US oil boom fuels rail industry resurgence

An increase in US crude oil production has strained the nation's existing pipeline capacity. The rail industry is picking up the slack but oil train accidents have raised questions about how to safely transport oil.

Despite mounting concerns about safety, and developments in the midstream sector, John Gray, a senior vice president of the Association of American Railroads, said crude oil is now a key commodity group for the rail industry.

AAR said less than half of the 20 commodity groups carried on the U.S. rail network saw increases in delivery volumes last month when compared with February 2013. Outside of coal and grain, carloads for most commodity groups were lower by some 5,100 carloads.

The U.S. Energy Information Administration said last month the brutal winter season was affecting everything from refinery performance to pipeline deliveries. Gray said "it would be nice" to blame the decline in rail delivery on the weather, but that would be misplaced. (Related Article: Oil Train Derailments Reaching Crisis Point) 

"In the meantime, crude oil has become a significant part of the railroad business," he said.

From Jan. 1 to March 1, AAR said 127,534 carloads of petroleum and petroleum products, or about 89 million barrels, were carried on the U.S rail network, a 6.5 percent increase from the same time last year.

The increase in U.S. crude oil production has put a strain on existing pipeline capacity. Transit bottlenecks could be alleviated with the reversal of Enbridge Inc.'s Line 9 through Michigan to Canada and, assuming its approved, TransCanada's Keystone XL pipeline. In the interim, however, rail is becoming an important cog in the energy transport wheel.

The Transportation Safety Board of Canada, along with the U.S. Pipeline and Hazardous Materials Safety Administration, both found the risks of transporting some types of oil by rail were not documented accurately, however. Last week, the U.S. Senate Committee on Commerce, Science and Transportation vetted concerns about rail safety given the increase in crude oil delivery.

"While rail safety is improving, high-profile train accidents … underscore how important it is to be ever-vigilant in protecting local communities and the environment," PHMSA Administrator Cynthia Quarterman testified.

The U.S. Department of Transportation in February slapped Hess Corp., Marathon Oil Corp. and Whiting Petroleum Corp. each with $93,000 fines for not following the rules on oil classification for rail and in early January, PHMSA said some types of crude oil may present unique risks to rail transport. (Related Article: Keystone Decision in Two Months?)

AAR said the railroad industry, meanwhile, has "led the charge" for the safe transport of crude oil.

"Railroads know how important it is to move crude oil safely, and they are committed to continually searching for ways to make this happen," AAR's Gray said.

Sen. John Thune, R-S.D., ranking member of the Senate committee, said he was encouraged by the industry's commitment to safety, but stressed more time was needed to get the right regulatory policies in place. In the meantime, as the U.S. oil boom continues, rail has established itself as a fundamental part of the U.S. midstream conversation.