How dangerous is the shale boom?

The recent derailment of a train carrying crude oil that resulted in a fire, with oil spilling into the James River in Lynchburg, Virginia, and hundreds of residents being temporarily evacuated, once again highlighted the challenges that the shale boom in the US and Canada presents.

The accident, which happened on April 30, underscored the need for better energy infrastructure and brought to mind a report that had been issued just a month earlier which forecast that the US and Canada would need to invest about $30 billion a year in midstream infrastructure for natural gas, crude oil and natural gas liquids up to 2035. Of that amount, an investment of $12.4 billion annually would be needed for crude oil infrastructure alone.

“There’s a fundamental structural shift around exploration and production for oil and gas that requires the resource to be dealt with – it’s black and white,” says Jim Barry, managing director and chief investment officer of Blackrock’s infrastructure investment group.

But how it is dealt with is not so clear cut.

“One does not need a crystal ball to predict increased pipeline infrastructure development,” acknowledges Joel Moser, head of Kaye Scholer’s energy and infrastructure group. “Nevertheless, the upfront cost of this permanent infrastructure requires either risk capital or long-term off-take agreements, so don’t expect the end of rail shipments any time soon,” he adds, noting that many in the industry prefer oil by rail because of the flexibility of matching production to market demand.

A more immediate solution would appear to be increased regulation.

A few days after the accident, on May 7, the US Department of Transportation (USDOT) issued a safety advisory “strongly urging those shipping or offering Bakken crude oil to use tank car designs with the highest level of integrity available in their fleets”. The guideline refers to Bakken crude oil specifically because it ignites more easily than other types of crude oil.

But the advisory is not binding. Stricter regulations that are enforceable will take time.

According to Tom Simpson, president of the trade association Railway Supply Institute, the industry petitioned USDOT in the spring of 2011 to adopt a new standard of enhanced car design requirements as a federal regulation. “They have not yet acted on that petition; presumably they’re in the process of doing that now,” he says.

The rail industry, however, is ahead of federal regulators in building more than 57,000 enhanced tank cars that are expected to be in service by the end of 2015, according to Simpson.

Another example of the industry moving faster than the authorities is BNSF Railway Company, a unit of Warren Buffet’s Berkshire Hathaway.

The company issued a Request for Proposals (RFP) for the purchase of crude oil tank cars with safety features that go beyond existing standards.

The RFP was issued in February before the train derailed in Virginia but after the deadly derailment of an unattended train in Quebec killed at least 42 people last July.

The move by BNSF is unusual since, historically, tank cars are owned by either shippers or leasing companies. The railroads usually own the tracks.

Other concerns

While accidents such as the ones mentioned here shed the most glaring light on the issue of safety, they are not the only cause for concern. The sharp increase in the volume and frequency of crude oil transports is also a factor. According to the Wall Street Journal, in 2008 it took railroads four days to move 100 tank cars; today, trains of that size depart every two hours.

Unfortunately, it seems that Barry’s prediction of the regulatory response being slow is on the mark. “That’s the nature of the US and regulation and Congress at the moment,” he says.

“I think that the dynamics around events with transport of fuel on rail will again re-emphasise the need for midstream infrastructure,” Barry says.

While that assessment is no doubt accurate, current circumstances strongly suggest the need for action now.