(Updates with pipeline concerns, regulator comments starting in fourth paragraph.)
Jan. 3 (Bloomberg) -- Safety rules will probably be tightened on crude oil shipments from North Dakota following a string of railway explosions, threatening to damp an energy boom that has boosted the region’s economy.
U.S. regulators yesterday issued a safety alert after a train carrying oil crashed and caught fire earlier this week in North Dakota, where surging production has helped lead a renaissance in domestic energy and driven the state’s unemployment rate to the nation’s lowest.
The type of oil pumped from the shale formations of North Dakota may be more flammable and therefore more dangerous to ship by rail than crude from other areas, the Transportation Department said in the alert. Regulators are considering imposing tougher rules on railcar construction, among other steps, potentially raising the cost of moving the crude to market.
“A couple years ago, we really weren’t transporting much oil by train,” Brigham McCown, a former administrator of the Pipeline and Hazardous Materials Safety Administration, said today in a phone interview. “The monumental growth in oil transport by rail means there are opportunities to have things not classified right.”
This week’s incident, near the town of Casselton, is the fourth major derailment in six months by trains transporting crude. An explosion of a runaway train carrying North Dakota oil in July killed 47 in Quebec. Restrictions on railcars could worsen a shortage of capacity for moving oil to refineries.
Pipelines could be affected as well.
“Regulators have to take heed that anything they do is going to go beyond the rail industry, beyond the tank car industry,” Jason Seidl, a rail analyst at Cowen & Co. based in New York, said in an interview.
Record volumes of oil are moving by rail as production from North Dakota and Texas have pushed U.S. output to the most since 1988 and pipeline capacity has failed to keep up. North Dakota in particular relies on the railways to carry its crude East or West and away from the bottlenecks to the Gulf Coast refineries.
If the lighter crude releases gases that could be explosive after a rail crash, it could also lead to an explosion after oil leaks from a pipeline, Carl Weimer, the executive director of the Pipeline Safety Trust, an independent advocate for pipeline- safety rules, said in an interview.
“If it’s the same type of oil, it could be the same type of issues with pipelines,” Weimer said.
PHMSA, the Transportation Department unit that issued yesterday’s alert, said it is also looking at how corrosive shale oil is to railcars, something Weimer said also could affect pipelines.
Three pipeline companies including Enbridge Inc. warned regulators that North Dakota oil with too much hydrogen sulfide, which is toxic and flammable, was reaching terminals and putting workers at risk.
In June, Enbridge won an emergency order to reject oil with high hydrogen-sulfide levels from its pipelines after telling the Federal Energy Regulatory Commission it found dangerous levels of the compound at a Berthold, North Dakota, rail terminal. Hydrogen sulfide fumes are an irritant and a chemical asphyxiant that can alter both oxygen use and the central nervous system, according to the U.S. Occupational Safety and Health Administration.
The FERC also approved requests from two other pipeline operators, Tesoro Corp. and the closely held True companies, the latter of which operates North Dakota’s Belle Fourche and Bridger pipelines, to reject oil with high hydrogen sulfide contents. Tesoro can reject crude with hydrogen sulfide at more than 5 parts per million effective Jan. 1. True companies is allowed to turn away oil with more than 10 parts per million of hydrogen sulfide effective April 1.
FERC this week rejected Trailblazer Pipeline Co.’s request to reduce hydrogen sulfide amounts in its pipeline network.
Trailblazer, a unit of Tallgrass Energy Partners LP, said the chemical was dangerous and that reducing the level would be consistent with industry standards. In the order, FERC -- which is responsible for ensuring that gas shipment rates are just and reasonable -- said the company didn’t show why the level needed to be reduced.
Stocks of Bakken producers and rail shippers fell on the news. Continental Resources Inc., the largest owner of drilling rights in the Bakken formation, fell 4.2 percent to $107.76 yesterday and was down another 0.9 percent at 4:03 p.m. in New York today. Other producers Hess Corp. and Whiting Petroleum Corp. also declined.
Surging output from North Dakota’s portion of the Bakken formation and Texas’s Eagle Ford shale formation has helped domestic oil production increase to the highest level since 1988 and is set to propel the U.S. past Saudi Arabia as the world’s largest supplier in 2015.
Crude from the Bakken, which is along the northwest section of North Dakota and east of Montana, accounts for more than 10 percent of the nation’s oil production, after more than doubling between 2010 and 2012. Drillers use a combination of horizontal drilling and hydraulic fracturing to unlock previously unreachable shale deposits.
Bakken crude tends to be flammable because it contains a large fraction of volatile propane and butane, said Zak Mortensen, business development manager for Inspectorate America Corp., which performs oil quality inspections.
With rail companies linking together dozens of cars carrying oil in one train, the risks in any one accident increase, as one car can ignite the next, Anthony Swift, an attorney working on oil-transport issues at the Natural Resources Defense Council in Washington, said.
“What has become clear is that crude oil transport, both by pipeline and railcar, presents risks,” he said.
Shippers will stomach the additional costs associated with new regulation because the economics of moving cheap crude from the middle of the country to the coast remains favorable, according to John Auers, executive vice president of Turner, Mason & Co., a Dallas-based energy consulting firm.
“They’re going to keep railing to the East Coast,” Auers said. “They’re going to keep moving Bakken to the Pacific Northwest. There’s no other option.”
Bakken crude for delivery at Clearbrook, Minnesota, has averaged a $5.13-a-barrel discount versus the U.S. benchmark West Texas Intermediate in the past year, according to data compiled by Bloomberg. The oil strengthened $4.50 a barrel versus WTI yesterday on speculation that this week’s derailment would delay deliveries.
The Bakken and Texas Eagle Ford regions together account for about two-thirds of the nation’s monthly oil production growth, according to the Energy Information Administration.
“We’re not going to stop producing Bakken,” Carl Larry, president of Oil Outlooks & Opinions LLC, said in a telephone interview. “We can’t put a damper on the growth of the economy right now.”
Railroads also have a large stake in the outcome.
Petroleum products was the fastest-growing category of rail shipments in 2013, the Association of American Railroads said in a report this week. The volume of the shipments rose 31 percent last year while total traffic rose 1.8 percent, said the organization, whose members include BNSF, Canadian Pacific Railway Ltd., CSX Transportation Inc. and Norfolk Southern Corp.
“The railroads obviously want this business. They like the business,” Seidl said. “It’s going to continue to grow.”
So far, it hasn’t been hazard free.
“Bakken is presenting its own, new set of risks,” Swift said.
Environmentalists worry that hydraulic fracturing, in which water, sand and chemicals are shot underground to break apart rocks, can contaminate aquifers and releases methane, a potent greenhouse gas, or volatile organic compounds that can cause smog. Two pipelines carrying oil sands from Canada ruptured in recent years, including one that sent tarry sludge down the street of a suburban subdivision in Arkansas.
In September, a Tesoro pipeline spewed 20,000 barrels of crude in northwest North Dakota.
The oil carried on the train that crashed in Lac Megantic, Quebec, was improperly labeled as a less volatile liquid with a lower level of hazard, Canada’s Transportation Safety Board said in September. The crude was being delivered to Irving Oil’s refinery in Saint John, New Brunswick, from the Bakken region.
After the Quebec blast, U.S. regulators jumpstarted efforts to require fortified railcars.
The latest inferno will probably accelerate those efforts, said Kevin Book, managing director at ClearView Energy Partners, LLC in Washington. About three-quarters of the oil produced in North Dakota is shipped by rail rather than pipeline.
Railroads, tank car suppliers and tank car owners that have said replacing the most of the DOT-111 tank car fleet is too expensive will have less weight to their arguments as the volume of oil by rail grows, said McCown, who is now an industry consultant.
“Some of the industry opposition to new tank car standards is going to get muted,” he said.
Crude carried in tank cars are classified as flammable liquids and then divided into so-called packing groups based on the level of hazard, with PG I being the most hazardous and PG III being the least. The Bakken oil being transported by the train that derailed in Quebec was described as PG III when it should have been PG II, the Canadian safety board said.
In its safety alert yesterday, the U.S. pipeline and hazardous materials regulator said it was “reinforcing the requirement to properly test, characterize, classify, and where appropriate, sufficiently degasify hazardous materials prior to and during transportation.”
The regulator in a notice on its website today said it began its “Bakken Blitz” inspections, which it announced in August, in March to see whether oil shipments from that region are properly classified and labeled under U.S. hazardous materials law.
First responders rely on classification information to determine how to respond to an accident or fire.
“Initial laboratory test results indicate that shippers were assigning proper hazardous materials packing groups to the crude oil being shipped,” the regulator said today, saying it tested crude at 18 sites in North Dakota and four in Texas.
Oil-by-rail projects have been facing regulatory setbacks at the city and state level since the Quebec disaster. Washington state regulators reversed the approval of two terminals in November that would have allowed companies to unload oil from rail cars at the Port of Grays Harbor and load them onto marine vessels.
Valero Energy Corp.’s plan to build a rail-offloading complex at the 170,000-barrel-a-day Benicia refinery in Northern California has been put on hold as city regulators study its environmental impacts. The city’s planning commission was scheduled to vote on the complex in August and tabled a decision after receiving “voluminous comments” from residents.
--With assistance from Jim Snyder and Brian Wingfield in Washington, Joe Carroll in Chicago and Jim Efstathiou Jr. in New York. Editors: Jon Morgan, Elizabeth Wasserman