Is Shipping Oil by Rail a Good Idea?

By Noel T. Braymer

In the last 6 months of 2013 there were 4 explosive accidents with fires in the US and Canada of unit oil trains carrying unconventional oil made from shale or tar sands. The latest accident in North Dakota on December 30th involved an 104 car train of oil tanker cars. While in this case no one was killed, the nearby town of Casselton was evacuated because of toxic smoke. The heat from the fire was so intense that after almost half of the train was pulled away the fire was left to burn itself out.

This brings up the issue of what happens if a similar accident were to happen in a populated area? This happened back in July 6th of 2013 at the Quebec town of Lac-Megantic. The resulting explosion and fire left 47 dead and over 30 buildings destroyed. The oil carried by the 74 car train came originally from North Dakota . Investigation of shale oil from North Dakota finds that it is lighter and more flammable than conventional crude oil as well as more corrosive and volatile.

Besides the recent fires in North Dakota and Quebec, in October of 2013 there was a Liquid Petroleum/ Tar Sand crude oil spill and fire in Alberta, Canada. Alberta is the location of Tar Sand mining and refining and is not a conventional crude oil. In November of 2013 there was also a derailment and fire in Alabama of a train carrying shale oil from North Dakota.

There is a boom of drilling of unconventional oil in Alberta, North Dakota and Texas. With this there is a dramatic increase in rail transport of these unconventional oils to refineries from both Canada and the upper Mid-West . This has affected service for other users of rail service. The Empire Builder passenger train which runs from Chicago to the Pacific Northwest through North Dakota has seen an increase of ridership from workers headed to the oil fields of North Dakota. But also in large part because of increased oil train traffic the on-time performance of the Empire Builder in recent months has gone to near zero. During December of 2013 several Empire Builder trains were cancelled because traffic congestion on its route. This was before the fire at the end of December which created further delays for the Empire Builder.

The development of unconventional oils has generated a great deal of excitement in the oil industry as a way to guarantee future supplies of oil. The history of booms such as we see now with unconventional oils is sooner usually than later they go bust. The problem the oil industry has is conventional oil production peaked in 2005. Since then despite the industry’s best efforts production continues to decline. There are still plenty of oil reserves out there. But the cost of pumping oil in old fields increases as they are depleted. As this happens it becomes uneconomical to continue pumping old wells so they are abandoned.

The reason there is so much interest in unconventional oil now is the price of oil is high enough to make it viable to refine such oils which cost much more to produce than conventional oil.This includes shipping it by rail which is more expensive than using pipelines which now often don’t exist at the sites of these new wells . There has been a dramatic increase in drilling of “fracking” oil and gas wells in shale deposits in this country. Despite all of this activity almost all of the shale oil produced in this country comes from a few “sweet spots” in North Dakota and Texas. This has increased oil production in this country. Assumed reserves of shale oil for the nation is 24 billion barrels of oil. At the current annual rate of consumption of 7 billion barrels, this reserve will only provide a little over 3 years of American consumption.

But that assumes that it will be viable to drill for all 24 billion barrels. The problem with shale oil is the wells dry up very quickly. Just to sustain production in North Dakota and Texas requires constant drilling of new wells to make up declining production in older wells. North Dakota and Texas each are assumed to have around 3.5 billion barrel of shale oil reserves. The largest potential shale oil reserve is in California with over 15 billion barrels. The problem with this is California’s shale oil is not as easy to drill and produce as in North Dakota and Texas. Since what is economical to produce is less than assumed oil reserves it is unlikely that shale oil production will be able to keep up with current conventional oil depletion.

The problem the oil industry has is producing oil will continue to become more expensive. Alternative energy costs on the other hand continues to decline. While oil still has a cost advantage it is slipping and soon alternative energy and greater efficiency will take away the dominance and high profits of the oil industry. This situation could be compared to what has happened in the photo industry in the last 20 years.  Now it is almost impossible to buy film with most photos taken with digital cameras.

Despite all the hype about the current boom in oil production, the long term reality is not so rosy. The problems with booms are they go bust. Because of the excitement of the boom , otherwise level headed people get carried away thinking the good time won’t end soon. One thing all businesses are worried about are legal liabilities. The explosive and volatile nature of shale oil in particular makes it a very dangerous product to ship. These accidents and fires are very expensive to the railroads as well to the clients using the railroads when accidents and fires disrupt service. There is also the potential for massive legal costs. In the case of the Lac-Mégantic derailment , explosion and fire destroyed a area roughly a half mile in radius. The result of this are major lawsuits. This has caused the railroad, the Montreal, Maine and Atlantic Canada Company to file for bankruptcy and its assets are scheduled to be auctioned in January 2014

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