HOUSTON (Reuters) - As oil prices recover and U.S. shale production picks up, energy companies that had planned to ship crude on the Dakota Access Pipeline will turn to rail, a transport method that poses its own risks to the environment and local communities.
Sunday’s decision by U.S. Army Corps of Engineers to deny Energy Transfer Partners an easement to complete the line means shippers who expected to see another 570,000 barrels of daily Bakken pipeline capacity in 2017 will have to find new ways to move supply.
Rail comprises nearly 65 percent of total crude export capacity in the Bakken, but is currently underutilized because it is more costly and less efficient. In September, only 29 percent of total Bakken oil production moved by rail, according to the latest figures from the North Dakota Pipeline Authority.
“Once the pipes are full, that means more trains. And without DAPL, the pipes get full sooner than they otherwise would have,” said Rick Smead, managing director of advisory services for RBN Energy, noting that this scenario is contingent on a big rise in production.
A rise in incidents during the shale boom, and high-profile accidents, such as the explosion in 2013 that killed 47 people in Lac-Megantic, Quebec, has drawn increased scrutiny to the rail industry, prompting the U.S. government to enact more stringent regulations for rail movements.
Overall, oil spills more frequently with pipelines than rail cars, according to data from the Pipeline and Hazardous Materials Administration (PHMSA). For example, in 2015, there were 252 pipeline spills reported to PHMSA involving crude oil, versus 44 for the rail industry. The year prior, the frequency of spills at pipes was about 62 percent greater than rail, the data shows.
The 1,172 mile (1,885 km) Dakota Access Pipeline is slated to run from western North Dakota to Illinois, and has been the subject of protests for months from Native American and environmental activists concerned about leaks and contamination of water supply.
Incidents involving crude-by-rail peaked in 2014, at nearly 144, versus just one accident in 2006, the data shows.
The rise in accidents followed a surge in volumes moving by rail each day, which hit a high of 29.2 million barrels per month in October 2014. As of September 2016, that had declined to about 10.5 million barrels monthly, according to data from the EIA, as new pipelines displaced rail and production has declined.
With lower volumes, train accidents involving crude are down significantly, with only nine reported this year, according to PHMSA data.
But that could change.
“There are increased chances of accidents, leaks and greenhouse gas incidents when transporting by rail,” said Afolabi Ogunnaike, a senior analyst at consultancy Wood Mackenzie.
Bakken oil production is expected at 918,000 barrels per day in December - about 70,000 bpd above current pipeline capacity, according to the U.S. Energy Information Administration. A recent deal by OPEC to cut production and stabilize prices could boost drilling activity.
“The Bakken is a tremendous resource. It’s going to grow significantly ... There is a need for additional pipeline capacity in years to come,” said Ogunnaike.
In North Dakota, there have been no accidents involving crude rail cars this year, versus six in 2015 and five in 2014, according to PHMSA data.
Four spills since 2012 have occurred in Mandan, North Dakota, a city about 40 miles (64 km) north of the proposed route of the Dakota Access pipeline that has been the site of protests.
Reporting by Liz Hampton; Editing by Alan Crosby
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