June 19, 2018
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Oil-by-rail disasters prompt crackdown on risky shipments

The wreckage of a train is pictured July 6, 2013, after an explosion in Lac-Megantic, Quebec.
By Lynn Doan, Joe Carroll and Jim Snyder, Bloomberg

WASHINGTON — U.S. energy companies using rail to carry crude must conduct tests to help ensure the oil cargoes won’t explode or eat holes through tank cars after rising train derailments spurred new emergency rules.

The order issued Tuesday by the U.S. Transportation Department inspired some protests, but mainly confusion as refiners and producers tried to understand what the new requirements will mean to their operations and how broadly they will apply to shipments across the country.

“What do you want us to do? What do you want us to test for?” said George Stutzmann, director of supply, trading and business development for oil refiner Alon USA Energy Inc. “I’m not really sure what this means or what they expect from us,” he said on the sidelines of a conference in Glendale, Calif., held to discuss the markets for oil by rail.

Oil explorers including Continental Resources Inc. and EOG Resources Inc. will be required to test the chemical composition of all crude intended for shipment by rail. The new rules appear to reclassify some grades of oil and require stricter safety measures for transport, said Marvin Trimble, director of commercial development for Strobel Starostka Transfer Canada.

“It’s going to have far-reaching ramifications, and I don’t know for how long,” said Trimble, whose Calgary-based company provides rail services to the energy industry.

A refining industry trade group criticized the directive for leaving “several questions unanswered,” including how often testing should be conducted and how crude shipments might be affected.

The American Fuel & Petrochemical Manufacturers said in a statement Tuesday it hoped the Transportation Department “will work collaboratively to answer these and other unanswered questions.”

Crude-by-rail shipments have soared along with U.S. oil production as drillers employing new technologies cracked open shale formations faster than new pipelines were built to handle the outflows. The bonanza has increased the risk of explosions and fires because much of the new supply is more volatile than some traditional types of domestic oil. There have been 10 derailments in the past year of trains carrying crude.

“Petroleum crude oil may contain dissolved gases, may exhibit corrosive properties and also may exhibit toxic properties,” the agency said in its order. “Additionally, the flammability of crude oil being shipped by bulk rail poses a significant risk of substantial endangerment to health, property or the environment when an explosion occurs.”

The directive addressed what the Washington-based agency called an “imminent hazard” to the communities and environment through which crude-hauling trains move.

The most severe incident occurred in July in Lac-Megantic, Quebec, where an unattended train owned by the Hermon-based Montreal, Maine and Atlantic Railway rolled away, derailed and exploded in a fireball that killed 47 people and leveled half the downtown. In December, a BNSF Railway Co. train carrying Bakken crude crashed in North Dakota, forcing the evacuation of a nearby town.

An investigation by the Federal Railroad Administration found that shippers sometimes misclassified the oil they were offering for sale, loading it into tankers that weren’t stout enough to safely carry materials in the highest hazard category.

“Misclassification is one of the most dangerous mistakes to be made when dealing with hazardous materials,” the department said in the order. “Misclassification may indicate larger problems with company management, oversight and quality control.”

Continental, the biggest producer of Bakken crude, lauded the federal government’s effort to improve the safety of crude- by-rail shipments.

“All crude should be properly tested, classed and transported safely,” Eric Eissenstat, the Oklahoma City-based company’s general counsel, said in an emailed statement.

The agency’s order was issued as railroad companies, refiners and oil producers and distributors gathered at the Crude by Rail 2014 conference organized by American Business Conferences in Glendale. Mark Smith, Tesoro Corp.’s vice president of development, supply and logistics, said he wasn’t sure what new procedures were being mandated since the company already tests crude shipments.

“If they’re just talking about taking samples to test, we already are,” said Smith. “We’re taking samples all the time – we’re taking samples today.”

Last week, railroads agreed with U.S. regulators to slow trains hauling crude oil and install safety equipment in response to the recent accidents.

“Railroads have supported the administration’s pursuit of proper classification and labeling of petroleum crude oil in tank cars by shippers prior to transport,” the American Association of Railroads said in an email Wednesday. “This is essential to ensuring first responders are able to safely and appropriately respond in the event of an accident or incident.”

Federal regulators are separately considering requiring upgrades to the DOT-111 tank car, which the National Transportation Safety Board has said must be strengthened to reduce spill risks.

Retrofitting the cars may increase rail costs by about 9 percent, or $1 a barrel, Mike Lutz, vice president of midstream for Bakken oil producer Hess Corp., said at the Crude by Rail conference Tuesday.

Congestion on BNSF Railway Co. tracks in North Dakota already has driven oil-by-rail costs up by about $1 a barrel over the past month, slowing deliveries exacerbated by winter storms, he said.

“It may add some cost, but the testing itself is probably small in the scheme of things,” industry consultant Andy Lipow, president of Lipow Oil Associates LLC in Houston, said by phone. “Someone’s going to pay for it, and ultimately it’s going to be the consumer.”


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