The nagging question of what changes await for crude by rail looms larger in the Bakken than anywhere else. As Foster Mellen, senior strategic analyst for Ernst & Young’s EY Oil & Gas, tells Midstream Business, “the Bakken is driving crude by rail. We are seeing bits and pieces elsewhere, but by and large, that's the main part of the rail business right now, at least in the U.S.”

He estimates around 700,000 barrels (bbl.) per day of Bakken crude—about 70% of production—currently moves to market by train.

The bulk of the play’s crude moves out in unit trains of 100 to 120 tank cars each, loaded at several major terminals built in the Williston. That works out to around 75,000 bbl. per unit train—and lots of motorists stopped at grade crossings as the red lights flash and tank car after tank car rumbles by. BNSF Railway and Canadian Pacific Railway handle the bulk of those shipments.

Industry observers expect the railroads to dominate the Bakken’s midstream for the foreseeable future despite growing concerns about the safety of North American crude shipments in general—and the play’s light crude in particular. The concern seems to be centered on whether tank cars built to existing specifications are adequate to safely move around the light crude.

A tank car tax

At one end of the what-to-do debate, Chicago Mayor Rahm Emanuel recently proposed a new federal tax on hazardous-cargo rail shipments in a presentation to the U.S. Conference of Mayors. Proceeds would be used to fund expanded emergency responder training and equipment needs, he said. Chicago is the continent’s largest railroad hub and has multiple crude trains per day passing within its city limits.

At the other end are various proposals to strengthen existing tank cars to better withstand potential derailments.

None of the crude-related accidents to date have been in major cities. The worst incident, which claimed 47 lives and resulted in millions of dollars in property damage, occurred in the small town—population 5,900—of Lac-Mégantic, Québec, last year.

The likely outcome will be regulations that require significantly beefed-up cars with specifications that exceed current rail industry standards.

An outright ban on the use of existing tank cars would be “a catastrophic impact to the Bakken” according to Caliber Midstream’s Scobel, and it’s not likely.

“There are less draconian things along the way that could make an impact,” Scobel adds. “You know, needing more buffer cars [empty cars between full tank cars and locomotives] in a unit train, or having fewer cars on a unit train. There are a lot of other steps that could be taken that are less painful.”

‘A done deal’

Mellen calls tougher tank car standards “a done deal, it’s just going to be the timing of the phase-in.”

The result could be big but won’t derail the business, according to a recent Wells Fargo research report.

“We believe the forthcoming regulatory response will entail certain higher costs for stakeholders, with the majority of the costs being borne by the owners and users of tank cars, not the railroads,” according to the report. “However, railroads could be adversely affected if higher costs reduce the competitiveness of crude by rail versus pipe, or if added costs reduce the competitiveness of inland crudes versus imported waterborne crudes.

“We do not expect the impact to be noteworthy, unless regulatory changes materially decrease the availability of tank cars,” Wells Fargo concludes.

Estimates for retrofits to existing tank cars vary from $5,000 to $45,000 per car. Somewhere around 70,000 to 80,000 of the roughly 300,000 tank cars currently in North American rail service probably will need some sort of upgrade—whatever that might entail. So even minimal upgrades can run into a lot of money for a fleet of that size.

Midstream operators likely will see minimal impacts, Wells Fargo adds.

“In general, the potential impact of increased rail regulations should not be material to energy MLPs [master limited partnerships], in our view,” the report says. “Only a few partnerships have invested in rail-related infrastructure with even a smaller subset of MLPs owning/leasing railcars. Thus, while a potential regulatory change could impact MLPs involved in the rail business, the overall impact to the sector (given limited participation) should be nominal, in our view.”

Wells Fargo analysts early this year estimated the regulatory changes will tack on 50 cents per barrel to crude-by-rail shipments, but the firm later backed off that estimate as conflicting and more stringent proposals come out of multiple federal agencies.

The energy industry and regulators currently are considering interim and smaller, stopgap moves to lower the risk of crude train derailments and accidents.

The U.S. National Transportation Safety Board and Canada’s Transportation Safety Board in late January issued similar statements asking railroads to re-route crude trains around population centers, better classify hazardous cargoes and review existing emergency response plans.

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