US shale boom threatened as rail explosions spark tighter oil shipping rules


Safety rules will probably be tightened on crude oil shipments from North Dakota following a string of railway explosions, threatening to damp an energy boom that has boosted the region’s economy.

US regulators issued a safety alert after a train carrying oil crashed and caught fire earlier this week in North Dakota, where surging production has helped lead a renaissance in domestic energy and driven the state’s unemployment rate to the nation’s lowest.

The type of oil pumped from the shale formations of North Dakota may be more flammable and therefore more dangerous to ship by rail than crude from other areas, the Transportation Department said in the alert. Regulators are considering imposing tougher rules on railcar construction, among other things, potentially raising the costs of moving the crude to market.

Pipelines could be affected as well.

“Regulators have to take heed that anything they do is going to go beyond the rail industry, beyond the tank car industry,” Jason Seidl, a rail analyst at Cowen & Co. based in New York, said in an interview.

This week’s incident, near the town of Casselton, is the fourth major derailment in six months by trains transporting crude. An explosion of a runaway train carrying North Dakota oil in July killed 47 in Quebec. Restrictions on railcars could worsen a shortage of capacity for moving oil to refineries.

Record volumes

Record volumes of oil are moving by rail as production from North Dakota and Texas have pushed US output to the most since 1988 and pipeline capacity has failed to keep up. North Dakota in particular relies on the railways to carry its crude East or West and away from the bottlenecks to the Gulf Coast refineries.

If the lighter crude releases gases that could be explosive after a rail crash, it could also lead to an explosion after oil leaks from a pipeline, Carl Weimer, the executive director of the Pipeline Safety Trust, an independent advocate for pipeline- safety rules, said in an interview.

“If it’s the same type of oil, it could be the same type of issues with pipelines,” Weimer said.

The Pipeline and Hazardous Materials Safety Administration, the Transportation Department unit that issued yesterday’s alert, said it is also looking at how corrosive shale oil is to railcars, something Weimer said could affect pipelines.

Share prices

Stocks of Bakken producers and rail shippers fell on the news. Continental Resources Inc., the largest owner of drilling rights in the Bakken formation, fell 4.2% to $107.76 at 4:01 p.m. in New York trading yesterday. Other producers Hess Corp. and Whiting Petroleum Corp. also declined yesterday.

Surging output from the North Dakota’s portion of the Bakken formation and Texas’s Eagle Ford shale formation has helped domestic oil production increase to the highest level since 1988 and is set to propel the US past Saudi Arabia as the world’s largest supplier in 2015.

Crude from the Bakken, which is along the northwest of North Dakota and east of Montana, accounts for more than 10% of the nation’s oil production, after production of it more than doubled between 2010 and 2012. Drillers use a combination of horizontal drilling and hydraulic fracturing to unlock previously unreachable shale deposits.

Bakken crude tends to be flammable because it contains a large fraction of volatile propane and butane, said Zak Mortensen, business development manager for Inspectorate America Corp., which performs oil quality inspections.

Tanker cars

With rail companies linking together dozens of cars carrying oil in one train, the risks of any one accident increase, as one car can ignite the next, Anthony Swift, an attorney working on oil-transport issues at the Natural Resources Defense Council in Washington, said.

“What has become clear is that crude oil transport both by pipeline and railcar presents risks,” he said.

Shippers will stomach the additional costs associated with new regulation because the economics of moving cheap crude from the middle of the country to the coast remains favorable, according to John Auers, executive vice president of Turner, Mason & Co., a Dallas-based energy consulting firm.

“They’re going to keep railing to the East Coast,” Auers said. “They’re going to keep moving Bakken to the Pacific Northwest. There’s no other option.”

Bakken crude for delivery at Clearbrook, Minnesota, has averaged a $5.13-a-barrel discount vs. the US benchmark West Texas Intermediate this year, data compiled by Bloomberg show. The oil narrowed its discount by $4.50 a barrel yesterday to $3, a five-month high, on speculation that the latest accident will delay deliveries.

Railroad stake

The Bakken and Texas Eagle Ford regions together account for about two-thirds of the nation’s monthly oil production growth, according to the Energy Information Administration.

“We’re not going to stop producing Bakken,” Carl Larry, president of Oil Outlooks & Opinions LLC, said in a telephone interview. “We can’t put a damper on the growth of the economy right now.”

Railroads also have a large stake in the outcome.

Petroleum products were the fastest-growing category of rail shipments in 2013, the Association of American Railroads said in a report this week. The volume of the shipments rose 31% last year while overall traffic rose 1.8%, said the organization, whose members include BNSF, Canadian Pacific Railway Ltd., CSX Transportation Inc. and Norfolk Southern Corp.

“The railroads obviously want this business. They like the business,” Seidl said. “It’s going to continue to grow.”

‘New risks’

So far the evidence is that it isn’t hazard free.

“Bakken is presenting its own, new set of risks,” Swift said.

Environmentalists worry that hydraulic fracturing, in which water, sand and chemicals are shot underground to break apart rocks, can contaminate aquifers and releases methane, a potent greenhouse gas, or volatile organic compounds that can cause smog. Two pipelines carrying oil sands from Canada ruptured in recent years, including one that sent tarry sludge down the street of a suburban subdivision in Arkansas.

In September, a Tesoro Corp. pipeline spewed 20,000 barrels of crude in northwest North Dakota.

The oil carried on the train that crashed in Lac Megantic, Quebec, was improperly labeled as a less volatile liquid with a lower level of hazard, Canada’s Transportation Safety Board said in September. The crude was being delivered to Irving Oil’s refinery in Saint John, New Brunswick, from the Bakken region.

Quebec blast

After the Quebec blast US regulators jumpstarted efforts to require fortified railcars.

The latest inferno will probably accelerate those efforts, said Kevin Book, managing director at ClearView Energy Partners, LLC in Washington. About three-quarters of the oil produced in North Dakota is shipped by rail rather than pipeline.

Crudes carried in tank cars are classified as flammable liquids and then divided into so-called packing groups based on their level of hazard, with PG I being the most hazardous and PG III being the least. The Bakken oil being transported by the train that derailed in Quebec was described as PG III when it should have been PG II, the Canadian safety board said.

In its safety alert yesterday, the US pipeline and hazardous materials regulator said it was “reinforcing the requirement to properly test, characterize, classify, and where appropriate sufficiently degasify hazardous materials prior to and during transportation.”

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