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Shipping crude oil by rail: Are the gains worth the risks?

Oil Collapse-RailroadsOil Collapse-Railroads
A BNSF Railway train hauls crude oil near Wolf Point, Mont.Photograph by Matthew Brown — AP

The past five years have seen a dramatic rise in the shipping of crude oil by rail, triggered by rapidly expanding production in both the Bakken Shale region of North Dakota and the Tar Sands of Alberta.

The U.S. Energy Information Administration reports that crude-by-rail expanded by more than eighteenfold between 2010 and 2014, as production has exceeded existing pipeline capacity and trains have taken up the slack.

But one side effect has been a string of derailments, explosions, and leaks involving crude oil trains. On June 22, 2015, the Canadian government filed new charges in connection with the 2013 explosion of a train carrying crude oil through Lac-Megantic, Quebec. The now-defunct Montreal Maine & Atlantic Railway and its affiliates are charged with safety violations including insufficient testing of hand brakes. The explosion killed 47, making it the deadliest train disaster in North America in two decades.

And according to the International Energy Agency, 4.35 million liters of crude oil were spilled in 2013 by U.S. railroads—more than the total for every previous year in which records were kept. Those who support more pipeline construction have also pointed out that moving oil by rail creates more greenhouse gas emissions. And studies have shown that both shale and sand-extracted crude is much more volatile than conventional oils.

The big railroads have made safety improvements—for example, upgrading dated tanker cars. But despite safety and environmental concerns, rail’s flexibility may be its trump card over pipelines in the new North American oil landscape.

 

Shipping of crude by rail had been a negligible in North America since competitors of Standard Oil rolled out pipelines in the 1870s. Even with John D. Rockefeller’s sweetheart rail deals, the pipelines were a cheaper way to move oil—and still are, by as much as half, according to the Congressional Research Service.

But pipelines require serious capital investment, long-term commitments, and even political will, while railroads are more able to accommodate short-term needs. Progress in building more pipeline capacity has been spotty: Koch Pipeline Co. in early 2014 suspended plans to construct a pipeline from North Dakota to Illinois, and the Keystone XL pipeline originating in Alberta remains in legislative limbo.

The advantages of rail’s flexibility have continued to be highlighted over the past year, as crude prices have collapsed, then rebounded slightly. Because shale and sand oil production is more expensive than conventional drilling, falling prices disproportionately depress production and exploration. That has led to what some have called a “shale bust” in North Dakota, and stalled growth in crude freighting. Pipelines, and oil producers locked into long-term contracts with them, could have become something of an albatross in the world of $60-a-barrel crude oil.

While crude prices are likely to rebound sooner rather than later, cold, hard geology also suggests pipelines could be a bad bet, at least in North Dakota. Speaking with Bloomberg, geologists have argued that unlike conventional wells, shale formations lose between 60 and 70% of their productivity after their first year. The USEIA has projected that shale oil production nationwide will peak as early as 2020, which would leave any pipeline projects underutilized within a matter of a few years.