Deadly Canadian accident may lead to more regulatory scrutiny of industry.
By Jon Ross
In the early morning hours of July 6, a Montreal, Maine & Atlantic Railway train carrying crude oil derailed, causing one of the deadliest rail accidents in Canadian history.
More than 45 people died, and in the weeks after the incident, regulators got to work developing new rules regarding a carrier’s movements when hazardous goods are carried aboard trains.
Shipping crude oil by rail in Canada and the United States is nothing new — in fact, it is a trend that has been growing exponentially during the past few years — but the Canadian accident brought some of the industry’s problems into sharp relief.
While industry observers and representatives from the rail carriers say the accident and resulting rule changes won’t stop the flow of crude on North American railroads, shipping oil by rail may look a lot different moving forward.
Montreal, Maine & Atlantic Railway, devastated by the crash, has had to change its direction. On Aug. 7, the carrier filed for bankruptcy protection in the United States and its parent company, Montreal, Maine & Atlantic Canada Co., filed for similar protection in Canada. In a statement, Edward Burkhart, who chairs both company boards, said “the obligations of both companies now exceed the value of their assets,” tying the companies’ issues to the derailment. The companies are still assisting in the ongoing investigation and cooperating with regulatory authorities.
Rail service was to continue during the bankruptcy proceedings, the carrier said. But earlier last month, the company discontinued crude oil transport. The company operates in Quebec, Maine and Vermont. On Aug. 13, Canada’s transportation agency revoked Montreal, Maine & Atlantic Canada’s right to operate in that country, recently saying it must shut down by October.
The Canadian disaster has sent shockwaves throughout the U.S. crude oil industry, which is now booming. Much of the crude in the United States originates from the Bakken region in Montana and North Dakota; the Barnett shale deposit in Texas; and the Marcellus shale deposit. According to the Energy Information Administration (EIA), about 7.5 million barrels of crude per day was produced in July, up from more than 7.3 million barrels per day in May. EIA predicts production will average 7.4 million barrels per day in 2013 and 8.2 million barrels per day in 2014.
In its short-term energy outlook, EIA wrote most of this massive draw in U.S. crude oil — 2014 production will surpass the highest annual average since the 1980s — is the result of increased drilling in tight rock formations of North Dakota and Texas. This onshore drilling activity is predicted to surpass offshore exploration in the future, but drilling for oil off the American coast will also increase, according to EIA. Finally, continued advances in technology allow drillers to extract oil from places once off limits.
Holly Arthur of the American Railroad Association said the railroads have moved crude for many years and maintain a “solid” safety record. She did allow that the Canadian accident has put the shipment of this commodity front and center and raised awareness about the role of the railroad industry in crude shipping. She has not yet seen a measurable impact on crude riding the rails due to the accident, but these shipments only represent 1.5 percent of all rail traffic measured by AAR in the first quarter of the year.
“The volume of crude oil traffic is not overwhelming,” Arthur said.
According to AAR, rail is used when the pipeline network near production facilities is insufficient of capacity, and the recent stratospheric increase in oil production has been a boon for the rail industry. Five years ago, Class I railroads transported 9,500 carloads of crude. Last year, that number ballooned to 234,000 carloads, and activity is increasing. In the first quarter of 2013, carload crude activity rose 20 percent, year over year, and while crude oil still only accounts for a small percent of total rail activity, that number has risen from a meager 0.03 percent in 2008. Between 2005 and 2012, the number of crude oil originations increased 443 percent, AAR said.
As a consequence of this rise in crude production, EIA recently announced the United States will no longer hold the top spot as the world’s largest oil importer by next year. That designation will go to China.
Most of this crude has been historically transported safely. According to the U.S. Department of Transportation’s Pipeline and Hazardous Materials Safety Administration, railroads spilled an average of 2.2 gallons per million crude oil ton miles. Between 2002 and 2012, there was a total of 95,000 gallons spilled.
Meanwhile, rail isn’t the only transport mode benefitting from increased oil production. According to a Stifel Nicolaus in July, the U.S. ramp up in oil production will lead to a growing demand for Jones Act ocean tankers transporting oil to the West and East coasts from the Gulf region. The supply of new U.S.-flag coastal tankers is limited, but current rates for tanker movements from the Gulf to the East Coast top out at $5 per barrel; a per-barrel price for a train ride is nearly three-times that amount.
With all that oil flowing and the recent disaster, Canadian regulators figure something needs to change, and safety has become a renewed priority. On July 24, Transport Canada issued new rules regarding the transport of crude oil by rail, centering mostly on unattended cars. The rules establish that directional controls must be removed from unattended locomotives, and special operating instructions have to be attached to a railcar’s braking mechanism if it is to be left alone for more than an hour. Operators must make sure independent and automatic brakes have been fully applied before leaving a car. Also, if a train is carrying dangerous goods, there can be no fewer than two employees operating the train. These rule changes came after the Transportation Safety Board of Canada found that before the accident insufficient braking force had been applied.
In early August, DOT’s Federal Railroad Administration released its own guidelines targeted at unattended railcars, but they’re slightly different than the Canadian rules. FRA said railcars transporting hazardous materials cannot be left alone on mainline tracks. The agency also released rules
regarding the training employees responsible for handbrake equipment and the inspection of emergency equipment.
Handbrake regulations were included in the rule.
To further enhance the safety of the railed crude in the United States, FRA is looking into tank car packaging and outage requirements, as well as how crude oil is classified when shipped on railroads. In a letter to Jack Gerard of the American Petroleum Institute, Thomas Herrmann, FRA’s acting director in the office of safety assurance and compliance, said shippers should evaluate their testing, classification and packaging processes.
“The frequency and type of testing should be based on a shipper’s knowledge of the hazardous material,” he wrote, “with specific consideration given to the volume of hazardous material shipped, the variety of sources that the hazardous material is generated from, and the processes that generate the hazardous material.”
Loading crude onto train cars — either directly from cargo tankers or storage tanks at a bulk storage facility — leads to shippers placing a blend of crude from a variety of different sources into tanker cars. To comply with the current U.S. Hazardous Materials Regulations, shippers must properly classify crude in regard to specific gravity at loading, the presence of specific compounds, the substance’s corrosiveness and other factors. FRA is worried that shippers aren’t doing enough to fully classify crude and are only supplying a few data points instead of giving true readings of the substance. This leads to crude being packaged incorrectly and results in unintentional violations.
In the letter, Herrmann also said shippers must know the specific gravity of crude at both the reference and loading temperature to make sure the load is safe. If these numbers aren’t known or specific enough “the tank car could be loaded such that if the temperature increases during transportation, the tank will become shell-full and the material will leak from the valve fittings or manway,” he wrote.
Finally, he found materials used in fracturing for oil are being mixed with crude when loaded into tank cars, and this contamination leads to internal tank corrosion. He said shippers must identify these substances and find tank cars that can properly handle transportation of the materials.
“Proper identification also enables a shipper to determine if there is a need for an interior coating or lining, alternative materials of construction for valves and fittings, and performance requirements for fluid sealing elements, such as gaskets and o-rings,” he said.
Retrofitting railcars to increase the safety of oil transportation is also under discussion, but is a highly contentious issue because of the financial cost to the industry. A proposed rulemaking about the retrofits was proposed years ago, and a new regulation was to be put in place last year, but the complexity of the issue has forced delays.
For now, railroads are taking a wait-and-see approach to the proposed changes to oil transport regulations.
CSX moves between seven and nine crude trains per week. According to a spokesperson, the railroad, which deals with refiners in the Northeast, is looking into how to make sure the route remains safe and efficient.
“Railroads are an essential part of the transportation and logistics of this emerging energy market, which has the potential for enormous economic benefits, including U.S. energy independence and supporting the manufacturing renaissance,” the CSX spokesman said. “Railroads meet a need where other modes of transportation do not exist or are impractical to use.”
CSX said it is already operating within FRA’s guidelines and gathers feedback from other railroads to move forward in the safest way possible. “Working in close collaboration with the other major railroads for consistency across the industry, CSX’s team of safety experts is systematically putting any new elements in place,” the spokesman said.
CSX officials have not seen any change in activity due to the Canadian oil train accident. They allow, however, it’s still a fluid situation and just because shipping changes haven’t taken place doesn’t mean they aren’t around the corner.
“While the accident is still under investigation and the regulatory bodies consider additional decisions, our customers are closely watching the situation to understand potential implications for their business,” the CSX spokesman said. “We are closely following the upcoming regulatory and advisory council meetings discussing railroad safety, tank car standards and transportation of hazardous materials.”
At Kansas City Southern, officials don’t see a movement to other transport modes due to the crude accident, and the railroad still sees significant interest in using rail to ship crude. The railroad transports crude from Western Canada, the Bakken region and western Texas; the majority of this oil is then shipped to destinations along the Gulf Coast, but could end up anywhere along the carrier’s U.S. network. Except for most of the crude from Texas, all the oil originates from other railroads.
Changes in regulations will lead to more oversight and will cause railroads to adapt to new rules, which will cost money, a KCS spokesman said. These new fees will be a major focus moving forward, as when changes in regulations occur costs will likely go up.
“Undoubtedly, new regulations will impact costs and that will affect the cost of shipping in the future; however, KCS remains very confident about growth in the crude by rail sector for the North American rail industry and very confident about its safety,” the spokesman said.
The rail industry, the KCS spokesman said, is committed to implement the safety measures issued as a result of the Canadian accident, and officials maintain shipping crude by rail continues to be safe way to transport crude.
“KCS has not seen a change in its crude oil shipments since the accident in
Quebec, and we do not anticipate any trend toward less crude business,” the spokesman said.
Hot on oil trains
