Bloomberg News

Oil-Sands Cargos Face Tougher Rules for U.S. Rail Shipments (1)

February 27, 2014

Train shipments of crude are under review across North America after a U.S. emergency order requiring new safety measures to prevent accidents. Oil-sands shippers may be scrutinizing the rules most closely.

Oil producers, refiners and logistics companies are comparing their procedures with new rules issued Feb. 25 by the U.S. Transportation Department that require testing all crude before transporting it by rail to ensure the proper containers are used and safety steps are taken. Some crude must be reclassified under a higher risk level, triggering requirements such as stronger rail cars that will be less likely to leak or break open in an accident.

Shippers of bitumen, the thick, tar-like crude from Canada’s oil sands, may be most affected by the new rules just as exports by rail to the U.S. accelerate. More than 200,000 barrels a day of crude are leaving Western Canada by rail, a figure poised to more than double to 500,000 by the end of the year, according to an estimate last month by Peters & Co., a Calgary-based investment bank.

“The biggest impact is going to be on the stuff coming out of Canada, especially the diluted bitumen moving by rail,” Mark Luitwieler, executive vice president of operations for Peaker Energy, a Houston-based company that develops oil-by-rail terminals, said yesterday at the Crude by Rail 2014 conference in Glendale, California.

Crude Prices

Western Canada Select, a heavy, sour Canadian crude blend, weakened by 75 cents against the U.S. benchmark West Texas Intermediate oil to a discount of $24.75 a barrel, data compiled by Bloomberg at 11:50 a.m. New York time show. Syncrude, a synthetic Canadian oil consisting primarily of naphtha and light and heavy gas oil, weakened 50 cents to $3 a barrel under WTI.

The Transportation Department’s order follows a series of derailments and explosions involving trains carrying crude from the Bakken shale in North Dakota and Montana.

Company interpretations differed on how the new rules would affect oil-sands shipments.

Heavier crudes that were previously categorized as less flammable “Group III” products must now be labeled as riskier “Group I” or “Group II,” which require tank-cars held to a higher standard for welding and inspections.

Bitumen Shippers

The rule may particularly impact bitumen shippers such as Altex Energy Ltd., NuStar Asphalt Refining LLC, Torq Transloading Inc. and Elbow River Marketing Ltd. because bitumen has typically been classified as a Group III product, said Marvin Trimble, the commercial development director at Strobel Starostka Transfer Canada, a rail-services company.

However, some companies interpret the rules as exempting raw bitumen from the reclassification. Bitumen would be affected by the new rules only if it’s diluted by mixing with a light-weight oil, according to Altex, a crude-by-rail logistics company.

“If you’re a facility that ships diluted bitumen, this will definitely affect you. If you’re shipping bitumen, which is a different product, it doesn’t apply,” said Randy Meyer, vice president of business development and logistics at Altex, a Calgary-based company that ships mostly raw bitumen and heavy oil. “Bitumen is not like a crude oil, it’s more like roofing tar.”

NuStar Asphalt

Part of NuStar Asphalt’s leased tank-car fleet is affected by the federal order, and the San Antonio-based company is working with its carriers to determine how to comply with the new classification, Claire Riggs, a company spokeswoman based in West Deptford, New Jersey, said by telephone.

“It’s clear that we are carrying heavy Canadian crude that’s not as volatile as the other crudes that are part of this main concern,” Riggs said. “Even so, the order does impact the operations of part of our leased fleet.”

NuStar Asphalt is a joint venture between NuStar Energy LP (NS:US) and Lindsay Goldberg LLC that runs a refinery in Paulsboro, New Jersey, and a terminal in Savannah, Georgia. NuStar Energy said Feb. 3 that the company is divesting its 50 percent voting interest in the venture.

Torq, the Calgary-based independent operator of six Canadian rail loading terminals, is evaluating whether the change in regulations affects the roughly 40,000 barrels a day it ships primarily to the U.S., Chief Operating Officer Steve Smith said in a phone interview.

Ed Malcolm, president of Elbow River in Calgary, didn’t immediately respond to a request for comment left by telephone.

Canadian Directive

The U.S. rules follow a Canadian directive issued in October imposing stricter labeling requirements for train shipments of crude and surcharges introduced this month by Canada’s two national railways on shippers using older cars to transport oil.

Canadian Pacific Railway Ltd. and Canadian National Railway (CNR) Co. are trying to encourage the phasing out of older so-called DOT-111 tank cars used to ship crude, said Hunter Harrison, chief executive officer of Canadian Pacific.

“Both of us feel that it’s pretty important that we get those vessels repaired, fixed or out of the pipeline,” Harrison said yesterday in an interview on Business News Network, criticizing the additional regulations that have been added on rail transport. “I don’t think the regulations are making anything safer, in reality.”

Studying Rules

Canadian National is trying to understand what the Transportation Department’s order requires so it can put the right restrictions in place, Sebastien Labbe, the rail company’s director of sales and marketing, said yesterday at the Glendale oil-by-rail conference organized by Houston-based American Business Conferences.

“The way it’s done is not 100 percent clear,” he said. “So we’re talking other railroad companies and we’re collectively looking at it.”

The impact of the order on oil-by-rail volumes in North America “will be manageable,” Labbe said at the meeting.

“But if you’re the guy that has 2,000 out of those 3,000 rail-cars affected, you’re impacted a lot,” he said. “This issue should be marginal, but it’s going to impact some people more than others.”

To contact the reporters on this story: Rebecca Penty in Calgary at rpenty@bloomberg.net; Lynn Doan in San Francisco at ldoan6@bloomberg.net

To contact the editors responsible for this story: Susan Warren at susanwarren@bloomberg.net; Dan Stets at dstets@bloomberg.net Richard Stubbe, David Marino


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