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Crude by Rail

Keystone XL saga, Alaska pipeline and crude by rail

Monthly Overview from EnSys North America Logistics Review Service – February 2015 edition

Keystone XL Saga

After the U.S. Senate approved a bipartisan bill to start the construction of the Keystone XL pipeline, U.S. President Barack Obama vetoed the bill, arguing that the bill would undercut the longstanding process for determining if projects serve the national interest. Several government institutions have provided the State Department with their comments about the project but not all of them have been made public. In February, the Pentagon reaffirmed its stance of “no objection” to the pipeline’s construction.

At the same time, in Nebraska, a judge issued a temporary injunction that prohibits TransCanada from using eminent domain to acquire land rights for the future construction of the pipeline in this state. So far TransCanada has not mention how long this injunction will delay the project but some articles mention that the process could take up to 18 months for this issue to be resolved.

Many opponents to the project argue that the pipeline will bring Canadian crude to the Gulf Coast only to have export it, thus the U.S. will only marginally benefit from the pipeline. However, IHS recently released a study that suggests 70% of the products made with this crude will be consumed in the U.S. and forecasts significant volumes of oil sands will continue to enter the U.S. via rail regardless of whether Keystone XL is built.

What about Alaska?

With major pipeline projects facing long delays, a proposal to have a pipeline going through Alaska is capturing the attention of the states that would be involved in the project. This possibility of building a pipeline through Alaska will follow the Mackenzie River Valley route and industry players say it would make sense because Alaskan ports have been shipping crude for decades and they are well suited for exporting crude. The question is if the project would be economically feasible. Alaska Governor Bill Walker is willing to look at the project which would cross through Canada’s Yukon and Northwest Territories and terminate at the port of Kitimat to then deliver crude to the U.S. West Coast refiners via tankers.

Crude by rail cannot catch a break

Crude by rail in California is suffering from the effects of price differentials. The California Energy Commission, reported that imports of Canadian crude by rail went from a high of 12,008 bpd in January to zero since August 2014. Only New Mexico, Utah and Wyoming kept their imports at 15,842 bpd in December.

Source: California Energy Commission
Source: California Energy Commission

It is not only price differentials that are affecting crude by rail volumes. Recent crude by rail accidents highlight the importance for the rail industry to continue to improve its safety. A large missing piece of the puzzle is the safety component as Sara Feinberg, acting Federal Railroad Administrator said improving the safety of crude transportation will require a multipronged approach.

“This situation calls for an all-of-the-above approach—one that addresses the product itself, the tank car it is being carried in, and the way the train is being operated,”

and the longer regulators take to issue final rules, the crude by rail option will suffer due to the uncertainty. Currently the US President’s administration is reviewing the proposed rail tank regulations submitted by the U.S. Department of Transportation, the main points of contention include the proposed wall thickness of the rail cars and an improved brake system. The final regulations are expected to be released by May of this year.

At the same time, state regulators in the states that have seen the most increase of crude by rail traffic in their communities are not waiting any longer. For example, The North Dakota Department of Transportation (NDDOT) announced it has partnered with the North Dakota Public Service Commission (PSC) and Upper Great Plains Transportation Institute to update the state rail plan to include a rail safety component.

Also, the states of Washington and Oregon have voiced their concerns about the increasing crude by rail traffic; Union Pacific has confirmed these concerns reporting that between 7 and 10 unit trains pass through these states per month. Although railroads are required to notify states about oil shipments larger than one million gallons under an emergency order from the federal Department of Transportation, Canadian crude is exempt from this requirement. Oregon’s Department of Environmental Quality and Washington’s Department of Ecology have said that in the case of an accident where Canadian oil is spilled from rail cars, their first responders would not have all the information to contain the spill.

To add to the concerns, the Associated Press reported on a previously unpublicized analysis by the Department of Transportation which reviewed the risk of moving oil and ethanol across the nation and through major cities. The study predicts that trains carrying crude and ethanol will derail an average of 10 times a year over the next two decades, causing more than $4 billion in damages and possibly killing hundreds of people if an accident were to happen in a densely populated part of the U.S. Industry advocates contest the report, asserting that the analysis assumed a worst case scenario which, they indicate represents a highly unlikely scenario.
In Canada, Lisa Raitt, Minister of Transport Canada has announced the Safe and Accountable Rail Act , new legislation that will require companies that ship oil by rail to pay into a compensation fund set up to cover the costs of a derailment.

U.S. Oil Production

During the month of February, the International Energy Agency (IEA), the U.S. Energy Information Administration (EIA) and BP released their energy outlooks. Each of the three outlooks indicated that the U.S. will be the world’s top oil producing country for the next 5 years. Furthermore, the EIA indicates that by 2016, U.S. could approach its all-time crude oil production record of 9.5 mpbd. BP mentions that US will become self-sufficient by 2030. These predictions hinge on the assumption that Brent and WTI crude prices will eventually stabilize around $75 and $71 respectively in 2016 (EIA projections).

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