Archive for July, 2013

The Wall Street Journal reports that JP Morgan agreed Tuesday to pay $410 million to U.S. energy regulators to settle accusations that the banks’ traders manipulated electricity markets in California and the Midwest.

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Remains of Lac Megantic, Quebec, Town Center

Remains of Lac Megantic, Quebec, Town Center

A train carrying 73 tank cars of North Dakota crude oil rolled driverless down a hill into the center of the small town of Lac-Megantic, Quebec early yesterday where it derailed and exploded, leveling the town center, killing at least five people and leaving another 40 missing.

The Sparkspread has previously said that Energy Rule Number One is: It’s All About Infrastructure.  Whether it’s oil underneath North Dakota, Alberta or West Texas or 80-foot high coal seams in Wyoming, they’re all worthless without a way to get them to market. Yesterday’s tragic accident in Quebec shows the types of risks we run in favoring one form of infrastructure over another.

Horizontal drilling and hydraulic fracturing may once again elevate the United States to the higher tiers of oil-producing states. Already, North American production has served to stabilize world oil prices against shocks that might otherwise have sent prices at the pump sharply upwards. But the new oil fracking regions are remote and served poorly, if at all, by oil pipelines.

With the price of natural gas having depressed the demand for coal-fired generation (and therefore the demand for coal supply), and the Great Recession having depressed freight shipments more generally, the railroads were positioned to help get that oil to refineries.

“Freedom Ain’t Gettin’ No Closer…” Kinder Morgan’s proposed 277,000 barrel/day Freedom Pipeline, which would have connected the West Texas oil fields to the California refineries of Valero, Tesoro and Phillips 66, died a quick death recently when those refiners declined to sign on for the project. Freedom’s proposed tariff rate of $5/barrel would have been about the same as the refiners are paying to the railroads — at least for now. But going with Kinder Morgan’s Freedom Pipeline project would have tied them into long-term contracts, which is not true of railroad shipments. The refiners want the ability to take advantage of “opportunistic” pricing on shipments of crude.

This trend has been ongoing for some time already. Burlington Northern/Santa Fe expects crude oil shipments to grow to 700,000 bbl/day by the end of 2013, and then to 1,000,000 bbl/day by mid-2014. BNSF is adding new tracks and siding in North Dakota to allay local concerns that traditional agricultural shipments might be displaced. Tesoro, Valero and Phillips 66 are also expanding rail capacities at their west coast facilities. Tesoro and Savage Companies announced a $100 million joint venture for shipping Bakken crude by rail and barge to California.  Railroads, once seen as an interim solution to the problem of bringing crude out of remote areas, has taken over the business, and they’ve done so with the acquiescence, if not the full cooperation, of the refiners themselves.

The refiners demonstrate the type of shortsightedness with which flies accept dinner invitations from spiders. Their failure to learn from the history of relations between the railroads and the coal miners will come back to haunt them. They’ve given up Big Oil’s advantage, which is that their commodity can be pumped and piped. Instead, they lump themselves in with coal, which has to be dead-hauled from where it’s mined to where it’s burned.

Certainly pipelines have vulnerabilities and disadvantages, but railroads have more, especially considering the state of most rail lines in the United States. Pipelines have accidents too, but they carry a much larger volume of crude than do railroads, so their ratio of barrels spilled to barrel-miles is lower. Railroads, of course, take the contrary position, but remember that the railroads are the ones who boast about how their operations save on CO2 emissions while fighting CO2 emission regulations that might impact the amount of coal shipped and pushing for coal exports. Railroads can see the coal dust handwriting on the wall, and they want crude oil to replace coal as their top freight category, so expect to see similar railroad agitation against pipelines.

Lac de Megantic will be a major setback to the rail operators. And it’s the latest in a string of accidents:

Lac Megantic, Quebec, Burning

Lac Megantic, Quebec, Burning

People generally don’t like to see their entire town burned to a crisp. But fire is not the only risk presented by shipping crude by rail. Apart from explosion and fire, a crude oil tanker has the power to turn the area of a spill into scene of carnage rivaling the Second Battle of Ypres, the WWI battle where poison gas was first used as a weapon. Crude oil carries with it highly corrosive, rotten-egg-smelling hydrogen sulfide gas, or H2S. At 50 parts per million (ppm), H2S inhalation causes shock, convulsions and coma, and can result in death. At 200 ppm, a few breaths of H2S is sufficient to cause complete respiratory failure, with death following in mere seconds.

In May 2013, Enbridge Energy threatened to shut down an 80,000 bbl/day crude oil loading facility in North Dakota when the crude it was being asked to ship pushed the H2S needle to 1,200 ppm — six times the amount needed for nearly instant death.

As the economy improves and rail traffic volume picks up, the oil refiners may realize that they’ve put themselves into Old King Coal’s shoes, an unenviable position in which the railroads may be the ones determining the price and availability of Bakken, Barnett or Alberta crude. Congestion and derailments will directly affect supply reliability. The refiners should understand that if electric utilities are as nice as schoolyard bullies, then railroads are as nice as the enforcers working for the neighborhood crack dealer. Disputes about rail carriers’ prices don’t go to FERC, but rather to the Surface Transportation Board. Refiners who bring a complaint there may find that the railroad steps up its inspection regime, or somehow “loses” the shipper’s consignment for a day or two. Or three.

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