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Off the Tracks: Exploring the tanker at the centre of the oil-by-rail debate

Crude by rail in North America has exploded over the last few years, both figuratively and, in a few cases, literally. With pipelines seemingly blocked at every available turn, where do we go from here?

Mar 4, 2014

by Anthony A. Davis

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July 6, 2013 • Lac-Mégantic, Quebec • 47 dead

At the centre of the disaster that has defined the booming oil by rail business is a 34,000-gallon, rupture-prone tanker car known as the DOT-111. An ugly jumble of DOT-111s, their black skins split and flaked, smoked for days after they exploded the night of July 6, 2013, in Lac-Mégantic, Quebec. Around the tankers was a charred desolation so complete it looked like the town had been flattened by a bombing raid. In a sense, it had.

Forty-seven people died that night, not long after the parking brakes failed on an unattended Montreal, Maine & Atlantic Railway train parked in the town of Nantes, 11 kilometres up the line from Lac-Mégantic. The train was pulling 72 DOT-111s full of light oil, from the Bakken shale fields of North Dakota, heading for the Irving Oil refinery in Saint John, New Brunswick. At about 1 a.m., it began rolling downhill, locomotives dark, picking up speed as it descended the 100 metres of elevation difference between the two towns. The train entered Lac-Mégantic like a black bullet, moving at more than 100 kilometres per hour. At a turn meant to be negotiated at no more than 16 kilometres per hour, the train derailed, lobbing 63 of the DOT-111s, like incendiary grenades, into the heart of town. It was the worst Canadian train tragedy in 100 years.

“Once upon a time I wanted people to do the right thing for the right reasons. Now I just take it when I can get it.” – Keith Stewart, climate and energy campaign coordinator, Greenpeace

If the recent flurry of rail accidents involving crude are any indication, it may not take long before Canada sees another tragedy like Lac-Mégantic. Governments, regulators and the companies involved have so far failed to insist on the retrofits needed to make the existing fleet of DOT-111s safer. Most experts predict it could take at least a decade to implement changes.

Meanwhile, as the pipeline projects needed to move ever-increasing volumes of Canadian crude get jammed up by environmental, political and legal obstacles, producers are turning to rail en masse to get their product to market. In 2013, Canadian Pacific Railway moved about 70,000 tanker-loads, while Canadian National Railway hauled 60,000 of its own. That’s all the more astonishing when you consider that just five years ago this increasingly cozy relationship between Canada’s railways and energy companies didn’t exist. In 2009, CP moved just 500 tanker loads of crude; CN didn’t move one. But last year, about 150,000 barrels per day (bpd) was shipped by rail in Canada, or about four per cent of Canada’s production. And if terminals planned for Western Canada – like TORQ Transloading’s $100-million rail oil hub in Kerrobert, Saskatchewan, which will set a new standard for loading speed – are completed this year, the volume of crude moving over Canada’s 49,000 kilometres of track could more than triple to 550,000 bpd. At about 700 barrels per car, that equates to about 280,000 tanker cars a year. So, even in the aftermath of Lac-Mégantic, oil-by-rail is likely to grow unless the approval and construction of a major pipeline such as Northern Gateway or Keystone XL, both mired in the regulatory approval process and battling environmental resistance, happens surprisingly quickly.

“If the many pipeline proposals are able to be completed in the medium to long term, then oil-by-rail will serve only as a short-term solution and as a niche service later to provide a competitive alternative,” says Malcolm Cairns, an Ottawa-based transportation research consultant. “On the other hand, if new pipeline capacity is blocked by the efforts of the environmental activists, then rail will play a larger role regardless of the higher price to move oil by rail compared with pipelines.”

In total there are 15 new trunk pipelines at various stages of planning and development across North America. If they are built, they would add two million bpd of transport capacity from Alberta alone to markets and refineries on the B.C., Maritime and U.S. Gulf coasts.

There’s plenty of oil to fill them, though, at the moment a majority of the oil on North American railways is from the U.S. That may change in the future, thanks both to increased production in the oil sands and hydraulic fracking technology that is extracting more and more oil and gas from previously untapped shale basins in Canada as well as the U.S. In 2012, according to the Canadian Association of Petroleum Producers (CAPP), crude output from Canadian conventional and unconventional sources was three million bpd. CAPP expects production to grow to 3.9 million bpd by 2015 and to 4.9 million by 2020. U.S growth has been nearly as energetic. Output was 7.25 million bpd in 2013 according to the U.S. Energy Department, up about 12 per cent over 2012.

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October 19, 2013 • Gainford, Alberta • Town evacuated

This new class of customers has been very good to Canada’s rail companies. Both CN and CP posted record profits in their most recent quarters, while the shares of the two companies soared by 203 and 142 per cent, respectively, between the end of 2011 and the beginning of 2014. And the attraction is no less powerful for the oil companies paying the bills. Their ability to ship oil by rail can be quickly expanded or shrunk, and doesn’t require the expensive and uncertain federal environmental reviews and approvals that their partners in the pipeline industry must go through when they want to build pipelines. The Northern Gateway pipeline, which would pump 525,000 bpd of oil sands crude from Bruderheim, Alberta to Kitimat, B.C., may have received conditional approval from a National Energy Board panel, but it’s still a long way from moving its first barrel of oil – that is, if it ever gets built. On the other hand, if you want to ship oil by rail – right now, anyway – you just do it, no questions asked.

“On the other hand, if new pipeline capacity is blocked by the efforts of the environmental activists, then rail will play a larger role regardless of the higher price to move oil by rail compared with pipelines.” – Michael Cairns, Ottawa-based transportation research consultant

No questions, at least, from a legal perspective. As “common carriers” under Transport Canada rules, railways can’t refuse, even if they wanted to, the transportation of hazardous goods (oil included) that are deemed vital to the Canadian economy. And, with oil and pipelines, it would be difficult to argue against the federal government’s premise that both are vital to the Canadian economy. In 2012 alone, the oil industry spent $62 billion on capital projects and paid $18 billion in taxes and royalties to governments. Nevertheless, in the wake of a spate of derailments that happened throughout the second half of 2013 (in Gainford, Alberta, Casselton, North Dakota, rural Alabama and, most recently on January 7 of this year, in New Brunswick) Canadians are asking plenty of questions about whether North America’s existing rail infrastructure is capable of moving this ever-expanding cargo. “If you increase the amount of oil being shipped by rail by 2,000 per cent, you increase the risk of something bad happening,” says Keith Stewart, a climate and energy campaign coordinator at Greenpeace who follows oil-by-rail developments closely.

Increasingly, Stewart says, trains are carrying crude only, rather than interspersing cars with less hazardous cargo. That increases the efficiency of moving oil for the rail companies, and reduces their costs. But it increases the risk of a domino of explosions in the event of a derailment – just like the accident in Lac-Mégantic. Regardless, he says, there hasn’t been “a lot of political pressure” in Canada on either the railways or the oil companies to change how crude moves on rail.

There hadn’t been much regulatory pressure, either, until Transport Canada proposed new rules for DOT-111s in January. Before that, the agency appeared to be asleep at the switch, despite the fact that the Transportation Safety Board of Canada (TSB) first questioned the DOT-111s suitability for shipping crude and other hazardous materials in the mid-1990s, after the investigation of a derailment near Westree, Ontario. Like the findings in earlier accident reports issued by the corresponding U.S. agency, the safety board “determined that this classification of tank car has a high incidence of tank integrity failure when involved in accidents and that certain hazardous materials are transported in these tank cars even though better protected cars (less liable to release the transported product when involved in accidents) are available.” Twenty years later, the DOT-111 still makes up 80 per cent of the tank car fleet in Canada, and 69 per cent in the U.S. In a further rebuke of Transport Canada, federal Auditor General Michael Ferguson cited “significant weaknesses” in the agency’s oversight of rail safety in a report last November. Ferguson said the agency only completed about 26 per cent of federal railway audits in the three prior years, and that its 101 inspectors are poorly trained to begin with.

So on January 10th, after rail associations and even people like CP Rail CEO Hunter Harrison – well known in the industry for making cuts in the name of efficiency and profit – called for changes, the TSB recommended regulations for the retrofitting or replacing of DOT-111 tanker cars (known as the CTA-111A in Canada) with new models that meet higher standards of crash-worthiness. Transport Minister Lisa Raitt said her officials were reviewing the recommendations, which generally follow standards set by American authorities.

The new regulations seek several changes, though no specific timelines have been set north or south of the border. Most older DOT-111s, which are non-pressurized cars (pressurized cars, which go by other DOT numbers, are thicker and have more safety features) have steel shells 11.1 millimetres thick. Retrofitted cars must have thicker, more puncture-resistant shells at least 18 millimetres thick. They must also have crumple zones at either end, and protective shields – steel plates 12.7 millimetres thick at the fore and aft ends of each tanker to prevent them from banging into each other in the event of a derailment. In Canada alone it could cost $1 billion to retrofit the DOT-111s.

New cars will need all of the above, plus an outer steel jacket or thermal jacket around the tanker and high-flow capacity pressure relief valves that would release liquids as pressure builds due to temperature increases, should a fire break out around tanker cars.

Aside from Raitt’s January announcement for tougher tanker car standards, the federal government had issued some minor rules concerning rail safety. In December, after years of resistance, Transport Canada announced it would require that all crude be labelled as a highly flammable dangerous good by mid-2014. As well, railways carrying crude must have specialized response teams available along a route in case of an accident.

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December 30, 2013 • Casselton, North Dakota • Toxic fumes trap 300 residents indoors

But, as Greenpeace’s Stewart points out, all the new regulation has done is prompted the railways and tanker leasing outfits – to avoid the time and bother of sorting out the proper labelling of different oils – to label them all as the most dangerous Class 1 and Packing Group 1 products the railways transport. It makes no difference how they will be shipped. The crude, regardless of type, will still move in DOT-111s, as the federal government waits on the outcome of the TSB investigation into Lac-Mégantic and pending U.S. regulations regarding tankers before making a move. All the while, the crude continues to roll onto – and, in some cases, off of – Canada’s network of railways.

Even Greenpeace’s Stewart was surprised Harrison came out so strongly in favour of replacing or refitting the DOT-111s, though he remarked that Harrison must recognize the potentially bankrupting liability CP could face should one of its crude unit trains explode in a populated area.

“Once upon a time I wanted people to do the right thing for the right reasons,” Stewart says. “Now I just take it when I can get it.”

If the oil industry has hardly uttered a word on the subject of rail safety and the DOT-111s, Karen Darch certainly has. She’s mayor of Barrington, Illinois, a quiet, affluent village of 10,500 people 50 kilometres northwest of Chicago. She’s also a founding member of TRAC, a coalition of various small-town mayors and leaders in Illinois who have been at odds with CN Rail ever since it acquired U.S. rail company Elgin Joliet & Eastern Railway in 2008.

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The purchase, which came just before Hunter Harrison left CN, greatly intensified freight traffic through TRAC communities, which were originally concerned about noise and frequently blocked grade-crossings that inhibited vehicular traffic. But after a CN train hauling ethanol in DOT-111s derailed near Rockford, Illinois in 2009 causing an explosion that killed a woman, Darch and TRAC have been at the forefront of calls in the U.S. for tougher safety rules surrounding the transport of dangerous goods by train.

Testifying before regulatory authorities in Washington, D.C. about TRAC concerns over CN oil-by-rail traffic hauled through communities surrounding Chicago, Darch recalls “I likened the DOT-111 to the Ford Pinto scenario,” referring to the Pinto’s tendency to explode when rear-ended.

In 1977, Mother Jones magazine unearthed a cost-benefit analysis Ford had used to determine it was cheaper to pay off lawsuits resulting from deaths and injuries from a gas-tank design defect the company knew about than it would be to recall and repair Pintos. Simply put, it was cheaper to do nothing, deaths be damned.

Stewart sees a similarity with the rail industry. Before Lac-Mégantic, the Association of American Railroads (AAR) stated that retrofitting DOT-111s couldn’t be justified economically. The AAR contended that since the damage costs of U.S. derailments were only $64 million over the preceding five years, it made no sense to spend the $1.2 billion or so needed to retrofit the 78,000 DOT-111s in the U.S.

Since Lac-Mégantic, the AAR has changed its tune. It now recommends the U.S. government adopt new tanker car standards and DOT-111 retrofits. Those costs won’t be borne by the rail companies, though. Most of them, including CN and CP, don’t actually own the cars they haul. CN recently told the CBC it owns just 36 DOT-111s and leases another 175. The company says the owners of the DOT-111s, not the railways, should pay for any legislated upgrades.

Those owners tend to be rail leasing companies like American Railcar leasing, GATX or Procor Limited, a Canadian company with the largest tanker car fleet in Canada. And they, of course, will most certainly pass on the cost of better tanker cars to the chemical and oil companies that need them.

For its part, the rail industry is doing all it can to reassure people that shipping crude by train is safe. But the fact that CN and CP don’t have a history of being good neighbours in many of the communities they track through, even before tanker cars started coming off the rails, makes their facts and figures a difficult sell for some.

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January 7, 2014 • Plaster Rock, New Brunswick • 150 people forced from their homes

“Every time these accidents happen, they trot out the statistics and say on a per mile basis, the rail line we operate, here’s our accident rate, and they try to characterize it as minimal,” says John Kristensen. The retired 62-year-old biologist and former deputy minister for Alberta Tourism, Parks and Recreation, made it his mission, after losing a battle to prevent CN from building a 225-car tanker-car storage yard adjacent to his rural acreage near Edmonton, to advocate on behalf of people who are at odds with the rail industry.

“Every time these accidents happen, they trot out the statistics and say on a per mile basis, the rail line we operate, here’s our accident rate, and they try to characterize it as minimal.” – John Kristensen, former deputy minister for Alberta Tourism, Parks and Recreation

He started the website railroaded.ca in 2010, at the beginning of his own fight with the industry, and now uses it to blog about its shortcomings and the latest friction between communities and CN and CP. Post-Lac-Mégantic, Kristensen says, the railways and the federal government are merely paying “lip service” to Canadians when they say they are going improve safety when it comes to oil-by-rail.

Walking down the tracks that ran along his former acreage, he saw the maintenance CN did on that line; one that now sees many crude-filled tankers rolling along it. He’d often see spikes sticking out of loose, rotting ties, and areas where the gravel bed was slumping.

Canada’s rail infrastructure, Kristensen says, “was never made to handle this kind of weight and the kind of length of trains we’ve got, trains that are up to two miles long…. And our rail lines are laid along river valleys, beside stream beds and lake shorelines, the worst possible place for a potential spill.”

Kristensen says the Auditor General’s report proves Transport Canada has allowed the rail industry to get to the point where it’s left to monitor and regulate itself. “That’s a classic example of the fox guarding the henhouse.”

But, perhaps, after Lac-Mégantic, the fox is learning that, especially with explosive and demonstrably deadly crude aboard its trains, safety can no longer be measured strictly on a financial cost-benefit basis.

When Harrison was CEO at CN, he earned fame – and fear – as a ruthless cost-cutter who drove down the company’s operating ratio (a standard measure of efficiency in the rail business) and drove up its profitability. But some, like Karen Darch, thought he did it at the expense of safety. She had met him during her lobbying against his industry and thought he was a man who didn’t care about the concerns of her community.

Today, Harrison is the CEO of rival CP. But that’s not the only change – at least, not from Darch’s perspective. “He has an uncanny sense of railroading,” Darch says. “It’s sometimes been difficult to be on the receiving end of his business acumen when it meant increased freight through my town.” But, Darch says, after Lac-Mégantic, Harrison has become “a little bit more aware of community concerns.”

“I’d like to think his understanding of the DOT-111 concerns is partly because he’s a good railroader, but also because he has an increased awareness of the need to have the balance between the community and the railroad.” She’ll have to hope that’s the case, too. With pipelines unable to handle North America’s growing production of crude for the foreseeable future, it may be nascent awareness on the part of CEOs like Harrison that will keep oil-by-rail on the tracks. Indeed, it may be the only thing that can.

The Economics of Oil

Given the choice, energy companies would still be moving their product to market by pipeline. After all, it generally costs about $12 to $15 more to ship a barrel of oil by rail than by pipe (although that can be partially mitigated by using so-called “dedicated” trains, which bring down the spread by $3 to $4). But rail, according to CAPP vice-president David Pryce, “can be more flexible and timely, particularly into new markets or from new fields that may have rail capacity but no pipelines as of yet. When Canadian prices are discounted from world oil prices, that discount can be significant enough for rail to be economic.”

Depending on how the discount plays out, it could be a crucial factor for the railways when it comes to retaining the oil industry as a customer. When WCS is priced significantly cheaper than West Texas Intermediate (WTI) or the imported Brent-priced oil American refineries often use, then, even with added rail shipping costs, the domestic oil becomes a bargain. In the winter of 2012-2013, the WCS-WTI spread was over US$40 per barrel. In January, the discount had decreased to $20.58, a spread that still makes our oil attractive to U.S. refineries.

But, last November, FirstEnergy Capital predicted the discount would shrink even further in 2014 to below $20 – ironically, because more transportation options, namely rail, have become available to producers. If the spread narrows much more, it could do more to curtail oil by rail than could any new rail regulations in Canada or the U.S.

Click here for a timeline of incidents involving oil-by-rail in North America

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