Paul Blackburn 612-599-5568 paul@paulblackburn

Paul Blackburn612-599-5568

[email protected]

Pipeline Versus RailThe False Choice

The Industry and Media Frame Oil Transportation as a Societal

Choice Between Pipelines or Rail

THIS IS A FALSE FRAMING

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OUTLINE

• The North American crude oil transportation market: supply and demand

• Existing transportation options: pipeline, rail, barge/ship

• Transportation choices• Transportation safety• The correct frame: make transportation as safe

as possible and conserve oil to reduce the need to transport it

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THE RAIL VERSUS PIPELINE FRAMING

• Crude oil is moving by rail because there is insufficient pipeline capacity

• Pipeline transportation is cheaper, therefore if more pipelines are built shippers will switch to pipelines and railroads will become less congested

• Pipelines are safer than railroads• Therefore, citizens should support pipelines

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RAIL SHIPMENT NUMBERS

• About 939,000 bpd of crude oil is being hauled each day on railroads throughout the US

• Railroad congestion is localized as oil transportation makes up only about 3.5% of railroad shipments

• In 2013, railroads carried about 395,000 more tank cars of crude than in 2005, but about 1.3 million fewer cars of coal

• BNSF estimates that the amount of farm commodities it shipped from North Dakota increased 50 percent from 2009 to 2013

• The rail congestion problem is limited to particular bottlenecks in the northern plains caused by increased grain and oil shipments

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CRUDE OIL SOURCES

• This presentation focuses on sources of oil involved in the rail versus pipeline debate

• At issue is landlocked crude oil remote from refining centers

• For practical purposes, the source of conflict relates to transportation of crude oil from the US Williston Basin and Canadian Tar Sands

• Williston oil is mostly light sweet crude oil• Tar Sands oil is either diluted or undiluted heavy

sour bitumen or medium sweet syncrude6

US LIQUID FUELS SUPPLY (MBPD)

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USEIA AEO2014 Early Release Rollout Presentation December 16, 2013

PRIMARY SOURCES OF NEW CRUDE OIL IN MARKET

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WILLISTON BASINCRUDE OIL FORECAST

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North Dakota Pipeline Authority July 8, 2014

WILLISTON BASIN TYPICAL WELL PRODUCTION DECLINE

10North Dakota Industrial Commission

NORTHERN GREAT PLAINS CRUDE OIL PRODUCTION TYPE

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USEIA US Crude Oil Production Forecast-Analysis of Crude TypesMay 29, 2014

ESTIMATED WILLISTON BASIN OIL TRANSPORT BY MODE

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North Dakota Pipeline Authority July 8, 2014

CANADIAN RAILROAD EXPORTS

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Source: National Energy Board of Canada

DESTINATION OF CANADIAN 2013 CRUDE OIL EXPORTS

14Source: National Energy Board of Canada

CRUDE OIL SUPPLY SUMMARY

• Bakken oil is mostly light sweet crude• Bakken oil production is expected to start declining in the

mid-2020s• Existing combined rail and pipeline export capacity from

North Dakota far exceeds forecast maximum production• In 2013, Williston shippers decreased use of pipelines in

favor of railroads• Canadian rail exports have been modest at about 160,000

bpd• 44% of Canadian exports by rail went to the East Coast,

45% to the Gulf Coast 15

CRUDE OIL DEMAND AND MARKETS

• US domestic demand for crude oil is about 9% below historical highs and is unlikely to increase substantially

• Increased domestic production reduces imports or is used to make petroleum products for export

• Refineries are designed to process different types of crude oils

• Refineries in the Midwest and Gulf Coast generally refine medium-heavy sour crudes; on the East and West Coast they process large amounts of light sweet crude oil

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FORECAST US PETROLEUM USE

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US PETROLEUM USE DOWN ~9%

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Source: US EIA

MARKETS DEMAND DIFFERENT TYPES OF CRUDE OIL

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COASTAL REFINERIES RECEIVE ALMOST ALL OVERSEAS IMPORTS

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EIA REFINER ACQUISITION COST

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North Dakota Pipeline Authority July 8, 2014

DEMAND AND MARKET SUMMARY

• US demand for petroleum fuel has dropped and is not forecast to increase substantially

• The East Coast is the primary market in the US for domestic light sweet crude oil

• The Midwest receives almost no overseas imports and refines mostly heavy to medium sour crude oils

• The Gulf Coast imports little overseas light sweet crude oil and instead processes overseas medium and heavy sour crude oil and local domestic oil (off-shore, fracked, and conventional)

• The West Coast imports some light sweet crude oil but primarily refines a mix of sour crude oils

• East and West Coast refiners pay higher prices22

TRANSPORTATION OPTIONS

• Existing and planned pipelines• Existing and planned railroad infrastructure• Williston Basin and western Canadian

transportation options

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EXISTING PIPELINES

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NO PIPELINES FROM ND TO WEST COAST

NO PIPELINES FROM ND TO EAST COAST

CRUDE OIL PIPELINES & PROPOSALS

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WILLISTON BASINTRANSPORTATION OPTIONS

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North Dakota Pipeline Authority July 8, 2014

US WILLISTON BASIN CRUDE OIL EXPORT OPTIONS OCTOBER 2014

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2014 Pipeline = 705,000 bpd; 2014 Rail = 1,260,000 bpd

North Dakota Pipeline Authority October 2014

US RAILROAD LINES

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RAIL CRUDE OIL OFFLOADING TERMINALS ON THE EAST COAST

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Operator/ Location Capacity x000 bpd In-Service

PBF Energy (refinery) Delaware City, DE

145Expandable to 210 Operating Q4 2014

Axeon Specialty Partners (refinery) Savannah, GA 9 1Q 2014

Axeon Specialty Partners (refinery)Paulsboro, NJ Unit train capable Operating 2014

Buckeye Partners, L.P.Perth Amboy, NJ 60-80 Q3 2014

Buckeye Partners, L.P.Albany, NY 135 Nov 2012

Global Partners Albany, NY 160 2011

Eddystone Rail Company Philadelphia, PA

80Expandable to 160 May 2014

Philadelphia Energy Solutions (refinery)Philadelphia, PA 140 Oct 2013

Plains All American Pipeline Yorktown, VA 60 Dec 2013

Total Potential Capacity 954,000+ bpd

RAIL CRUDE OIL OFFLOADING TERMINALS ON THE WEST COAST

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Company Capacity X00 bpd In-Service

WashingtonShell (refinery)Anacortes, WA 50 ?

Tesoro (refinery)Anacortes, WA 50 2012

BP (refinery)Cherry Point/Blaine, WA 60 Q3 2014

Phillips 66 (refinery)Ferndale, WA

small volumesExpandable to 30 Dec 2014

US Oil (refinery)Tacoma, WA ? 2012

US Development GroupGrays Harbour, WA 50 2016

WestwayGrays Harbour, WA 27 Q1 2015

Imperium Renewablesgrays Harbour, WA ? ?

Global Partners of MassachusettsPort Westward/Calskanie, WA

65expandable to 130 Q4 2012

Washington potential subtotal 332CaliforniaAlon USABakersfield, CA 150 Q4 2015

Plains All AmericanBakersfield, CA 65 Q1 2015

Valero (refinery)Benicia, CA 70 Q1 2015

Phillips 66 (refinery)Santa Maria, CA 41 Q1 2016

California potential subtotal 326TOTAL 658

PLANNED RAIL UPGRADES• BNSF is planning $5 billion in track upgrades, including a 60-mile

double-track stretch between Glasgow, MT, and Minot, ND, double track through MN, and multiple meet-pass sidings

• BNSF customers have invested more than $2 billion in rail cars and facilities

• As of April 2014, manufacturers had 50,000 crude oil tank cars on order; up to 10,000 can be built each year

• BNSF mis-forecast service demand and shippers are now paying the price

• By the end of 2014, BNSF plans to offer service from shale plays to more than 50 destinations that serve inland and coastal refineries and ports

• Other railroads are also planning upgrades31

TRANSPORTATION SUMMARY• It is not possible to ship crude oil by pipeline from the Williston

Basin to the US East and West Coast, as these markets are accessible only by rail and/or ship

• No pipelines are planned between the Williston Basin and the US East and West Coast

• Planned US pipeline expansions go primarily to Oklahoma and the Gulf Coast which have limited capacity for additional light sweet crude refining

• Planned Canadian pipeline expansions go to the coasts but would require shipping by tanker to US refineries and likely would not serve the Williston Basin

• The oil industry has made substantial investments in railroad transloading capacity on the East and West Coasts

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FACTORS FOR SHIPPER PREFERENCE FOR RAIL

• Williston Basin shippers have stated a preference for rail and support for pipeline projects is limited

• Rail offers greater flexibility both on the gathering and delivery side

• Rail has lower capital costs for shippers than pipelines• Substantial new railroad loading and unloading

infrastructure is planned• Pipelines require long-term shipping contracts prior to

construction; railroads do not • Relatively short well life and high production costs in the

Williston Basin means that long-term capital investments in pipelines may not be worth the risk

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RAIL VERSUS PIPELINE COSTS

• Rail costs $4 to $10 per barrel more, depending on the market, but refinery profitability depends on regional crude oil price and competing transportation costs

• Rail can transport undiluted bitumen and this reduces overall transportation costs substantially

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LIMITED SUPPORT FOR PIPELINES FROM SHIPPERS

• Pipeline projects cancelled due to lack of shipper interest include Dakota Express and Bakken Crude Express

• Of Enbridge’s 185 ND shippers, only 15 even asked for the Sandpiper Pipeline pro forma TSA

• Shipper protest at FERC:– “Virtually every governmental study shows that current pipeline and rail

facilities are more than sufficient for the foreseeable future to transport Bakken crude oil production . . . .”

– “The use of extensive rail transport clearly indicates that the market regards the availability, pricing and terms of service of rail transport as equally desirable as the pipeline service . . . .”

• “Crude oil take away capacity is expected to remain adequate as long as rail deliveries to coastal refineries keep growing.” Lynn Helms, Director ND Industrial Commission, 9/12/2014

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THE RAIL VERSUS PIPELINE FRAMING

• Crude oil is moving by rail because there is insufficient pipeline capacity – for important US markets rail is and likely will be the preferred or only option

• Pipeline transportation is cheaper – refinery profitability depends on a number of market factors, not just transportation cost

• If more pipelines are built shippers will switch to pipelines and railroads will become less congested – the relatively short life of Williston Basin wells may not justify

the risk of a long-term pipeline investments– the market has supported more rail than pipelines– the railroads are planning expansions to address congestion

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TRANSPORTATION OPTIONS CONCLUSION

• Planned pipeline projects are unlikely to substantially reduce railroad congestion because they do not serve the markets served by railroads

• Ultimately, market forces are driving shippers’ pipeline versus rail decisions and citizens have little control over this

• Rail transportation of crude oil is likely to continue

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RAIL VERSUS AND

PIPELINE SAFETY

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SAFETY DEPENDS ON METRIC

• Conventional wisdom is that pipelines are safer than railroads

• Both the rail and pipeline industries offer 99.99%+ safety numbers, but both have risks

• Rail worse than pipelines for human death and property destruction

• Rail better than pipelines for amount of oil spilled and impacts of spill on the natural environment

• Rail worse than pipelines for impact of CO2 released due to normal operations, but both promote carbon extraction

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BETTER FRAMING

The “which is safer” debate detracts from more important debates, including:1) how to make each as safe as possible, and 2) how to reduce crude oil demand and

therefore shipments

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UNDERLYING CHALLENGES COMMON TO BOTH RAIL AND PIPELINE SAFETY

Rail and pipeline safety improvements are both hampered by:

– A lack of public information leading to limited proactive citizen involvement and political will

– Insufficient inspection, enforcement, and regulatory reform power and funding

– Regulatory language and culture that allows almost complete industry self-regulation in many safety matters and results in reactive regulation and hostility to citizen participation

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RAILROAD SAFETY

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DERAILMENTS

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Location Date Oil Cars Derailed

Lac Mégantic, Quebec

July 52013 63

Gainford, Alberta

October 192013 4

Aliceville, Alabama

November 8 2013 30

Casselton, North Dakota

December 302013 20

Plaster Rock, New Brunswick

January 72014 5

Philadelphia, Pennsylvania

January 202014 7

Vandergrift, Pennsylvania

February 132014 19

Lynchburg, Virginia

April 302014 15

RAILROAD SAFETY NEEDS

• Tank car safety design• Track inspection and

maintenance• Increased regulation of short

line track• Crew size• Positive train control• Route selection• Spill response• Cargo information disclosure

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TANK CAR SAFETY DESIGN

• Improvements to DOT-111 rail cars (life 30-40 years)• ~92,000 tank cars are moving flammable liquids and ~78,000

require retrofitting• Use only cars designed for explosive liquids• Head shields, thermal shielding, thicker steel, improved

fittings and couplers, pressure relief valves• Critical issue is time required 45

TRACK INSPECTION AND MAINTENANCE

• Track problems cause the most derailments and result in the worst accidents

• FRA track inspection rules do not consider population density or sensitive areas

• Voluntary agreement requires 1 additional internal and 2 geometry inspections per year for track carrying >20 oil cars

• Installation of test equipment on locomotives would allow near-continuous monitoring

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IMPROVED REGULATION OF SHORT LINE TRACK

• Short line track used for crude oil trains should be maintained to the same standard as mainline track

• Lac Mégantic and Aliceville derailments were on short line track

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CREW SIZE

• Federal regulations do not specify how number of crew

• Although many trains carry two crew, the number should be standardized for crude oil trains

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POSITIVE TRAIN CONTROL

• Positive train control means the installation of equipment that automatically controls trains to override human error to prevent accidents

• Not expressly required for crude oil trains but is required on passenger routes and for trains carry toxic-by-inhalation materials

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ROUTE SELECTION

• Railroads required to assess route safety for some hazardous materials, but not crude oil

• Railroads have voluntarily agreed to assess route safety for crude oil trains

• State and local governments should review railroad judgments about route safety and require changes where needed, rather than leave this solely to railroads

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EMERGENCY AND SPILL CLEANUP RESPONSE

• Oil trains currently exempt from preparing and filing response plans that comply with Oil Pollution Act requirements, and instead prepare only “basic” plans

• Require that railroads prepare and that federal, state, and local governments approve response plans

• Fees for local first responder hiring, training and equipment

• Community notification

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CARGO INFORMATION DISCLOSURE

• Improve accuracy and first responder access to train manifests

• Allow community access to information about types of commodities passing through their communities to allow emergency planning

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PIPELINE SAFETY

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PIPELINE SAFETY NEEDS

• Increased inspection and enforcement• More knowledge about excavation damage• Increased use of automatic and remote-controlled

valves• Improved integrity management• Increased public information• Standardized leak detection requirements• Spill response capabilities for submerged oil• Regulation of gathering lines• Maintenance of cover

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INCREASED INSPECTION AND ENFORCEMENT

• PHMSA’s authority is limited mostly to paper and post hoc investigation

• When adjusted for inflation, fines are about the same as in the 1960s

• Limited number of actions taken byPHMSA

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EXCAVATION DAMAGE

• Lack of tracking and analysis of incidents• PHMSA has not yet completed report required by

2011 legislation

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AUTOMATIC AND REMOTE-CONTROLLED VALVES

• Issue has been debated for years• Not uniformly required• Oak Ridge study showed effectiveness• In 2010, PHMSA issued Advanced Notice of

Proposed Rulemaking for hazardous liquid pipelines and received comments, but no actions since then

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IMPROVED INTEGRITY MANAGEMENT

• Congress required report on integrity management in 2011

• NTSB recommended audit of PHMSA’s performance-based safety programs

• PHMSA issued an ANPRM• Nothing released to public

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INCREASED PUBLIC INFORMATION

• The public has no meaningful access to PHMSA regulatory materials and no meaningful opportunity to participate in any pipeline-specific PHMSA regulatory processes related either to pipeline safety or spill response

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STANDARDIZED LEAK DETECTION

• PHMSA has no minimum leak detection standards

• In 2010, PHMSA issued an ANPRM on leak detection but has not taken any public steps since then

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SUBMERGED OIL

• In 2011 Congress required a study of dilbit, which spilled and sank in the Kalamazoo River

• Rather than study this material fully, PHMSA limited the study to whether the risks of dilbit to pipeline operations was greater than for conventional crude oil, but did not study the behavior of dilbit on release

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MAINTENANCE OF COVER

• Federal regulations require that pipelines be buried at minimum depths when constructed, but do not require that pipeline operators maintain this depth

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CONSERVATION: THE SAFEST AND BEST OPTION FOR CONSUMERS

• The differing decreases in petroleum fuel use among the states indicates that some states are taking successful actions to promote oil conservation

• Rather than focus expressly on increasing oil production, policy makers should encourage oil conservation, as this provides greater energy and financial security for Americans

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Thank you!

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Paul Blackburn

PO Box 17234Minneapolis, MN 55417

[email protected]

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