U.S. Raises Safety Bar For Crude Oil Transported By Rail

Competition between rail and truck for crude oil shipments may soon be heating up with the issuance of costlier new railroad reporting requirements.

A final rule issued on February 14 by the Pipeline and Hazardous Materials Safety Administration (PHMSA), an agency of the U.S. Department of Transportation, requires that railroads develop oil spill response plans for routes travelled by trains carrying crude oil in a block of 20 or more loaded tank cars, or those with a total of 35 loaded tank cars spread throughout the train.

Railroads will also be required to establish geographic response zones along various rail routes to ensure there are people and equipment staged and prepared to respond to an oil spill within 12 hours. In addition, railroads affected by the new standards will have to share certain railcar and cargo information with state safety agencies.

The rule goes into effect 180 days after it's published in the Federal Register.

PHMSA has estimated the administrative costs of the new requirements at $3 to $4 million per year for industry, which includes the seven major Class 1 railroads.

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"Railroads will be required to internalize the costs of these new requirements and will presumably seek to pass them on to their customers in the form of increased rates, more carrier-friendly indemnity provisions, or both," Scott Janoe, chairman of law firm Baker Botts' environmental group, told FreightWaves.

Railroads have long maintained they're much safer than trucks for moving crude oil and other hazardous materials. "In fact, railroads have approximately 10 percent of the hazmat accidents trucks have despite roughly equal hazmat ton-mileage," according to the Association of American Railroads. The group noted that fewer than 1 percent of all derailments in 2017 involved cars transporting crude oil, and the rail hazmat accident rate has dropped by 41 percent since 2008.

But despite more than 99.99 percent of all such cargo reaching destination without an accident causing a release, several high-profile rail accidents involving crude oil spills within the last five years caught the public's attention, prompting the increased regulatory oversight.

Costs associated with that oversight could change the market dynamics of railroads' over-the-road rivals after making huge gains into the crude market over the past decade as a result of the shale revolution.

Since 2012, domestic railroad carloads of crude oil destined for U.S. refineries climbed from 35 million to 133 million barrels per year in 2014, dropping down to 77 million barrels in 2017, according to data from the U.S. Energy Information Administration (EIA).

Of the total domestic barrels moving to U.S. refineries by rail and truck, the railroads' percentage increased from 18.7 percent in 2012 to 46.7 percent in 2014, and then decreasing to 41 percent in 2017, according to EIA.

Having a competitive edge in the rail-truck market for crude oil could come in handy in the Texas Permian Basin, where pipeline capacity is having difficulty keeping up with demand - creating opportunities for both railroads and trucks.

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