Crash Risks Stopping Crude Rail Boom In Its Tracks

BMI View : The latest major rail accident involving crude transportation in North Dakota is likely to bring further regulatory attention to the safety of crude-by-rail transport, and could also weaken the argument against the safety and environmental risks of crude oil pipelines. This is of particular importance to North Dakota, which has been relying on rail to transport the majority of its crude oil output to refineries outside of the state. Pipeline projects planned in North Dakota could get a boost should closer scrutiny and caution against railway deliveries provide momentum for the expansion of the state's crude oil pipeline network.

A major accident involving a train carrying crude in North Dakota could signal the beginning of the end of the buoyant sentiment surrounding crude-by-rail in the US. On December 30, a Burlington Northern Santa Fe Railway (BNSF) train carrying at least 10 tank cars of crude oil collided into another train that had derailed, resulting in several explosions and a large fire that required the evacuation of residents in the nearby town of Casselton. While no injuries were reported at the time of writing, firefighters faced difficulty putting out the fire due to high temperature and risks that further explosions could take place.

The accident is likely to spark off a debate about the safety of transporting crude by rail, which has soared in North America over the past two years as a result of the lack of pipeline infrastructure to support the region's crude oil boom.

Shale Boom Strikes North Dakota
North Dakota Monthly Crude Oil Production (b/d)
Overnight Fortunes
North Dakota Crude Oil Production As Share Of US Total ('000 b/d)

BMI View : The latest major rail accident involving crude transportation in North Dakota is likely to bring further regulatory attention to the safety of crude-by-rail transport, and could also weaken the argument against the safety and environmental risks of crude oil pipelines. This is of particular importance to North Dakota, which has been relying on rail to transport the majority of its crude oil output to refineries outside of the state. Pipeline projects planned in North Dakota could get a boost should closer scrutiny and caution against railway deliveries provide momentum for the expansion of the state's crude oil pipeline network.

A major accident involving a train carrying crude in North Dakota could signal the beginning of the end of the buoyant sentiment surrounding crude-by-rail in the US. On December 30, a Burlington Northern Santa Fe Railway (BNSF) train carrying at least 10 tank cars of crude oil collided into another train that had derailed, resulting in several explosions and a large fire that required the evacuation of residents in the nearby town of Casselton. While no injuries were reported at the time of writing, firefighters faced difficulty putting out the fire due to high temperature and risks that further explosions could take place.

The accident is likely to spark off a debate about the safety of transporting crude by rail, which has soared in North America over the past two years as a result of the lack of pipeline infrastructure to support the region's crude oil boom.

This is particularly so for North Dakota, where production from the liquids-rich Bakken shale formation has made the state into a major oil producer.

Shale Boom Strikes North Dakota
North Dakota Monthly Crude Oil Production (b/d)

Crude-by-rail has been the principal means through which oil has been transported from North Dakota. At the time of writing, the state's total available pipeline transport capacity is only about 515,000b/d - a little more than half of its production in October 2013. In contrast, the rapid build-up of rail capacity, particularly in 2012, has seen crude-by-rail transport capacity rise to 865,000b/d by the end of 2013.

Rail To The Rescue
Crude Oil Transport Capacity By Type Compared To North Dakota Crude Oil Production ('000b/d)

According to the North Dakota Pipeline Authority, rail accounted for 69% of crude oil delivered from the Williston Basin - which part of the Bakken formation lies - in October 2013, while the total volume of crude oil delivered via rail out of the state exceeded 740,000 barrels per day (b/d). This is approximately 78% of the state's total production in October.

Rail Takes The Cake
Distribution Of Crude Exported From Williston Basin, October 2013 (%)

On Track To Ride On Oil Boom

Crude-by-rail has benefited from the crude oil boom in North Dakota partly because it has come under less regulatory attention than their pipeline counterparts. The risk of oil spills from pipeline ruptures has led to intense scrutiny for proposed pipeline projects particularly at the federal level in the US. This has been highlighted by TransCanada's troubles in obtaining approval for the 830,000b/d Keystone XL project, which is to run from Hardisty, Alberta in Canada to Steele City, Nebraska in the US.

Smaller pipeline projects are subject to less pressure, though they continue to require more regulatory approvals before they can proceed and long construction periods. In contrast, railway companies have benefited from the shorter lag time between approval and project start-ups, as many of them have utilised existing railway networks for crude deliveries. This has allowed crude-by-rail capacity in North Dakota to grow 149% from 265,000b/d to 660,000b/d between 2011 and 2012 alone, and another 31% between 2012 and 2013.

A Tracking Good Time
North Dakota Crude-By-Rail Capacity ('000b/d)

Fortunes Derailed

However, the severity of BNSF's rail accident could put an end to speedy crude-by-rail capacity expansions. This accident is the latest in a series of railway accidents involving oil transportation in North America, most notable of which was a fatal accident involving an unmanned train carrying crude oil in Lac-Megantic, Quebec in Canada. As a result, regulators have started turning attention to safety issues surrounding rail transportation in Canada, and the latest incident in North Dakota would likely prompt the US to also take a closer look into railway safety regulations.

While resistance against pipelines is likely to remain strong ( see 'Pipeline Resistance To Remain Strong Despite Trainwreck', October 21 2013), the latest accident in the US weakens the argument against the risks of crude transportation via pipelines vis-a-vis other modes of transport. TransCanada's Keystone XL pipeline will still face a long battle ahead before its approval, but smaller and more regional-based pipeline projects could get a boost if apprehension of crude deliveries by rail grows.

Pipelines could get a boost particularly in North Dakota, where crude oil production is expected to grow further to pass 1mn b/d by 2014. The state's Department of Mineral Resources (Oil & Gas Division) has described its crude oil takeaway capacity as 'adequate', though it is dependent on growth in rail deliveries to costal refineries. Should greater regulatory scrutiny slow the rate at which rail deliveries expand, the state would have to rely on other modes of transport to export oil so as to avoid depressing oil prices.

Pipeline proposals that could see more favourable regulatory response to their construction are Enbridge's Sandpiper project and Koch's Dakota Express, both of which are targeting start-up by 2016.

  • Sandpiper: About half of the 300-mile (482.8km) pipeline will run through North Dakota to transport about 225,000 barrels per day (b/d) of crude oil to its destination in Superior, Wisconsin. The US$2.6bn project is set for three public hearings in February 2014.

  • Dakota Express: The pipeline will transport crude oil from western North Dakota to Hartford and Patoka in Illinois, with a possible connection to the Eastern Gulf Crude Access Pipeline that will deliver Bakken crude to refineries along the eastern US Gulf Coast. The project will involve the reversal of an existing pipelines as well as new construction as part of the project.

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This article is tagged to:
Sector: Oil & Gas, Infrastructure, Freight Transport
Geography: United States, Canada
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