Railed oil issues surfaced long before Quebec incident

Argus Media
22 July 2013

Houston, 22 July (Argus) -- Last month, an oil industry association assembled a committee to examine crude-by-rail practices amid concern that non-standard handling could hurt the integrity and consistency of crude oil reaching refiners.                                                       

As crude production outstripped the pipeline capacity to move it in the last couple of years, quick and easy opportunities for profit were attracting rail operators who did not have a background in handling crude. That lack of handling standards, mixed with the rush of new players, raised the potential for error as use of railed crude facilities reawakened after decades of dormancy, according to Matthew Goitia, chief executive of Peaker Energy, a logistics development firm working on projects that involve railing oil. He suggested the Crude Oil Quality Association (COQA) form the subcommittee to look at how those issues impacted crude quality.

Just a few weeks later on 6 July, a unit train filled with nearly 50,000 bl of crude derailed in Lac-Megantic, Quebec, exploding and killing dozens of people while leveling much of the downtown core. As workers continue to pick through the rubble, industry advocates have expressed dismay at the tragedy while stressing the accident appears to have been caused by operator error rather than broader problems with moving crude by rail. They also point to the relative rarity of incidents in rail and pipeline hazardous materials transportation.

Nevertheless, the deadly Quebec trail derailment has thrust crude transportation – a business that has boomed with North American production in recent years – into an even brighter spotlight in the Keystone XL era.

While data show more than 99pc of shipments by both pipeline and rail reach their destinations without incident, there have been glitches: Tales of a railcar filled with water instead of the ordered crude and loose debris in the tank cars such as a glove, a hammer and trash. Canadian Pacific (CP) suffered back-to-back derailments this spring, each time spilling less than a tanker's worth of crude.

“They have been such small volumes that I think there has been a lot of cavalierness,” said Goitia, who sits on the committee but stressed that his views are his own and not COQA's. Crude-by-rail volumes are small compared to what he thinks they could eventually reach. The issues can affect crude quality, risking damage to a refinery if, for example, watered-down crude arriving by railcar makes its way into the plant undiscovered.

The amount of crude and refined products moved by rail has averaged roughly 700,000 b/d during the first half of 2013, up by 48pc from the same period in 2012, according to an US government analysis of Association of American Railroads (AAR) data. Three-quarters – close to 600,000 b/d – of Williston basin crude production left North Dakota by rail in April. The practice has been rising in Canada as well, and railroads Canadian National (CN) and CP plan to move a combined 130,000 carloads of crude this year, or roughly 235,000 b/d.

Goitia proposed the COQA subcommittee to start a dialogue on proper handling procedures, with the hope it might consider creating a suite of best practices. One issue he wants to examine are the practices of rail operators who are not experienced in handling crude, because the record-wide crude spreads that kicked off the crude-by-rail trend meant “people made money in spite of themselves,” bringing in players from fields such as ethanol. Goitia wants to track who has certain safeguards at their facilities, and who does not.

“People have to realize the risk you take on when you receive from some operators versus others,” he said. “A lot are trying to go the refinery direct. No intermediary or safeguard like a lot of the pipelines.”

As a middleman, pipelines create and enforce rules on crude quality and safety measures, setting restrictions on crudes and operating quality banks that make up for deviation from promised specs. Midstream provider Enbridge, for example, recently put in place a new rule on Williston basin crude's hydrogen sulfide content over concern that too-high levels would harm workers. Railroads do not play that role for crude, Goitia said.

The Quebec accident has grabbed the ear of politicians and environmentalists who have become accustomed to battling over the proposed Canada-to-US Keystone XL pipeline. While the owner of the Montreal, Maine & Atlantic Railway (MMA) said it appears the disaster was caused by human error involving setting the train's brakes, Canadian inspectors said that the type of tank cars used in the train contributed to the explosion, and Quebec police have launched a criminal investigation. Minority political party the New Democrat Party has criticized federal budget cuts to rail safety and the lack of a requirement for emergency breaking systems.

In the US, Quebec's neighboring Maine has ordered a review of freight rail shipments in the state, including data on the company that operated the train. MMA's tracks wind through Maine, and the Lac-Megantic explosion happened just miles from its border. The state's governor also recently pressed legislators to pass his proposal to fund transportation improvements in the state, including ones involving rail.

And US regulators have long weighed requiring retrofits on the tank cars in question. The accident could have “broad repercussions for North American infrastructure,” Wells Fargo analyst told analysts this week. Investment bank Tudor Picking Holt warned clients permitting could be slowed for a proposed crude-by-rail project in Vancouver, Washington, by refiner Tesoro.

One likely new rule as a result of this incident is that trains carrying hazardous materials will no longer will be allowed to be unmanned, like the MMA train was after the engineer departed for the night, Goitia said. The MMA chief has suggested the company and rail industry in the future will no longer leave trains unmanned.

But the mere fact that the explosion did not happen in the US, close as it was, may mean that crude-by-rail does not get as much scrutiny as it might have otherwise.

“I do not think we have gotten to the tipping point yet. If the explosion would have happened in the US — Oklahoma, Texas, the Bakken — then there would probably be more interest and concern. I think this will add to the weight of pipeline versus rail,” University of Calgary professor Robert Schulz said. “But I expect the railroads to come back with a railway push.”

Former acting administrator of the US Pipeline and Hazardous Materials Safety Administration (PHMSA) Brigham McCown said the accident was unlikely to impact the US pipeline debate. A State Department review of the 830,000 b/d Keystone XL project suggested that rail could replace the volumes set for shipment on the line if it were not approved.

“I am very skeptical that rail could offset the pipeline, and even if it can, it will be at a much higher cost and a higher carbon footprint,” McCown said.

An estimated 99.9977pc of all rail hazardous materials shipments reach their destination without a release caused by a train accident, according to the AAR. On average, pipeline spills are four times larger than the average rail spill: the group's data show that from 2002-2012, railroads spilled 2,268 bl of crude compared with 474,441 bl spilled by pipelines over the same period.

The number of hazardous materials incidents from 2005-2009 for road and railway transportation is greater than the number of significant pipeline incidents, but a lower percentage of road and railway incidents result in fatality or hospitalization, according to an October 2010 PHMSA report. The report found that transmission pipelines have lower rates of serious incidents per mile than other transportation modes.

MMA's record shows 129 accidents in Canada since 2003, including 78 derailments.