Derailment highlights risks from oil-by-rail boom: Campbell

NEW YORK Thu Mar 28, 2013 10:33am EDT

A demonstrator holds up a sign during a march past the White House to protest against the Keystone XL pipeline in Washington, February 17, 2013. REUTERS/Richard Clement

A demonstrator holds up a sign during a march past the White House to protest against the Keystone XL pipeline in Washington, February 17, 2013.

Credit: Reuters/Richard Clement

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NEW YORK (Reuters) - The derailment of a Canadian Pacific Railroad train transporting crude oil in Minnesota this week underscores the policy risks inherent in delaying the Keystone XL pipeline amid unfettered growth in rail shipments of oil.

Although the incident has resulted in only a small spill in a rural area, accidents involving crude oil being shipped by trains are inevitable, and, according to safety data, likely to be more frequent than spills from pipelines.

This is the key point. Any method of moving oil from point A to point B involves risks and accidents are inevitable. A coherent approach to resource development would rationally weigh these risks and seek an optimal balance of risk, cost and benefit.

This has not been the approach chosen. Rather, a haphazard process that has seen largely unregulated oil movements by train spring up from nothing while a minority of pipeline projects are subjected to a regulatory process of immense complexity and thoroughness.

As a result the Keystone XL pipeline has been in regulatory limbo for years while existing pipelines, including major conduits for oil sands crude, have sailed through much lighter-touch reviews of their own expansion plans.

Meanwhile rail shipments, many of which must pass through built up areas, have received even less scrutiny. Despite the industry's safety record there will be more accidents and more oil spilled from trains.

The upshot is that the North American oil industry faces the possibility that a sudden backlash against moving oil by rail snarls the logistics of the continental energy system.

POLICY VACUUM

Certainly this is not to say oil movements by rail should be halted or even reduced. While the accident rate when compared with pipelines is higher, it is hardly the case that oil tank cars are flying off the rails with an alarming frequency.

But what the Keystone XL saga has underscored is that high profile projects or incidents attract a disproportionate amount of scrutiny.

It is not hard to imagine the chaos that might ensue if a crude oil unit train was to derail in the metropolitan Chicago area, a key bottleneck for many shipments from North Dakota.

And given that rail movements out of Cushing, Oklahoma are having a direct impact on the price of West Texas Intermediate crude oil, close scrutiny of oil movements on trains could well have a significant impact on global oil prices.

Although volumes of crude moving out of Oklahoma are unclear, estimates peg shipments at anywhere from 50,000 to 100,000 barrels per day. Some of this oil is coming from shale fields in Western Oklahoma. But a large chunk of this figure represents unit trains at Stroud, Oklahoma being filled with crude taken directly from the tank farms at Cushing.

A more coherent approach to the challenges of remaking the North American oil logistics system would be a major improvement on the current situation and would ease a risk for traders.

On balance it is a good thing that oil movements by rail are on the rise.

By allowing more rapid development of frontier crude oil deposits, North America as a whole is probably a considerable beneficiary through jobs and a faster increase in domestic energy output.

But rail shipments are also more risky, more expensive and more energy intensive. It is hard to square these facts with the stated desire of most people for cheaper, cleaner energy.

Public policy that aims for cheaper and cleaner energy must ultimately come down in support of pipelines and their expansion.

(Robert Campbell is a Reuters market analyst. The views expressed are his own)

(Editing by Kenneth Barry)

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