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July 12th, 2013

By Rail or By Pipe?

by Andrew Price, President & COO

The tragedy in Lac Megantic Quebec on July 6 raises many questions. How did a train of crude oil roll unattended and out of control into the center of town? Are the tank cars, known as DOT-111s, more prone to rupture during a derailment than other designs? Why did the crude oil, which is typically hard to ignite, catch fire and burn so catastrophically? Are ageing rail corridors up to the task of hauling the surging number of crude oil trains that are crossing the US?

The train that derailed in Quebec was carrying crude oil from the Bakken shale in North Dakota to the Irving refinery in St. John New Brunswick. Irving may be getting as much as 90,000 barrels of oil per day by train, out of a total capacity of 300,000 barrels. Irving and other east coast refineries are looking for alternatives to more expensive crude that comes in by ship and is priced against the London traded Brent index. Brent crude traded at an average premium of about $18 per barrel to the US index, West Texas Intermediate (WTI).  Oil from the Bakken and Alberta trade a discount to WTI, providing an incentive for refineries to find ways to access this landlocked crude.

The prolific Bakken shale formation has made North Dakota the second largest producer of oil in the US behind Texas. Bloomberg reports that rail shipments of crude from North Dakota have surged from 0 in 2008 to 675,000 barrels per day. Rail accounts for about 75% of all production in North Dakota.

Bottom line? Oil has been finding a way around pipeline constraints. Transportation of crude oil by rail looks like it will continue to increase into the foreseeable future. Upwards of 850,000 barrels per day of rail offloading terminals are being considered or are under construction on the east coast. The highly politicized Keystone XL pipeline, which would have a total capacity of 830,000 barrels per day, would accept only in the neighborhood of 100,000 barrels per day of crude from the Bakken.

Pipelines and rail both have their disadvantages. Rail is about 3 times more expensive per barrel than a pipe, but rail is much more flexible and faster to scale. Rail spills are historically more frequent than pipeline spills but rail typically releases fewer barrels per incident than a pipeline rupture.

A recent Bloomberg article cited a statistic from the Association of Oil Pipelines that US pipelines spilled 2.3 million gallons out of 474.6 billion gallons of crude and petroleum products that were transported in 2012. A spill rate of 0.0005%. For rail, Bloomberg cites a spill rate of 0.85% over the past decade.

Two things are certain – more scrutiny is going to be placed on the safety of transporting oil by rail. Given the magnitude of the tragedy in Lac Megantic, this scrutiny is certainly warranted. Second, oil will continue to flow to refineries from the low cost suppliers. Restrictions or limitations on one mode of transportation will quickly lead to a surge in another. 

Bloomberg articles referecend in the blog include:

(BN) Canadian Blast Revives Complaints of Rupture-Prone Rail Cars (2) By Jim Efstathiou Jr. and Jim Snyder

(BN) Quebec Oil-Train Disaster Spurs Rail-Versus-Pipelines Debate (2) 2013-07-08 20:13:52.548 GMT By Jeremy van Loon and Gerrit De Vynck

Tags: Crude Oil, Bakken, Shale Oil, North Dakota, Lac Megantic Quebec, WTI, Brent, Oil Sands, Irving, St John Refinery.

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