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Crude by Rail

Rail safety rules…too much or too little? – May 2015 Overview

Rail safety rules…too much or too little?

The responses from different industry stakeholders to the announcement of the final ruling for the safe transportation of flammable liquids by rail have been quite diverse. On the one hand, the American Petroleum Institute (API) filed a lawsuit in federal court to extend the time for the retrofitting of older tank cars, overturn the mandate related to the proposed braking system and loosen operational restrictions on certain trains. On the other, Earthjustice and two Illinois municipalities are challenging the ruling for not going far enough. The two common denominators of these complaints relate to the time to phase out older tank cars which both suits deem too long and a request for access to railroad information so communities and their first responders are prepared in the case of an accident.

Other industry participants are taking matters into their own hands. Tesoro is reported to have ordered “DOT-120s” tank cars for crude transportation. This model includes and exceeds the specifications of the new DOT-117 tank car which has been announced by the Department of Transportation (DOT) in its rail safety ruling as the next generation of tank cars required for the transportation of flammable liquids. BNSF is also actively working with customers to phase out older tank cars within a shorter time frame than that required by DOT.

DOT’s proposed braking system is emerging as the one section of the ruling that many rail industry participants consider unnecessary and expensive. During a panel presented at the Argus North American Petroleum Transportation Summit, experts in the rail industry such as Brad Myers from Amstead Rail and Michael Obertop of GBW Railcar Services stated that there is only one shop in the USA that can take care of the installation of this braking system and explained that, in order for the braking system to work, every single tank car on the unit train has to have it. This installation can cost up to $25,000 per tank car. The current uncertainty surrounding this issue has tank car owners debating what they should do. Some have decided to do nothing and to wait for the outcome of the lawsuits and others have decided to invest $500 per tank car to lay out the initial modifications needed to install the enhanced braking system in case this mandate goes ahead.

At the same time, states are enacting crude by rail regulation to protect their communities. This is the case in Washington State where the new House Bill 1449 requires crude by rail shippers to demonstrate their ability to pay for oil spill cleanup and requires facilities that receive oil by train to provide weekly notice of the type and volume of oil shipped. Also, a barrel tax collected on crude oil and petroleum products to railroads will help pay for oil spill response and grants will be implemented for the training of first responders.

Crude by barge, the new frontier

The remarkable increase in US crude production has created a need to use rail to transport crude to markets where pipelines are not available. Currently, more pipelines are being reversed, converted and built but this transportation option will not reach all the markets where crude oil is needed. For this reason, crude by rail is expected to continue to be the choice of transportation for producers to reach the West and East markets in the country. Now the new frontier is Crude By Barge (CBB). Kevin Sterling, Managing Director for BB&T Capital Markets recently wrote an analysis where he said “Just a few years ago, crude-by-barge was essentially nonexistent and today it [crude] has become one of the largest commodities moved by the barge industry.”

Infrastructure changes, many intermodal from pipeline or rail, are being implemented on the coasts and inland. In the northeast, this is the case for Global Companies and its Port of Albany terminal which is onward shipping by barge to regional refineries in both the USA and Canada. Similarly, the advent of rail offloading terminals on the Columbia River has led to the evolution of barge traffic to deliver crude oil to refineries in Washington and California. Barge traffic along the Gulf Coast is expected to increase as more pipelines and rail terminals offload crude which often has to be taken to final destination by barge. Inland, barge deliveries are occurring along major river systems, including the Arkansas and the Mississippi. EIA data show that PADD2 to PADD3 barge traffic rose to nearly 5 million barrels per month during 2013 – but also that activity has since dropped back to around 1 million barrels per month, indicating another facet of both crude by rail and barge – that movements via these modes are susceptible to pipeline developments and can drop as rapidly as they have risen when new pipelines systems come on stream.

It is important to remember that because of the Jones Act, which prohibits any foreign built or foreign flagged vessel from engaging in coastwise trade within the United States, crude by barge is already heavily regulated, an attribute that could weight to the advantage of barge, especially given the increasing regulations on rail and their effects on costs, complexity and capacity to move US – and Canadian – crudes.

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