More oil was delivered by rail in the United States during the first four months of the year than in any other period in history, according to the Association of American Railroads (AAR). With U.S. oil production increasing, rail may be in for a rough summer ride because of ongoing safety concerns.
The AAR said 110,164 carloads of crude oil traveled the U.S. rail network during the first quarter of 2014. While that’s only 1.6 percent of the total U.S. rail traffic, the first quarter volume was the highest ever for a single quarter by 1,559 carloads.
An accelerating rate of U.S. oil production means the existing network of pipelines in the country can't handle the output and industry officials have said rail is picking up the slack in response.
A potential consequence, however, may be more accidents.
Rail safety officials in Virginia recently announced that on April 29, an inspection by CSX Corp. found a defect on rail lines running through the middle of Lynchburg, Va., a city of 77,000.
One day later, on April 30, 17 CSX rail cars carrying crude oil from North Dakota derailed. Though no major injuries were reported, three cars fell into the James River, spilling 50,000 gallons of crude oil and causing a huge fire.
It was just the latest in a series of incidents involving rail accidents that have been linked to the North American oil boom. In July, 2013, 47 people were killed in a much worse derailment in Lac-Megantic, Quebec.
U.S. lawmakers have taken notice. Last week, a $54.4 billion spending bill passed the U.S. Senate that includes measures to improve safety standards for the transit of crude oil by rail.
In January, safety regulators said crude oil from the Bakken reserve area in North Dakota, in particular, may be more flammable than other grades. The Senate measure says there is "indisputable evidence" that rail cars designated DOT-111 are not safe enough to transport the oil.
"Rail safety begins with the rails, which means we need more inspectors, more inspections and more technology to monitor rail conditions and train movement," North Dakota's Sen. John Hoeven, a Republican member of the U.S. Senate Appropriations Committee, said in a statement.
U.S. safety regulators have called on the rail industry to address tank car design issues and the appropriations bill gives them until this October to finalize their regulations.
So what happens between now and October?
Baker Hughes, one of the largest oilfield services companies in the world, said nearly 97 percent of the 1,859 rigs actively exploring for or developing oil or natural gas in the United States last month are onshore. The total monthly average of active rigs for May was up 24 from April and up 92 year-on-year.
That pace suggests that, between now and October, U.S. oil production will increase without enough pipelines to handle the growth.
The U.S. regulatory landscape remains in limbo between now and then. While the rail industry says it’s mindful of safety concerns, accidents can, do and, more likely, will happen.
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The Energy Information Administration said average U.S. crude oil production reached 8.3 million barrels per day in April, the last full month for which data are available. That's the highest monthly average in more than 25 years and the pace is set to continue.
By the end of the year, U.S. crude oil production should average 8.5 million bpd. With U.S. regulators examining their options for the safe transit of crude oil, the midstream energy sector, at least as far as rail is concerned, could face a tense summer because of regulatory uncertainty.
By Daniel J. Graeber of Oilprice.com