U.S. Issues Emergency Testing Order to Crude Oil Rail Shippers

Move by Transportation Department Response to Crude-by-Rail Accidents

Wall Street Journal
25 February 2014
By Russell Gold and Laura Stevens

Federal regulators issued emergency rules Tuesday requiring extensive tests on crude oil moving by rail, concluding the system had become "an imminent hazard to public health and safety and the environment."

The order is aimed at operations in one of the U.S.'s booming oil fields, the Bakken Shale in North Dakota, where production has far outpaced the availability of pipelines to move crude to refineries.

In just a few years, hundred-car trains full of Bakken oil have started moving through major North American cities—and been involved in several explosive accidents.

The Transportation Department said the order is aimed at Bakken crude but will cover shipments from anywhere. While oil is classified as a hazardous material, it isn't generally linked to explosions. But Bakken crude is more volatile than other oils and is more likely to emit flammable gases, as The Wall Street Journal reported earlier this week.

The order will require companies to test each batch of crude for an array of characteristics, from the temperature at which it boils to the percentage of flammable gases trapped in the oil and the vapor pressure, which is created when crude emits gases that can build up inside railcars. Previously, federal rules didn't require that crude be tested as extensively; indeed it only required that crude be properly classified and didn't spell out in any detail how often to test the crude.

The testing requirement goes into effect immediately with a stiff penalty for noncompliance. "Any time the government is talking about $175,000 per incident per day in fines, they're pretty serious," says Kevin Book, an energy analyst at ClearView Energy Partners LLC.
The American Petroleum Institute, which has been representing the energy industry in its negotiations with the government, didn't respond to requests for comment. The trade association hadn't yet provided data that the DOT had requested in order to reach a voluntary agreement.

The crude-by-rail industry was almost nonexistent five years ago, but it has boomed along with petroleum output. In 2008, a train of 100 tankers full of crude departed a terminal in North Dakota once every four days, according to rail-industry statistics. By 2013, a unit train was departing every 2 1/2 hours.

The oil industry embraced train transport because it was quicker and easier to build rail infrastructure than it was to lay pipelines. In addition, even though moving oil by trains was more expensive than via pipelines, the industry could ship the crude to wherever prices were highest.

Crude has been heading to refineries from the Canadian province of New Brunswick to Washington state, and south to the Gulf Coast, home to the biggest cluster of refineries in the U.S.

Stephen H. Brown, vice president for federal government affairs at refiner Tesoro Corp., said refiners applaud the new requirements. "I don't think there's anyone in the industry who doesn't want to move this product as safely and efficiently as possible," he said.

Eric Eissenstat, senior vice president of Bakken oil producer Continental Resources Inc., said in a statement that the company was still studying the order but agreed "that all crude oil should be properly tested, classed and transported safely."

But the American Fuel & Petrochemical Manufacturers, which represents chemical companies and refiners, said the order "leaves several questions unanswered," including exactly how often crude should be tested and whether the new rules would affect the industry's ability to transport oil.

Last week, the American Association of Railroads agreed to a number of voluntary safety measures for transporting crude by rail, including lowering some speed limits, redirecting trains around high-risk areas, examining tracks more frequently and improving braking mechanisms. The group said Tuesday that it supports the DOT's order.

Proper testing and classification is essential in ensuring that first responders are able to react safely after an accident, spokeswoman Holly Arthur said in a statement. "The safe movement of crude oil by rail is shared responsibility among all stakeholders in the energy supply chain," she said.

Peter Iwanowicz, executive director of Environmental Advocates of New York, said he wished the government had gone further. "Merely requiring testing but not having an action plan or a requirement to release the testing data publicly still places our communities at risk," he said.

Federal regulators have been investigating the makeup of Bakken crude after accidents involving exploding tank cars—including one in Quebec in July that killed 47 people and leveled a town. The DOT said preliminary estimates of costs at the Quebec accident exceed $1 billion.

Derailments, which are typically caused by track problems or equipment failure, were found to have triggered the accidents.

The emergency order also prohibits moving crude using certain railcars that are suitable only for less hazardous materials. The American Association of Railroads said it would affect 1,100 tank cars, known as AAR-211s, or about 3% of the total crude-oil fleet.

Several companies, including Tesoro and Irving Oil Corp., have said they would phase out older railcars and use upgraded cars with thicker shells and other new protective measures.

In a speech last week, E. Hunter Harrison, chief executive of Canadian Pacific Railway Ltd., said companies should disclose more about the crude they were transporting. "I think that'd be good public relations on their part," he said. "It's the unknown that worries people."

A U.S. House subcommittee is expected to meet on Wednesday to discuss passenger and freight rail safety.

—Chester Dawson and David George-Cosh contributed to this article.

Write to Russell Gold at russell.gold@wsj.com and Laura Stevens at laura.stevens@wsj.com