Does Keystone XL Have a Place in the Oil-by-Rail Safety Debate?

ANALYSIS: The realities of the oil market make it clear that even if the Keystone and similar pipelines were operating, they would not be supplanting rail.

A member of the National Transporation and Safety Board assesses the damaged rail cars at the scene of the oil train accident in Casselton, North Dakota on Jan. 1, 2014. Credit: handout photo by NTSB

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A rash of explosive accidents involving oil-bearing trains has led to a surprising number of headlines and high-profile comments directly linking the fiery derailments to the fate of the long-stalled Keystone XL oil pipeline, the controversial project that would carry heavy bitumen from Canada’s oil sands to Texas refineries.

“North Dakota train fire adds fuel to Keystone XL debate,” said a Bloomberg News headline. The Los Angeles Times published “Canada rail crash stirs debate over Keystone XL pipeline delay.” And a year-end Fox Business segment asked, “Recent train derailments renewing push for Keystone Pipeline?”

Proponents of the pipeline project have been even more explicit in using the rail accidents to drum up support for the more than $5.4 billion northern segment of the Keystone XL, which the Obama administration has delayed for years over environmental concerns.

Diana Furchtgott-Roth, a Keystone backer and a Manhattan Institute senior fellow, wrote an opinion piece published by Canada’s Globe and Mail just days after a runaway crude train killed 47 people in Quebec. “After Saturday’s tragedy in Lac-Megantic, Que., it is time to speed up the approval of new pipeline construction in North America,” she wrote. After reciting pipeline and rail safety statistics, she noted that the Quebec disaster “brings home to all of us that in evaluating whether to build more pipelines, human safety should be a paramount consideration.”

Few would dispute that it’s appropriate—even urgent—to find out what caused the recent oil train disasters and enact safety measures to prevent them. Since the tragedy in Quebec last July, accidents in the United States  involving oil-carrying trains have triggered explosions in Alabama and North Dakota. But for many, it seems a stretch to use the issue to promote oil pipelines, and the Keystone XL in particular, as being safer and therefore a cure for oil-by-rail safety concerns.

“That’s a political idea that’s not particularly well supported by the facts,” said Peter Goelz, a former managing director at the National Transportation Safety Board, the federal agency that investigates plane crashes as well as accidents involving rail, highway, marine and pipeline transit.  He questioned the safety comparisons being cited and said Keystone XL backers have “tried to turn it into a zero-sum game, where they advance Keystone at the expense of railroads.”

In fact, the realities of today’s fast-changing oil market make it clear that even if the Keystone XL and similarly stalled Canadian pipelines had already been operating, they would not have supplanted the rapid rise in oil-by-rail. Today, more than 70 percent of the North Dakota region’s surging oil production leaves the area by rail, according to the North Dakota Pipeline Authority.

What’s more, the existence of the Keystone XL would not have prevented the recent rail accidents because it would not have been carrying the type of U.S. crude that spilled and erupted in flames.  

How can we know all that?

First, it’s the wrong oil. The Keystone XL and comparable pipelines under review in Canada would be almost entirely filled with less-volatile, diluted bitumen from landlocked Alberta on its way to the refining hub and export terminals of Houston, or to export facilities on Canada’s east and west coasts. They would carry very little, if any, of the light crude oil that is now riding the rails, such as that being drawn out of the Bakken in North Dakota. That lighter oil is chemically more combustible than heavy grades of crude, and regulators suspect that the specific make up of the Bakken variety may have boosted the risk of fire.

Second, most Bakken producers want rail. The producers of light, sweet Bakken oil are largely focused on shipping to the east and west coasts, where light crude usually sells at higher prices—and where only oil rail goes. Virtually all of the existing U.S. crude oil pipelines—as well as those on the drawing board such as Keystone XL—run north and south through the nation’s midsection, reaching markets that usually aren’t as lucrative for Bakken producers.

For instance, the delivery point for the Canadian heavy crude that would be carried by the Keystone XL is the Gulf Coast, where refineries are flooded with all the light crude they can handle, much of it from Texas’ Permian Basin and Eagle Ford formation. And so, even though a small portion of the Keystone XL’s capacity was reserved to carry light crude from the Bakken to the Texas Gulf Coast, that’s unlikely to be a popular option now.

Third, U.S. east-west pipelines are too financially risky. East-west pipelines were never built because East Coast refineries were historically supplied by ocean tankers, and West Coast refineries drew from California oil fields and tankers loaded with Alaskan and foreign crude. There are still no plans to build those pipelines.

For starters, pipeline companies require long-term contracts that lock shippers into paying for capacity on a pipeline that delivers oil to a specific location—for a decade or more. Even though pipeline transit is cheaper than rail, it’s risky to make a 10-year commitment when oil prices are fluctuating so much and so quickly that the most profitable light crude market could be Philadelphia one month and Anacortes, Wash. the next.

“It’s a very dynamic marketplace,” said David Hackett, president of the industry consulting firm Stillwater & Associates. “What the industry is finding is that railroads give them some flexibility that they don’t have with pipelines.”

In recent years, two companies tested the appetite for large light crude pipelines, but both failed to generate enough interest to make the projects profitable. Kinder Morgan proposed the Freedom Pipeline, which would have carried Texas light crude from West Texas to refiners in Southern California. Last May, the company canceled the $2 billion project because it couldn’t attract enough customers.

A $1.8 billion pipeline proposal from Oneok Partners called the Bakken Crude Express suffered a similar fate. The pipeline would have carried 200,000 barrels per day of light crude over 1,300 miles, from North Dakota to the Cushing, Okla. oil trading and storage hub. Oneok dropped the proposal in late 2012, saying it couldn’t land enough long-term deals to cover the cost.

For all those reasons, Bakken oil producers have been the driving force behind the rapid rise in oil-by-rail. Thanks mostly to them, oil transportation by railcar in the United States jumped from less than 50,000 barrels per day in 2010 to an estimated 800,000 barrels per day in 2013, according to an infrastructure study commissioned by the American Petroleum Institute, an industry advocacy group.

“It’s a bit disingenuous for the Keystone XL proponents to argue that the crude-by-rail boom and the safety risks associated with it are due to the Keystone XL fight,” said Anthony Swift, an attorney at the Natural Resources Defense Council, a group staunchly opposed to the pipeline project. For Bakken producers in particular, he added, “rail has become an alternative to pipelines rather than an emergency measure while they wait for pipelines.”