July 19, 2013

Deadly derailment won't stop oil on trains

Without new pipelines in North America, there's no other way to transport vast amounts of crude from the middle of the continent to its coasts.

The Associated Press

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In this July 12 photo, work continues at the crash site on in Lac-Megantic, Quebec of a train that derailed, igniting tanker cars carrying crude oil that killed fifty people. Trains have become an unexpected yet vital way to move oil from the continent's midsection to refineries along the coasts. However, since the July 6 tragedy, there have been calls for tougher regulations, stronger rail cars and more pipelines. (AP Photo/The Canadian Press, Ryan Remiorz)

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— Weak tank cars. The safety of the typical train cars that carry crude and ethanol, known as DOT-111 cars, has been called into question by the NTSB since a 1991 study. When trains do derail, these cars have been shown to fail at a high rate.

In 2009 a train carrying 2 million gallons of ethanol through Cherry Valley, Ill., derailed. Of the 15 cars that piled up, 13 failed and sparked a massive fire that killed a woman waiting at a nearby railroad crossing. In a 2006 ethanol train derailment and fire in New Brighton, Pa., 20 of 23 derailed cars released ethanol. The cars that derailed in Lac-Megantic were DOT-111 cars.

"You can expect them to fail," Chipkevich says. "They need to be improved."

Last year the NTSB issued a safety recommendation to the Department of Transportation that suggested that all tank cars that carry crude and ethanol be outfitted with stronger protective equipment. The Lac-Megantic accident increases pressure on regulators to adopt at least some of the recommendations, experts say.

Rail shipments of crude have spiked because oil is being produced in North Dakota in volumes far beyond what drillers had predicted five years ago. Pipelines take years to build and can be difficult to acquire land and permits for, so drillers and refiners needed railroads to quickly move the oil.

There was also big money to be made.

North Dakota crude has been selling for significantly less than similar crude that coastal refineries had been importing from the North Sea and West Africa. Even with the extra cost of shipping by rail, the benefit to refiners' bottom lines is sizable.

Railroads such as Union Pacific and Burlington Northern Santa Fe were also eager to transport more oil by train. It has helped offset a steep decline in coal shipments, which occurred as the drilling boom led more utilities to produce electricity with natural gas.

But the torrid growth of crude shipments by rail isn't likely to continue.

Several new pipelines are planned, and prospects for controversial ones like the Keystone XL may be helped by the devastation in Lac-Megantic. Pipeline spills generally release more oil than train spills, but they are less frequent and not as dangerous to people.

Also, the price difference between North Dakota crude and imported crude, which had been as high as $35 a barrel in November, has recently fallen to just $3 a barrel, thanks in part to rising rail shipments.

Delivery of crude by rail will have staying power, though, experts say.

"Initially rail was a placeholder, but (refiners) like the flexibility and speed to market it offers," says Anthony Hatch, a transportation analyst and consultant.

Shipping crude by rail is roughly $5 to $10 per barrel more expensive than shipping it by pipeline. But pipelines require refiners to enter into long-term contracts for delivery.

Last month Kinder Morgan Energy Partners shelved plans for a pipeline that would move crude from Texas to California because key refiners such as Valero Energy and Tesoro preferred getting crude by rail.

Dean Acosta, a spokesman for Phillips 66, said the temporary fall in the price advantage won't change the company's plans for new rail yards in New Jersey or Washington. "It leaves you a lot of different options," he says.

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