Feb. 26 (Bloomberg) -- U.S. energy companies using railroads to carry crude must conduct tests to help ensure the oil cargoes won’t explode or eat holes through tank cars after rising train derailments spurred new emergency rules.
An order issued yesterday by the U.S. Transportation Department requires oil explorers including Continental Resources Inc. and EOG Resources Inc. to test the chemical composition of all crude intended for shipment by rail. While the new rules are focused on volatile Bakken crude, they also require more robust tank cars for transport of material that’s designated lower risk, such as bitumen from Canada’s oil sands.
“It’s going to have far-reaching ramifications, and I don’t know for how long,” said Marvin Trimble, director of commercial development for Strobel Starostka Transfer Canada Ltd., a Calgary-based rail services company.
Crude-by-rail shipments have soared alongside U.S. oil production as drillers employing new technologies cracked open shale formations faster than pipelines were built to handle the outflows. The bonanza has increased the risk of explosions and fires because much of the new supply is more volatile than some traditional types of domestic oil. There have been 10 derailments of trains carrying crude in North America during the past year.
The directive addresses what the Washington-based agency called an “imminent hazard” to the communities and environment through which crude-hauling trains move.
Companies that ignore the order may be fined as much as $175,000 a day for each violation. Individuals may also be subject to fines and up to 10 years in prison, under the emergency order.
“Petroleum crude oil may contain dissolved gases, may exhibit corrosive properties and also may exhibit toxic properties,” the agency said in its order.
The most severe recent incident occurred in July in Lac-Megantic, Quebec, where an unattended train carrying oil rolled away, derailed and exploded in a fireball that killed 47 people and leveled half of the downtown. In December, a BNSF Railway Co. train carrying crude from the Bakken formation crashed in North Dakota, forcing the evacuation of a nearby town.
An investigation by the Federal Railroad Administration found that shippers sometimes misclassified the oil they were offering for sale, loading it into tankers that weren’t stout enough to safely carry materials in the highest hazard category.
“Misclassification is one of the most dangerous mistakes to be made when dealing with hazardous materials,” the department said in the order. “Misclassification may indicate larger problems with company management, oversight and quality control.”
The agency’s order was issued as railroad companies, refiners and oil producers and distributors gathered at the Crude by Rail 2014 conference organized by American Business Conferences in Glendale, California.
The federal order threatens to reduce or delay shipments of bitumen and other low-volatility fuels by ordering them reclassified, according to oil-by-rail companies. The order raises the risk level of an entire class of less-volatile grades that must now be shipped in safer, “more robust” tank cars.
Oils that were previously categorized as less flammable Group III products must now be labeled as Group I or Group II, which require safer cars.
The directive threatens to exacerbate a shortage of tank cars, forcing U.S. shippers to search for more protective units designed to handle flammable crudes or risk curtailing deliveries, Strobel’s Trimble said at the conference.
“This order affects more than just oil coming out of the Bakken,” Mark Luitwieler, executive vice president of operations for Peaker Energy, said at the industry gathering yesterday. Shipments of heavier oils such as waxy crude from Utah’s Uinta Basin will be just as affected, even if they’re less flammable, he predicts.
“That Uinta stuff is just like peanut butter,” said Luitwieler, whose Houston-based company develops crude-by-rail terminals.
The department’s order caused confusion in the industry as refiners and producers tried to understand what the new requirements will mean to their operations and how broadly they will apply to shipments across the country.
Tesoro Corp.’s Mark Smith said he wasn’t sure what new procedures were being mandated since the company already tests crude shipments.
“We’re taking samples all the time -- we’re taking samples today,” said Smith, vice president of development, supply and logistics for the San Antonio, Texas-based refiner.
“What do you want us to do? What do you want us to test for?” asked George Stutzmann, director of supply, trading and business development for oil refiner Alon USA Energy Inc. “I’m not really sure what this means or what they expect from us.”
Continental, the biggest producer of Bakken crude, lauded the federal government’s effort to improve the safety of crude-by-rail shipments.
“All crude should be properly tested, classed and transported safely,” Eric Eissenstat, the Oklahoma City-based company’s general counsel, said in an e-mailed statement.
A refining industry trade group criticized the directive for leaving “several questions unanswered,” including how often testing should be conducted and how crude shipments might be affected.
The American Fuel & Petrochemical Manufacturers said in a statement yesterday it hoped the department “will work collaboratively to answer these and other unanswered questions.”
Last week, railroads agreed with U.S. regulators to slow trains hauling crude around urban areas and install safety equipment in response to recent accidents.
“Railroads have supported the administration’s pursuit of proper classification and labeling of petroleum crude oil in tank cars by shippers prior to transport,” the American Association of Railroads said in an e-mail yesterday. “This is essential to ensuring first responders are able to safely and appropriately respond in the event of an accident or incident.”
Federal regulators are separately considering requiring upgrades to the DOT-111 tank car, which the U.S. National Transportation Safety Board has said must be strengthened to reduce spill risks.
Senator Charles Schumer, a New York Democrat, said U.S. regulators need to do more to address the risks of moving crude oil by rail by requiring a swift phase-out of the DOT-111s.
“Transporting crude oil by rail in outdated tank cars -- which have been proven to fail frequently upon derailment -- is a ticking time bomb,” Schumer said today in a conference call with reporters.
He also wants the speed restrictions agreed to by the railroad industry as an additional safety measure to apply more broadly.
Retrofitting the cars may increase rail costs by about 9 percent, or $1 a barrel, Mike Lutz, vice president of midstream for Bakken oil producer Hess Corp., said at the conference yesterday.
Congestion on BNSF Railway Co. tracks in North Dakota has already driven oil-by-rail costs up by about $1 a barrel over the past month, slowing deliveries already hindered by winter storms, he said.
“It may add some cost, but the testing itself is probably small in the scheme of things,” industry consultant Andy Lipow, president of Lipow Oil Associates LLC in Houston, said by phone. “Someone’s going to pay for it, and ultimately it’s going to be the consumer.”