Ever lapsed into daydreaming while you sit at a railroad crossing, waiting for a long freight train to go by?
After a fatal oil train explosion in Quebec last summer killed 47 people and flattened a downtown, people aren’t daydreaming anymore. That disaster served as a wake-up call to a lot of communities living close to railroad tracks, who suddenly realized that was crude oil rolling by in tanker. As oil trains have had more accidents, and governments are examining the safety of rail oil shipments, some local residents are applying the brakes on what they see as a dangerous rush to move oil by train.
There are, however, powerful economic reasons why more oil is being shipped by rail, rather than through pipelines.
Reporter Sarah Gardner talked with Graham Brisben, CEO and founder, PLG Consulting, about moving oil by train:
Q: How much crude oil are we moving on trains?
A: It’s certainly growing. It’s up to about 400,000 carloads per year today. Although crude by rail gets a lot of attention — it’s a big focus in the media partly because it’s an area of growth for railroads, but also because there have been a number of high profile crude-by-rail accidents — the reality is it’s only 2 to 3 percent of total car loadings for the railroads.
Q: Why are they using trains to move oil to refineries?
A: Initially, when crude by rail got started, it occurred in the Bakken play in North Dakota. The initial idea was to use rail to get crude to market simply to bide the time until pipelines were built out with enough capacity. But once crude oil got going, the commodity traders and the exploration and production companies realized that rail gave them faster transit times, the ability to ramp up more quickly than pipelines, and the ability to take the crude oil to different destinations where a higher price could be received for those barrels.
Q: There’s not just one price?
A: No. Because crude oil trades at different prices at different places according to oil benchmarks (like West Texas Intermediate, Light Louisiana Sweet and Brent).
Q: Won’t crude by rail go away when more pipelines get built?
A: As the pipeline network gets built out in a north-south direction, the flow of crude from the Bakken in North Dakota will have more of a shift from rail back to pipeline. But going east-west, that business will persist. You’re simply not going to see a buildout of pipelines going east-west. It’s simply cost-prohibitive to go over the Rocky Mountains, for example.
Q: What about tar sands oil from Alberta, Canada?
A: That oil is coming to market both by pipeline and now, increasingly, by rail. First, it was the light, sweet crude out of the Bakken. Now, it’s heavy sour Canadian crude going to U.S. refineries.
Q: Who’s making money on all this?
A: Obviously this has been a bright spot for the railroads. And tank car builders and leasers have enjoyed some very flush returns. The other beneficiary has been commodity traders who take advantage of those price spreads. It’s also a good time to be in the refining business because of abundant domestic supply. They’re in a better position than they were five years ago.
Q: Federal regulators are moving to increase safety standards in light of recent accidents. Will those new regulations affect the economics of crude by rail?
A: Crude by rail is economically attractive enough to warrant the hard work it is going to take to improve safety. The measures that can be taken, in reality, aren’t all that difficult. We expect regulations on retrofitting tank cars with crude oil. Also it wouldn’t surprise me if there end up being routing guidelines away from population centers, along with the speed restrictions. And greater scrutiny of terminal operations.
Q: Railroads seem very old-fashioned somehow. Could we live without them?
A: Could we live? Yes. Could our economy survive without railroads? No.
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