Oil shipments fuel U.S. boom by riding the rails

DELAWARE CITY, Del. – Who needs a pipeline when you have a railroad?

While Republicans in Congress accuse President Barack Obama of killing American jobs by delaying a decision on the controversial Keystone XL pipeline, the Delaware City refinery, 100 miles northeast of Washington, never needed it.

No pipeline runs from the booming Bakken oil-producing region of North Dakota to Delaware City. No pipeline stretches to the Tesoro refinery at Anacortes, Wash.

Rather, existing oil pipelines generally run north-south, not east-west. But railroads lead to Delaware City and Anacortes, and practically everywhere else in the country.

Until last month’s deadly derailment of a crude-oil train in Quebec, pipelines dominated the debate about moving oil. But rail shipments of North American crude oil already have matched what Keystone XL was proposed to carry, and more is on the way. What started as a stopgap has become the go-to for transporting crude.

“A big part of the popularity of rail is that the president can’t veto it,” said Eric Smith, associate director of the Tulane University Energy Institute.

Environmental and community groups may find that they have less power to stop a train than to stall a pipeline.

Pipelines can take years to approve and can only move a product from point A to point B. Rail cars, by contrast, can be deployed quickly and can go almost anywhere. Oil producers and refiners turned to rail because they didn’t have enough pipelines. They discovered they liked it.

“They always thought of pipelines,” said Philip Verleger, an energy economist and a visiting fellow at the Peterson Institute for International Economics, a Washington think tank. “Once they demonstrated it can be done (by rail), they said, ‘Oh, why didn’t we think of it?’ ”

In March, 71 percent of North Dakota crude moved by rail versus 20 percent by pipeline, according to state data. The rail shipments, and new hydraulic fracturing technology, have helped North Dakota overtake Alaska as the nation’s No. 2 oil producer. Texas is No. 1.

“It’s not for lack of pipelines that producers in North Dakota are shipping by rail,” said Anthony Swift, an attorney on energy issues at the Natural Resources Defense Council, an environmental group. “Producers are choosing to move by rail.”

Keystone was intended to transport both light crude from the hydraulic fracturing, or fracking, of shale formations in the Bakken region in North Dakota, as well as heavy crude extracted from the tar sands in western Canada.

Environmentalists oppose Keystone because it would tap the western Canada tar sands, which are more carbon-intensive and involve carving up boreal forests in a manner resembling the surface mining of coal.

While Obama still must decide whether to approve the Keystone XL project, the oil can flow by rail without his signature. In addition to Bakken oil, a small but growing volume of Canadian tar sands crude moves by rail.

Unlike a pipeline, rail can reach virtually everywhere, and not just refineries. The port commission in Vancouver, Wash., has approved a terminal that could receive as many as four trains a day, which would travel through Spokane. Tanker ships would take the oil to refineries in the Pacific Northwest. Yorktown, Va., is set to open a terminal later this year that would receive two trains a day. The oil would be shipped to refineries in the Mid-Atlantic via tanker ship or pipeline.

In June, Kinder Morgan canceled plans for an oil pipeline from Texas to California. The refiners were satisfied with receiving crude by rail.

It’s more expensive to ship crude by rail than by pipeline, but Verleger said the flexibility is worth the cost.

“You pay a premium, and that gives you flexibility,” he said. “I think they’ll wind up spending more. But they’ll make more.”

In 2008, the largest U.S. railroads shipped 9,500 carloads of crude oil. In 2012, that number had increased to 233,000. That’s enough to make more than 300 million gallons of gasoline, about what U.S. drivers use each day. Manufacturers of railroad tank cars can’t keep up: They face a 2 1/2-year backlog.

Railroads have room for the oil because of a drop in coal shipments. Stricter emissions standards for power plants and cheaper natural gas have taken a bite out of railroads’ coal business, long a mainstay.

Railroads have the spare capacity to move the oil, and they can make more money doing it.

“Oil has given a whole new breath of life to railroads,” said Robin Wehbe, who leads the energy research team at the Boston Co., a consulting firm. “Economically it’s bringing life to a lot of areas that didn’t have any.”

North Dakota has the lowest unemployment rate of any state, at 3 percent. Housing costs have skyrocketed in the rural towns dotting the Bakken region as thousands of workers have streamed in from across the country.

Its economic impact also reaches 1,800 miles east.

In 2009, Valero Energy announced it would close the Delaware City refinery, blaming reduced demand for gasoline and diesel fuel. With 550 jobs lost in the worst of a recession, it was one more blow to an area that had lost another large employer, a Chrysler assembly plant, a year earlier.

Four years later, the refinery, now operated by PBF Energy, employs 435 workers, and unloads crude oil by the trainload every day.

While the oil boom boosted the fortunes of many communities, the prospect of additional trains bearing hazardous cargo in densely populated areas has rattled some nerves.

At least 47 people were killed in Lac-Megantic, Quebec, on July 6, when an unmanned crude oil train rolled down a hill into the center of town. Although the cause of the derailment and subsequent explosions that leveled most of the city’s downtown won’t be known until Canadian authorities finish their investigation, the fiery wreck left many wondering if there was something inherently unsafe about transporting crude by rail.

Some Keystone XL supporters pointed to the Quebec accident as evidence that pipelines are safer, although pipeline spills tend to be larger than rail spills, according to the Pipeline and Hazardous Materials Safety Administration.

Swift said both rail and pipelines have safety problems, and regulators need to address both to catch up with the ever-increasing volume.

“A tragic disaster moving crude by rail,” he said, “doesn’t make pipelines any safer.”