It’s really very simple. Most of the country’s transportation system is based on oil. The production and sale of oil in the U.S. is a legal activity, and oil producers look to get the highest possible price for their product. Given that much of the nation’s refining infrastructure and demand is in coastal locations, and most of our oil production is not, in order for supplies in mid-continent regions like the Bakken Formation in North Dakota to reach the demand centers it must be transported.

An oil producer in North Dakota who could only sell oil locally for $40 per barrel (bbl) might obtain $60/bbl on the East Coast. Thus, as long as the local price plus the cost of transport is less than the price at the destination, the producer is going to want to ship the oil.

The preferred method of shipping crude oil, from a safety and cost perspective, is via pipeline. Pipeline transport also has a lower carbon footprint than shipping by rail. North America has an enormous underground network of oil and gas pipelines. In the U.S. alone there are 2.5 million miles of oil and gas pipelines — 53 times the length of the 47,000 miles in the US Interstate Highway System. Below is a partial map of just the largest pipelines that crisscross North America.

north_america_pipelines_map

Major North American Oil, Gas, and Product Pipelines. Source: Theodora

It’s usually a bit cheaper to ship by pipeline. A 2013 investor presentation from the oil refiner Valero (NYSE: VLO) indicated that the company can ship Bakken crude by rail to the West Cost for $9/bbl, to the East Coast for $15/bbl, or to the Gulf Coast for $12/bbl. Pipeline routes are not available from the Bakken to all of those destinations (although the pipeline infrastructure is being expanded), but a rough approximation is that shipping by pipeline is ~$5/bbl cheaper than shipping by rail. The shipping distance is obviously a factor, but the point is that shipping by rail is not prohibitively expensive compared to pipelines.

Over the past few years as oil production continued to expand in places like the Bakken, there was downward pressure on oil prices. Meanwhile, global crude oil demand continued to grow, and crude oil production outside the U.S. was relatively flat. While U.S. crude oil production rose by 3.2 million bpd between 2008 and 2013, global production outside the U.S. only rose by 0.5 million bpd during that time. As a result, there was upward pressure on the price of crude oil that could be sold internationally, and downward pressure on crude oil in the continental U.S. This opened up a price differential that provided an incentive to ship Bakken crude to the coasts. As a result, shipments by rail skyrocketed:

energy_independence_chart

There are a number of studies that show that shipping by rail is more dangerous than shipping by pipeline. In fact, a year ago the U.S. State Department did an analysis that projected that if oil is shipped via the (politically-delayed) Keystone XL pipeline, there will be 6 fewer deaths per year than if that same oil is shipped by rail. The environmental activists who work to block pipelines will dispute this, because they believe that blocking pipelines is an effective way to slow down the development of crude oil reserves. Their argument would be “There won’t be 6 additional deaths per year, because that oil will not take the rail instead.” I think this is a naive view, and is contradicted by actual observations.

So, where is all of the new oil-by-rail traffic? The Wall Street Journal published a nice graphic detailing these routes:

map-fallback-full

The greatest increase in traffic has come from that Bakken to East Coast “virtual pipeline.” Warren Buffet’s BNSF Railroad, incidentally, is the biggest player in moving oil out of the Bakken region. The red line in the map above likely represents the highest risk for future accidents given the number of crude oil trains traversing that route. In my view the only things that will slow the oil-by-rail trend are if either 1). The price of oil drops so low that it makes development uneconomical; or 2). The price differential between the source and the destination vanishes. These are issues related to demand. If demand is there, the oil will flow. Just look at the war on drugs to gauge the effectiveness of trying to cut off supplies in the fact of strong demand.

But back to the question of why we ship oil by rail. The reason is that consumers demand oil, and that drives the price higher. Where consumers are willing to pay, the oil is going to get to market one way or the other. In this case, insufficient pipeline infrastructure out of the Bakken is the major driver of the oil to rail development, but blocking pipelines will have the same effect as long as the demand is there.

Everyone who uses oil is culpable to some extent for these sorts of incidents. People will shake their heads at this latest incident, but few will change their driving habits to use less oil. Until that happens on a large scale, the oil will keep moving, perhaps right through your home town.

Link to Original Article: The Growing Risk of Transporting Crude Oil by Rail

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Bob Meinetz's picture
Bob Meinetz on Feb 24, 2015

Robert, of course it’s possible to ship oil safely by rail. What’s not possible is to ship it as fast and as cheaply as producers want to ship it, and do it safely.

Causes of 2013 Lac-Mégantic rail disaster (according to Transportation Safety Board):

  • Factors related to the lead locomotive on the derailed train:
    • Mechanical problems not remedied: An engineer reported trouble with the locomotive 5017’s engine on a separate trip two days before the crash in Lac-Mégantic. The locomotive remained in service despite that concern.
    • Non-standard engine repair failure: A quick and cheap repair using inappropriate materials allowed oil to accumulate in the turbocharger and exhaust manifold, resulting in a fire.
    • Locomotive engine fire: In order to put out the fire, the Nantes fire department shut down the locomotive thus inadvertently disabling the air brakes.
    • Safety device not wired to initiate braking: The “reset safety control” system was not wired to set the entire train’s brakes in the event of an engine failure.
  • Factor related to the tank cars:
    • Breached tank cars and highly volatile crude oil: The tank cars were prone to puncture and the Bakken oil was highly volatile.
  • Factors related to Transport Canada’s role in providing oversight of railway operations:
    • Inadequate oversight of operational changes: Transport Canada did not provide adequate regulatory oversight to ensure the associated risks were addressed when the MMA made significant operational changes.
    • Limited follow-up on safety deficiencies: Transport Canada did not follow up to ensure that recurring safety deficiencies were dealt with.
    • Inefficient program to audit safety management systems (SMS): Audits were limited in frequency and scope and had no followup procedure.
  • Factor related to the derailment:
    • Excessive train speed for track: At the point of derailment, the train was travelling at 105 km/h, more than triple the typical speed for that location

The list goes on.

Hops Gegangen's picture
Hops Gegangen on Feb 24, 2015

 

I haven’t seen any reports of disasters from shipping solar panels or wind turbines….

Or, for that matter, nuclear fuel.

 

Robert Rapier's picture
Robert Rapier on Feb 24, 2015

Robert, of course it’s possible to ship oil safely by rail.”

That goes without saying. Almost all of it is shipped safely. But it is inherently riskier than pipeline transport.

Bob Meinetz's picture
Bob Meinetz on Feb 24, 2015

Robert, understood – but the title of your article is, “The Growing Risk of Transporting Crude Oil by Rail”.

The risk of transporting crude oil by rail is only growing because in their mad rush to capitalize on their investment, producers are cutting safety corners.

Robert Rapier's picture
Robert Rapier on Feb 24, 2015

No, it’s growing because the volumes are increasing dramatically. Given that volumes are up more than 10 fold over the past 5 years, there is no way they can improve safety standards enough in that short amount of time to offset the volume gains. Hence, the risk is growing.

It’s just like if I put 10 times the number of cars on U.S. roads in the next 5 years, are there going to be more accidents? Yes. So if you put 10 times the number of rail cars on a route, the risk to communities along that route is necessarily higher (given the practical realities of how quickly safety standards could be improved).

Bob Meinetz's picture
Bob Meinetz on Feb 24, 2015

Robert, did you even glance at the conclusions of TSB below?

If industry is not willing to abide by safety standards (they’re apparently not), it sounds like we’ll have to limit the volume of oil traveling by rail. That should take no time at all.

Robert Rapier's picture
Robert Rapier on Feb 24, 2015

Bob, the conclusions of the report are irrelevant to the point I am making and the title of the article.  I can assure you there were people who failed to follow all the safety standards prior to this latest accident.The risk is growing because the volumes have exploded. You are always going to have people who didn’t abide by safety standards or who made errors, and the more often you do an activity the more often those errors will result in an accident. So I honestly don’t get your nit pick over the title, which merely states that the risks are growing. That’s a fact. Your argument seems to be that the risks are growing because corners are being cut. Corners are always cut by someone. Now increase the number of railcars by an order of magnitude, and it’s no surprise that we are seeing a rise in incidents.

Bob Meinetz's picture
Bob Meinetz on Feb 24, 2015

Robert, the risk is growing because trains are carrying more oil.

In 2013, more oil was spilled than in the forty years before that put together. Oil companies cram 100 cars onto a train to save money – that’s cutting corners, and puts trains at higher risk of derailment:

More crude oil was spilled in U.S. rail incidents last year than was spilled in the nearly four decades since the federal government began collecting data on such spills, an analysis of the data shows.


Including major derailments in Alabama and North Dakota, more than 1.15 million gallons of crude oil was spilled from rail cars in 2013, according to data from the Pipeline and Hazardous Materials Safety Administration.

The answer is to limit the volume of oil being transported by each train:

“One of the quickest ways to make these oil trains safer is limiting how much of this volatile crude oil they can carry,” said Jared Margolis, an attorney at the Center who focuses on the impacts of energy development on endangered species. “The government has acknowledged the dangers of these massive trains — now it needs to take action to protect people and wildlife from spills and derailments.”

Today’s petition calls for oil trains to be limited to 4,000 tons, which is the weight the American Association of Railroads has determined to be a “no problem” train, meaning there would be significantly less risk of derailment. This would limit oil trains to 30 cars. Most oil trains today include about 100 cars — well beyond what the industry has determined to be truly safe.

“Federal regulators have admitted these oil trains pose a significant risk to life, property and the environment, and granting our petition would significantly reduce those risks,” said Phillip Musegaas, Hudson River Program Director for Riverkeeper. “The government, to date, has left the lid off this explosive industry.”

Robert Rapier's picture
Robert Rapier on Feb 24, 2015

Robert, the risk is growing because trains are carrying more oil.”

Which is what I have been saying all along, but you seemed to take issue with that. OK, I think we are on the same page.

Bob Meinetz's picture
Bob Meinetz on Feb 24, 2015

Robert, each train is carrying more oil – which is the result of producers’ cutting corners in a mad rush to capitalize on their investment. Not anything inherent about shipping oil by rail.

Would you agree that limiting the size of oil trains is a good idea? Then we are indeed on the same page.

Robert Rapier's picture
Robert Rapier on Feb 24, 2015

Seems like it might be a good idea on the surface, but it is true that shipping by rail is inherently riskier than shipping by pipeline. Numerous studies extending back many years have shown this. Some of that risk has nothing to do with how much oil is carried per train.

In fact, more trains with a smaller number of cars might increase the risk to pedestrians and cars of being hit by a train. The State Department actually estimated that shipping the same amount of oil by rail instead of by pipeline would result in 6 additional deaths a year, primarily from people being struck by trains.

Bob Meinetz's picture
Bob Meinetz on Feb 24, 2015

Robert, maybe then we need to ship less oil.

You see 6 additional deaths a year as the cost of having no pipeline; I see it as payment for cheap oil.

Robert Rapier's picture
Robert Rapier on Feb 25, 2015

As soon as people stop buying it, that problem will take care of itself. As long as they demand it, it will get to market. 

Bob Meinetz's picture
Bob Meinetz on Feb 25, 2015

Robert, that’s true in an absolutist sense. There are, however, a hell of a lot of things we place legal restrictions on, or prohibit by law outright.

And overall that’s probably not a bad thing, is it?

 

Wilmot McCutchen's picture
Wilmot McCutchen on Feb 26, 2015

Upgrading the crude at the source might help allay growing public concern over oil-by-rail.  Strip out the low ends that cause explosions (like West Virginia) and the heavier than water fractions that would sink irretrievably into the groundwater from spills.  Upgrading should get out the suspended and dissolved solids as well as the water.  Gasoline-by-rail is not a problem, nor is refined oil-by-rail. 

Bob Meinetz's picture
Bob Meinetz on Feb 26, 2015

Ike, bottom line: it’s not America’s responsibility to make shipment of Canadian oil safer. If they have to use shorter trains and pay more, so be it. Or the next step will be banning all shipments of oil by rail.

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