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Vol. 18, No. 29 Week of July 21, 2013
Providing coverage of Bakken oil and gas

The nub of Lac-Megantic

NTSB estimates cost of $15,000 per car to meet new standards, or $1B-plus

Gary Park

For Petroleum News Bakken

There’s a skeleton in the closet that the crude oil industry would sooner not acknowledge.

In the wake of the Quebec rail disaster, which is expected to cost 50 lives and untold billions of dollars in rebuilding, compensation and litigation, the crude-by-rail-or-pipeline debate is raging in backrooms and private conversations.

But none of those most closely involved wants to put the issue on the table until there has been a seemly period of grieving and a chance for the 6,000 people of Lac-Megantic to reorder their lives.

Moody’s Investors Service, the rating agency, said two-thirds of North Dakota’s Bakken production, which topped 727,000 barrels per day in April, is carried by rail out of the region, spreading concern among producers such as Whiting Petroleum, Continental Resources, Oasis Petroleum and Kodiak Oil & Gas who face a serious challenge if transportation regulators in the United States and Canada make an early call for tighter safety measures.

Canada’s Transportation Safety Board confirmed that all 72 tanker cars in the crash were classed as CTC-111As, which are interchangeable with U.S. cars called DOT-111As.

There are 240,000 cars in the U.S. fleet, according to the Association of American Railroads, or AAR, which said that about half the tank cars in use are built to higher specifications, including any cars built after October 2011.

Voluntary new standards

Faced with the realization that the Department of Transport was not planning any “imminent” steps to set new guidelines for the DOT-111As, AAR opted to voluntarily adopt new standards for its cars.

They include: thicker, puncture-resistant shells, extra protective head shields in the front and back of the cars; additional protection for the top fittings; and higher flow capacity pressure release valves.

The U.S. National Transportation Safety Board, or NTSB, estimated it would cost at least $15,000 per car to meet the new standards, which the American Petroleum Institute, or API, said would cost the industry more than $1 billion.

A decision by the DOT’s Pipelines Hazardous Materials Safety Administration is not expected until after a public comment period in September 2013.

Meanwhile, Donald Ross, the Canadian TSB’s chief investigator into the Lac-Megantic disaster, said the regulator could enact safety measures “as soon as we have some to communicate” and not wait years for the full investigation to be completed.

He said the TSB has “long advocated improvements” to cars used to carry flammable liquids such as gasoline, diesel and crude oil.

Recent risk assessment

Canadian Transport Minister Denis Lebel said the government “will not hesitate to take appropriate action” if deficiencies are identified.

Marie-France Degenais, Transport Canada’s director general, transportation of dangerous goods, said the Canadian and U.S. transportation boards recently conducted a joint risk assessment on the use of rail to carry crude.

It was decided that the CTC-111A and DOT-111A cars did not need to be doubled-hulled to transport flammable materials.

Degenais also said it would take five years to implement any major changes because of the need for standard regulations in both the U.S. and Canada.

Moody’s has shown the least reluctance to take the debate public, predicting tough new regulations that will raise costs for railroads and their oil-producing shippers.

It said the bulk of those costs would be shouldered by Bakken producers in North Dakota and southern Saskatchewan and would be “credit negative for North American rail companies.”

David Berge, Moody’s vice president and senior credit officer, said pressure could be applied by regulators, either legislative or administrative “to come up with some sort of rules or regulations that would, for example, add safety features to railroading that would add to costs borne by the railroads.”

Pipeline approval issue

Nobody stands to benefit more from new pipelines than TransCanada, but its Chief Executive Officer Russ Girling reflected the transportation sector’s reluctance to enter the pipelines vs. rail issue.

Lac-Megantic is a “tragic event that shakes everybody. It shakes all of us that are in this business. Those kinds of events shouldn’t occur,” he said.

Girling said TransCanada’s two big projects — Keystone XL and the possible Energy East pipeline to ship 850,000 bpd from Alberta’s oil fields and the Bakken to Quebec City and possibly Atlantic Canada — are focused on “ensuring that we’re using the best technology, the best response capabilities that are available to us, to assure the public that we can do these things in a safe and reliable manner.”

But, for now, “there is no good news” in Lac-Megantic for anybody, he said, adding the theory that pipelines benefit from the disaster is wrong.

Environmentalists are eager to make their case that the Lac-Megantic is a wake-up call that oil in all forms, no matter how it is shipped, is bad for the planet.

But, by stalling the approval of new pipelines and refusing to let go of their view that the world must wean itself off oil, environmental organizations have forced producers to divert crude to trains, trucks and barges.

Rail shipments could reach 1 million bpd

Analysts are now estimating that rail shipments out of Western Canada could reach 1 million bpd by 2020 from the current 300,000 bpd.

There is a host of plans to accelerate rail deliveries to the Northwest United States focused on sourcing oil from North Dakota and the Alberta oil sands to a string of refineries on the Pacific Coast, said a report by Seattle-based Sightline Institute.

“In Oregon and Washington, 11 refineries and port terminals are planning, building or already operating oil-by-rail shipments,” said Sightline analyst Eric de Place.

He said the combined projects could total 720,000 bpd, exceeding the 525,000 bpd capacity of Enbridge’s Northern Gateway pipeline, or not far short of the push to expand Kinder Morgan’s Trans Mountain system to 890,000 bpd.

Sightline said the Washington refineries, while concentrated on securing Bakken supplies, are now making a concerted effort to add Canadian tight oil and oil sands crude to their mix.

60% from Canada

The Canadian Association of Petroleum Producers estimates that the refineries received 241,000 bpd of feedstock last year, of which 60 percent came from Canada.

CAPP said refineries in Washington and California “need to replace their traditional sources of supply that are now declining and may represent future market opportunity for Canadian producers.”

Of the refineries in Washington’s Puget Sound lowland areas, two receive crude-by-rail and the other three are planning new facilities.

In April, Tesoro and Savage formed a joint venture to develop and operate a new 120,000 bpd crude-by-rail unloading and marine loading facility at the Port of Vancouver in Washington State, indicating they could raise the bar to 360,000 bpd.

BP, which operates the largest refinery in the Northwest, is planning to receive 20,000 bpd by the end of 2014, with its focus on growing supplies of U.S. crudes and Phillips 66 is building a rail car receiving facility to handle 30,000 bpd.

FirstEnergy Capital analyst Steven Paget was one of the few who reduced the issue to its essentials, suggesting the Quebec tragedy will likely increase rail shipping of petroleum products and might reduce opposition to pipelines.

“We are likely to see increased dialogue on whether or not crude-by-rail is a safe alternative to pipeline transportation,” he said.

Peter Tertzakian, ARC Financial’s chief energy economist, said the need for a Canadian national energy strategy is now being pulled more forcefully into the spotlight.

The disaster is “one of the unintended consequences of the lack of a cohesive strategy,” he said.”

“Canada is one of the world’s largest purveyors of oil and natural gas and yet everything to do with energy policy is so reactionary.”

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