Oil Trains Rumble Into Philly, Bringing Dakota Crude, Jobs And Safety Concerns

Oil Trains Rumble Into Philly, Bringing Dakota Crude, Jobs And Safety Concerns

SEPTEMBER 19, 2013 | 5:52 PM
BY 

CSX K040 Robert King

COURTESY OF ROBERT KING

Robert King remembers the very first time he saw an oil train.

“It was April 14, 2013.”

King, a 17-year-old Philadelphian, is a “railfan,” the name for members of a worldwide community of passionate, or some might say obsessive, train buffs.

On that day, King and railfans from the Midwest to the East Coast were busily tracking the inaugural run of a brand new train: the CSX K040, an oil train more than one-mile long hauling raw crude from the Bakken Shale in North Dakota bound for South Philadelphia.

With his camera bag slung over his shoulder, King pedaled his blue-and-white mountain bike to Schuylkill River Park in Center City and up the ramp to a foot bridge overlooking the CSX tracks. Then he settled in to wait. As he stood there, he recalls, “There’s some worry on my mind.”

King fretted that another train slated to use the tracks at the same time might ruin his dream photo. But he got lucky that day, snapping the photo of Philly’s first oil train that you can see on this page.

That’s because Philadelphia is at the center of a new industrial boom. Oil trains are becoming a common sight on tracks between North Dakota and Philadelphia. To get here, they travel through some densely populated areas – Chicago, Albany and New Jersey – which is raising some safety concerns.

Why? These shipments are coming on the same type of train that derailed in Lac-Mégantic, Quebec, last July, leaving 47 people dead and reducing the downtown to smoldering rubble.

Seen in another light, this rail traffic is very good news for America’s energy economy. Rail shipments are booming as fracking in the Bakken Shale continues to yield a glut of light, sweet crude oil.

More traffic, more accidents, more independence

Without enough pipelines to move it all underground, rail shipments have doubled since this time last year, according to the Energy Information Administration.

Fadel Gheit, a senior analyst with the investment bank Oppenheimer, has followed the oil and gas industry for more than 30 years. It  has been decades since Gheit has seen this kind of rail traffic.

“Two or three years ago, very seldom you heard that companies were using rail cars. Everybody now is,” he says. “Also the sheer number went from a few hundred rail cars to tens of thousands of rail cars. We have not, to my knowledge, expanded the rail line too much. We have not really spent a lot of money on infrastructure.”

Gheit wonders whether our rail lines can handle all this new activity and whether increasing traffic on the rails will lead to more accidents.

Pennsylvania’s governor, Tom Corbett, prefers to focus on the good news part of the equation. In his own way, the governor is also a rail fan.

Earlier this summer, Corbett paid a visit to ACF Industries – a rail car manufacturing plant in Milton, Northumberland County. The 114-year-old company closed in 2009. But the growing demand for rail tanker cars has pushed its doors wide open again.

“You are part of the piece of the puzzle of how we make this country energy independent of the Mid East,” Corbett told workers that day.

Bakken crude is also a direct cause for the revival of the 140-year-old Sunoco refinery in South Philadelphia. It was set to close when it got new life thanks to a joint venture between a private equity firm and a natural gas company.

In July, the refinery complex now known as Philadelphia Energy Solutions hit a milestone: ramping up shipments to five trains of Bakken crude a week.

July is also when the derailment in Lac-Mégantic happened.

A Quebec Provincial Policeman crosses the railway tracks inside the exclusion zone in the town of Lac Megantic, Quebec.  Hundreds of residents were evacuated from their homes when a runaway train loaded with crude oil exploded on July 6.

EPA/STEPHEN MORRISON /LANDOV

A Quebec Provincial Policeman crosses the railway tracks inside the exclusion zone in the town of Lac Megantic, Quebec. Hundreds of residents were evacuated from their homes when a runaway train loaded with crude oil exploded on July 6.

Learning from Lac-Mégantic

Inspectors have since concluded that the tankers on that derailed train were mislabeled. Samples from cars that didn’t ignite show the oil inside was actually more flammable than shipping documents reported.

Last week, Canadian transportation officials sent a letter to U.S. regulators warning them that emergency responders may not be getting the right information about these shipments.

But federal regulators have been asking questions about the safety of this boom in rail traffic even before the Lac-Mégantic derailment.

In March, the Federal Rail Administration started planning unannounced spot inspections of crude suppliers and transporters.

Nancy Kinner is director of the Coastal Response Research Center at the University of New Hampshire. She says rail has a fairly good safety record and most incidents are caused by human error “where humans override a system that is designed for protection or don’t believe the data that’s being given to them or simply make a bad judgment.”

Kinner says mislabeled shipments are a prime example of that.

Being prepared

The growing rail shipments pose challenges for local emergency planners trying to prevent accidents or ensure swift, safe clean up.

In Pennsylvania, the Public Utility Commission does spot inspections of tracks, rail cars and shipping documents to make sure transporters are complying with federal rules.

Emergency planning is left to counties.

Immediately after the accident in Canada, Philadelphia’s Office of Emergency Management told StateImpact Pennsylvania it does not get detailed information about rail shipments. Two months later, the agency won’t say whether or not it has gotten any new information or updated its emergency plans.

Federal law does not require railroads to share information about hazardous shipments with them, but Philadelphia Fire Commissioner Lloyd Ayers says CSX regularly communicates with his department about these shipments.

“It’s well before the shipment so we’ll know the chemical or the hazard that’s coming through,” Ayers says. “Where its destination is, where it originated from and what the quantities are so we can be prepared.”

A spokeswoman for the railroad told StateImpact that CSX shares information with local fire departments “upon request.” The railroad also holds training sessions with the Philadelphia fire department every year.

But CSX would not confirm what or even if it’s shipping to Philadelphia Energy Solutions.

The refinery denied a request for an interview about rail safety in the wake of the Canadian accident. But StateImpact did get an invitation to the grand opening of its permanent rail facility and an e-mail from a spokeswoman saying Philadelphia Energy Solutions “enthusiastically supports” safety inspections.

Meanwhile, Energy Solutions CEO Philip Rinaldi says the company is on the verge of becoming the single largest consumer of Bakken oil. Next month, it’ll be welcoming two trains a day, each carrying 70,000 gallons of crude.

Rail fans like Robert King will be out there watching it all unfold and capturing it on film.

Is Keystone Doomed To Be a Historical Footnote?

Is Keystone Doomed To Be a Historical Footnote?

By Ben Winkley Wall Street Journal

WHO NEEDS KEYSTONE, ANYWAY?

As 2013 rolls on from summer into fall there is still no end in sight to one of the great energy impasses of the year—will the Keystone XL pipeline ever be approved, or is it fated to become a historical footnote?

The pipe, in case you have forgotten, is planned to allow 830,000 barrels a day of heavy crude to move from Canada’s oil sands development all the way to refineries on America’s Gulf Coast.

Keystone needs approval from the State Department because it crosses the Canadian-U.S. border. The debate on whether it is a good idea or not has seemingly been endless and a decision may not now be made until 2014.

U.S. refiners increasingly doubt that Keystone will ever be built, The Wall Street Journal’s Ben Lefebvre reports. Only now, thanks to the expansion of other pipelines, the record amount of oil being produced in the U.S. and the rapid expansion of crude-by-rail, they don’t particularly care.

Which is all well and good for American refiners—and probably for these seven adorable species threatened by Keystone—but potentially ruinous for Canadian drillers.

Extracting Canada’s huge deposits of oil sands in the next few years might not be economically viable without Keystone XL. Oil-sands production capacity is predicted to more than double by 2030, to more than 5 million barrels a day—if Keystone doesn’t happen, output could exceed shipping capacity as soon as 2016.

This will mean that Canadian heavy crude will continue to trade at a steep discount to other grades of oil for the next few years, which could weigh on the economics of developing the oil sands.

So Canada hopes to build some pipes of its own—one all the way from Alberta to the Atlantic coast, and one to the Pacific. The former faces the challenge of scale; the latter of local opposition.

If Canada gets one or both of these off the ground, however, it could mean that Keystone turns out to be a lot of fuss over nothing. A lifeline could be thrown its way, though. The U.S. Federal Railroad Administration has begun an investigation into the business of moving hazardous materials—read: crude oil—on the tracks in light of the fatal accident in Quebec earlier in the year.

Any new safety measures or restrictions (say, on moving crude through residential areas) could increase the cost of moving oil-by-rail, and make that pipeline look a more attractive option once more.

INDIA BETWEEN A ROCK AND A HARD PLACE

India is considering a plan to reduce its ballooning current-account deficit that includes holding its oil imports from Iran steady, potentially putting the country in jeopardy of losing an exemption from U.S. sanctions against countries that do business with Iran.

The subcontinent is stuck between a rock and a hard place. Its currency, the rupee, has recently hit record lows against the U.S. dollar, making crude-oil imports much more expensive.

India imports more than three-quarters of the crude oil it requires, and the depreciating local currency would make those imports more expensive in rupee terms and add to the costs of government fuel subsidies.

India is turning to the Middle East, looking for deals. Oil exporters are eager to boost supplies to India to compensate for shrinking U.S. demand.

India and Iraq are working toward a 10-year oil-supply deal and the former may offer a stake in state-run India Oil Corp.’s planned refinery in the east of the country, the Journal’s Saurabh Chaturvedi and Biman Mukherji report.

Dealing with Iran will prove more contentious. India buys oil from the Islamic Republic by depositing rupees into a bank account, and then Iran imports Indian goods, potentially including food, drugs, consumer products and auto parts, debiting rupee amounts from the same account.

A bizarre ongoing dispute over an Indian oil tanker that was detained by Iran’s navy threatens to stall negotiations, but India may feel its need for fuel is greater than America’s need to squeeze Iran.

More U.S. oil is moving via truck, barge and train than at any point since 1981

COMMODITIES Updated August 26, 2013, 12:07 a.m. ET

Pipeline-Capacity Squeeze Reroutes Crude Oil

More U.S. oil is moving via truck, barge and train than at any point since 1981

By RUSSELL GOLD CONNECT

More crude oil is moving around the U.S. on trucks, barges and trains than at any point since the government began keeping records in 1981, as the energy industry devises ways to get around a pipeline-capacity shortage to take petroleum from new wells to refineries.

Getty Images

Oil container cars sit at a train depot outside Williston, N.D.

The improvised approach is creating opportunities for transportation companies even as it strains roads and regulators. And it is a precursor to what may be a larger change: the construction of more than $40 billion in oil pipelines now under way or planned for the next few years, according to energy adviser Wood Mackenzie.

“We are in effect re-plumbing the country,” says Curt Anastasio, chief executive of NuStar Energy LP, a pipeline company in San Antonio. Oil is “flowing in different directions and from new places.”

U.S. oil production has reached its highest level in two decades, while imports have fallen dramatically. A system built to import oil and deliver it to coastal refineries has become ill-equipped to handle rising production in Texas, North Dakota and Canada’s Alberta province.

“All of the pipes are pointed in the wrong direction,” says Harold York, an oil researcher at Wood Mackenzie. “We are turning the last 70 years of oil-industry history in North America on its head, and we are turning it on its head in the next 10 to 15 years.”

With oil prices persistently above $100 a barrel, companies drilling new wells don’t want to forgo revenue while they wait years for new pipelines. That leaves them with trucks, trains and barges to move an increasing amount of crude.

Oil delivered to refineries by trucks grew 38% from 2011 to 2012, according to the U.S. Energy Information Administration, while crude on barges grew 53% and rail deliveries quadrupled. Although alternatives are growing rapidly, pipelines and oceangoing tankers remain the primary method for delivering crude to refineries.

In the Eagle Ford, a large four-year-old South Texas oil field, production has grown to more than 500,000 barrels a day, from less than 1,000 in 2009, according to state statistics. Getting that torrent out of the sparsely populated region has required modifications to the oil-delivery system.

For example, last year NuStar reversed a 16-inch pipeline built to carry crude imported from Africa and Europe northward from the Port of Corpus Christi. Now, the pipeline flows south, taking delivery from hundreds of trucks that fill up at individual wells. Some of the 175,000 barrels a day moving through the pipe is loaded onto barges at Corpus Christi and towed toward refineries near Houston.

Earlier this year, Phillips 66 began putting some of this crude on ships for a 2,200-mile journey around Florida to its refinery in Linden, N.J.

The heavy trucks moving Eagle Ford crude are causing headaches for residents and local officials, ripping up roads and causing traffic tie-ups.

“These are rural roads built for 10 cars an hour, and now it’s 100 vehicles an hour, and 75 of them are 80,000-pound trucks,” says Tom Voelkel, president of Dupre Logistics LLC. The Lafayette, La., company started hauling crude in Eagle Ford in November 2011 and has more than 100 drivers full time in the region.

The Texas Legislature appropriated $450 million this year to repair and improve roads in oil-producing counties. “It doesn’t even begin to reach where it needs to reach,” says Daryl Fowler, the chief elected county official in Cuero, Texas, about a hundred miles southeast of San Antonio.

“We’ve seen a fourfold increase in congestion around here,” he says. “The roads are crumbling.”

In July, the Texas transportation department decided to convert 83 miles of state road in six oil-boom counties from pavement to gravel, to reduce repair costs and slow traffic.

Trucks filled with Eagle Ford crude are also heading 100 miles west to a barge canal. The first barge of crude departed in September 2011, heading south toward the Gulf of Mexico and refineries near Houston. Now the canal moves 1.6 million barrels a month, says Jennifer Stastny, executive director of the Port of Victoria.

“It’s like putting your 5-year-old to bed one night and he wakes up the next morning as a 16-year-old, with the appetite and demands of a 16-year-old,” she says.

In North Dakota, trains move 69% of the state’s 800,000 barrels a day of crude, according to state figures. Energy companies say they value rail’s ability to deliver crude to the highest-paying markets.

But the deadly runaway crude train crash in Canada’s Quebec province in July, which incinerated a small town and killed at least 47 people, highlighted the risks of the mile-long crude trains crisscrossing the country. The U.S. government is imposing new regulations on oil shipments by rail.

Some state regulators wonder if their local efforts leave them prepared for a train accident, in part because federal railroad rules pre-empt state and local control over trains.

In Washington state, “we can’t say [to train operators] you have to have oil-spill contingency plans in order to operate,” says Curt Hart, a spokesman for the state’s Department of Ecology. “We do that for oil tankers, barges, large commercial vessels and refineries.”

Home to five refineries, the state levies a per-barrel tax on crude delivered by tankers and barges, which pays for spill-response officials and inspectors. The tax doesn’t apply to rail shipments.

The American Association of Railroads says it is prepared for growing crude shipments because it has long carried hazardous cargoes. In 2008, major U.S. railroads carried 9,500 carloads of crude, the association says, and are on pace this year to carry 389,000.

Most industry analysts believe that while crude on trains will last, truck and barge traffic will decline once new pipelines come into service.

Environmental groups have criticized some pipeline projects, including the Keystone XL, meant to move Canadian oil to Gulf Coast refineries. The federal government is still studying the Keystone pipeline and has yet to issue needed permits.

Steve Kean, president and chief operating officer of Kinder Morgan Inc., one of several interrelated companies that own or operate 82,000 miles of North American pipeline, says government agencies thoroughly vet new projects.

Falling imports, infrastructure investments and increased manufacturing are just some of the benefits of newly abundant energy supplies, he says. “This has got to be one of the best things that has happened in our economy in the past 10 years. It is better than the iPad.”

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Texas’ Next Big Oil Rush (WSJ 6/23/13)

New pipelines are beginning to carry a glut of domestic crude from the middle of the country to Texas’s Gulf Coast, boosting the fortunes of the area’s big refineries and further fueling a decline in oil imports. Dan Strumpf reports.

New pipelines are beginning to carry a glut of domestic crude from the middle of the country to Texas’ Gulf Coast, boosting the fortunes of the area’s big refineries and further fueling a decline in oil imports.

Magellan Midstream Partners’ Longhorn pipeline began shipping oil from West Texas to Houston in April—the first of at least seven pipeline projects that could send as much as two million barrels a day from oil-saturated choke points in Oklahoma and the interior of Texas to the largest concentration of refineries in the country. But domestic oil production is at such a high level that the Gulf Coast refineries won’t be able to process all of the crude.

The pipelines, all set to come online by the end of next year, mark a new phase in the U.S. oil boom.

Hydraulic fracturing has pushed U.S. oil output to its highest level in 17 years, but without adequate pipelines, much of the crude has been trapped at storage facilities, including domestically produced light, sweet crude at the massive storage hub in Cushing, Okla.

Because that Oklahoma crude is relatively stranded, its price is depressed compared with prices of oil stored in other parts of the U.S. and in Europe. But with the new pipelines, as well as increased use of rail cars and barges to move crude, Cushing prices are expected to rebound.

Light, sweet crude at Cushing is now trading at a discount of about $6 a barrel from imported European Brent crude, but far less than the $20 discount in February. Goldman Sachs Group Inc. says the discount could narrow to $5 by the third quarter as more pipeline capacity becomes available.

Oil refineries like this one near Houston are expected to benefit from new pipelines carrying less-expensive crude from inland and Midwest sites.

Refiners on the Texas Gulf Coast, which process about a quarter of U.S. gasoline, are poised to be the beneficiaries of the new pipelines. They have been largely stuck paying for more-expensive imported crude, or paying extra transport costs to have the cheaper, stranded U.S. crude brought in on rail cars, which are generally more costly than pipelines.

Valero Energy Corp., Phillips 66 and Marathon Petroleum Corp., as well as Exxon Mobil Corp., which runs a major refinery in Baytown, Texas, all stand to gain.

Valero will realize profit margins of $12.80 per barrel from 2013 to 2017, compared with $10.50 in 2011 and 2012, estimates investment research firm Morningstar. Phillips 66’s margins are projected to grow to $13.50 per barrel, from $11.40.

Refineries in the Midwest, meanwhile, may see adverse consequences. They have benefited from the regional glut, buying the low-price crude but selling gasoline at the same prices as their coastal competitors. (The price at the gas pump in the U.S. is determined by the higher cost of imported crude.)

Investors are already betting that Midwestern refiners’ profit margins will fall. Shares for CVR Energy Inc., which produces fuel in Oklahoma and Kansas, fell 4.3% Monday as the West Texas crude-oil discount continued to deteriorate.

However, Texas refiners won’t be able to take full advantage of the influx of U.S. oil, most of which is of the variety known as light sweet. That is because many of those refineries were modified years ago to also deal with heavier crudes from Mexico, Venezuela and Saudi Arabia, preventing significant portions of their plants from refining light crude.

“It’s rare to find a refinery down there that can take the majority of its crude” from the U.S. supply of light, sweet oil, said Cowen Securities analyst Sam Margolin.

Some industry experts think the pipelines will simply ease the oil glut in Cushing and create one in the Houston area as U.S. crude pours into the area faster than refiners can process it.

Trying to sell the crude abroad instead won’t provide refiners a relief valve: U.S. law prohibits most crude exports, although refined products can be shipped overseas.

“We think the U.S. Gulf Coast gets saturated” with U.S. and Canadian crude once the pipelines are completed, said Greg Garland, CEO of Phillips 66, the independent refiner which spun off from ConocoPhillips last year. If that occurs, Mr. Garland said more crude will instead have to move to the East and West coasts by rail.

The arrival of more U.S. light, sweet crude on the Texas coast is displacing imports of similar crude from Nigeria and Angola, which dropped to their lowest levels in about a quarter of century last year, a concern that was aired at the most recent OPEC meeting in May.

The competition from the new light crude arriving in Houston could push down the prices paid by Gulf Coast refiners for Gulf of Mexico oil, said Alex Morris, energy analyst at Raymond James. But it is unlikely that deep-water production would be curtailed, he added, because onshore production is easier to shut off if prices go down.

Write to Alison Sider at alison.sider@dowjones.com, Dan Strumpf at daniel.strumpf@dowjones.com and Ben Lefebvre at ben.lefebvre@dowjones.com

A version of this article appeared June 25, 2013, on page B1 in the U.S. edition of The Wall Street Journal, with the headline: Texas’ Next Big Oil Rush.