Shipping Crude Oil by Rail - Will Economics Trump Safety? Part 1 – Why Move Crude Oil by Rail?

Volume of Crude Oil Moving by Rail in the United States and Canada

U.S. crude oil production has risen sharply in recent years, with much of the increased output moving by rail. In 2008, U.S. Class I railroads originated 9,500 carloads of crude oil. In 2013, they originated 407,761 carloads. In the first half of 2014, it was 229,798 carloads. Much of the recent increase in crude oil production has been in North Dakota, where crude oil production rose from an average of 81,000 barrels per day in 2003 to more than one million barrels per day by mid-2014, making it the second-largest oil producing state. Crude oil output in Texas, the top crude oil producing state, was relatively flat from 2003 to 2009, but has skyrocketed since then, exceeding three million barrels per day by mid-2014. Canada ships 3.2 million barrels a day via pipeline and 215,000 barrels a day via rail.

Assuming, for simplicity, that each rail tank car holds about 30,000 gallons (714 barrels) of crude oil, the 229,798 carloads of crude oil originated by U.S. Class I railroads in the first half of 2014 was equivalent to 900,000 barrels per day moving by rail. According to EIA data, total U.S. domestic crude oil production in the first half of 2014 was 8.2 million barrels per day, so the rail share was around 11 percent of the total.

Advantages of Transporting Crude Oil by Rail

Pipelines have traditionally transported most crude oil, but in recent years railroads have become critical players. In addition to the fact that railroads provide transportation capacity in many areas where pipeline capacity is insufficient, railroads offer a number of other advantages for transporting crude oil:

• Geographical flexibility

By serving almost every refinery in the United States and Canada, railroads offer market participants enormous flexibility to shift product quickly to different places in response to market needs and price opportunities. Railroads deliver crude oil to terminals not only in Louisiana and other places in the Gulf region, but also to the East Coast and the West Coast of Canada and the United States.

• Responsiveness

Rail facilities can almost always be built or expanded much more quickly than pipelines and refineries can be. Essentially, railroads are the only transportation mode that can invest in facilities quickly enough to keep up with production growth in the emerging oil fields.

• Efficiency

Utilizing unit trains is often a key part of this process. Unit trains are long trains (usually at least 50 and sometimes more than 100 cars) consisting of a single commodity. These trains use dedicated equipment and generally follow direct shipping routes to and from facilities designed to load and unload them efficiently — say, from a gathering location near oil production areas to an unloading terminal at or near a refinery.

Cost Comparison – Pipeline versus Rail

A unit train might carry 85,000 barrels of oil and be loaded or unloaded in 24 hours. It’s usually a bit cheaper to ship by pipeline. A 2013 investor presentation from the oil refiner Valero indicated that the company can ship Bakken crude by rail to the West Cost for $9/bbl, to the East Coast for $15/bbl, or to the Gulf Coast for $12/bbl. Pipeline routes are not available from the Bakken to all of those destinations (although the pipeline infrastructure is being expanded), but a rough approximation is that shipping by pipeline is ~$5/bbl cheaper than shipping by rail.

Train Derailments and the DOT-111

In recent weeks there has been a flurry of train derailments in both Canada and the United States. Two CN Rail trains carrying crude oil derailed near the community of Gogama, Ont., causing a massive blaze with several tank cars falling in the nearby Makami River. A CSX train derailed and exploded 30 miles from Charleston, W.Va., with 19 of the 27 cars engulfed in flames. Some homes were within 30 yards of the crash site. One home was destroyed. Of course, these accidents follow on the heels of the major accident in Lac Megantic in 2013 that destroyed the center of this southern Quebec town and killed 47 people. Exploding trains carrying crude oil have emerged as a dangerous by-product of the energy boom in the United States and Canada.

The challenge is that pipelines cannot be built quickly enough to connect the various origin and destination points together. To further complicate matters, the rail infrastructure to handle these volumes was designed a half century ago. The workhorse tank car, the DOT-111, has been described as a “soda can on wheels.” It wasn’t constructed to move oil and is susceptible to puncture and over-pressurization. Approximately 228,000 tank cars are so-called “DOT-111” general service tank cars. Around 100,000 DOT-111 cars are used to transport crude oil or other flammable liquids. The DOT-111 still transports about seventy percent of the oil moving via rail. In recent years a new car, the CPC-1232, has been placed into service.

Why Ship Crude Oil By Rail?

In view the ongoing flurry of rail derailments, why don’t governments ban the use of rail cars and accept the limited capability of pipelines? The answer to this question is quite simple. Consumers demand oil. Oil remains a primary energy source in North America. Where consumers are willing to pay, the oil is going to get to market one way or the other. In this case, insufficient pipeline infrastructure out of several major oil producing locations is the major driver of the oil to rail development. Of course, curtailing pipeline development will only enhance rail growth. Everyone who uses oil is responsible to some extent for these sorts of incidents. People will shake their heads at these latest incidents, but few will change to an electric car or modify their driving habits to use less oil. Until that happens on a large scale, the oil will keep moving, by rail, perhaps right through your home town. So where do we go from here? This will be addressed in next week’s blog.

Dan Goodwill & Associates Inc. (www.dantranscon.com) provides freight transportation consulting services to shippers and carriers throughout North America. Follow Dan on Twitter @DanGoodwill or on Facebook (https://www.facebook.com/DanGoodwillAssociates ).