Railway Age Crude By Rail Conference Profiles Key Players, Key Issues in Crude By Rail Debate

by Nossaman LLP

On June 12 and 13, 2014, Railway Age’s Crude by Rail Conference and Expo brought together representatives from the oil and gas industry, railroads, rail car manufacturers, Federal government, emergency response organizations and Wall Street, to address the implications of the dramatic increase in shipments of petroleum by rail (CBR).

Several informative presentations were made on tank car specifications and numerous other technical topics.  This posting will summarize the policy and regulatory issues.

Ed Hamburger, President of the Association of American Railroads (AAR), gave the keynote address to start the conference.  Hamburger laid out the steps that the railroads have taken to improve the safety of crude oil shipments.  Hamburger said that "[r]ailroads believe that federal tank car standards should be raised to ensure crude oil and other flammable liquids are moving in the safest car possible based on the product they are moving. The industry also wants the existing crude oil fleet upgraded through retrofits, or older cars to be phased out as quickly as possible."  In response to questions about the possibility of speed restrictions, Hamburger told the audience that the railroad speed limits for unit trains of 40 miles per hour is appropriate for the shipment of crude oil and explained that the railroads had expressed concern to the Office of Management and Budget (which is currently reviewing a proposed rule on CBR) that a speed limit of 30 miles per hour for crude oil unit trains would have serious ripple effects of slowing down the entire rail system. 

Following Hamburger’s address, Michael Miller, Chief Operating Officer of Genesee & Wyoming, Inc., and Richard Flynn of Northeast Logistics Systems, gave presentations on crude by rail traffic trends and growth prospects.  Miller outlined the rapid growth of crude by rail shipments as well as the substantive benefits rail offers to oil refiners and producers versus pipeline shipments, including the flexibility of adjusting origin and destination points, scalability, and product uniformity.  Flynn addressed the rail industry’s efforts to get ahead of the crude by rail safety issues and the importance of everyone in the supply chain being involved in risk management initiatives. 

Nossaman Partner Linda Morgan gave the Luncheon address.  Morgan’s talk focused on the  many significant and challenging transportation issues raised by crude by rail, including how to most effectively use rail capacity, how to ensure enhanced safety throughout the entire logistics chain, how to best allocate risk, and how to strengthen local emergency response capabilities.  She emphasized the opportunity that this situation provides for a collaborative effort among all parties to find a resolution that strikes the right balance between public and private initiatives and creates certainties for the future. 

Next, Bob Greco of the American Petroleum Institute (API) spoke about the forecast for crude oil and the current production levels.  Greco also discussed the study that API recently released to address concerns over the volatility of Bakken crude.  Greco told the group that the study revealed that the comparison between Bakken and West Texas Intermediate crude oils amounted to a “distinction without a difference,” and showed that Bakken crude was not more volatile than other crude oil.  Greco said that next steps to address the concerns over crude by rail should be “data driven.”

A discussion on the Regulatory Outlook for Crude by Rail Safety featured panelists from the Federal Railroad Administration (FRA), the National Transportation Safety Board (NTSB), the Pipeline and Hazardous Materials Safety Administration (PHMSA) and an official with Transport Canada’s Transport Dangerous Goods Directorate. 

Bob Lauby, Associate Administrator for Railroad Safety/Chief Safety Officer at FRA, spoke about crude by rail safety and recent FRA efforts.  Lauby noted the top causes of crude by rail accidents are human error (38%) and track conditions (31%).  He expressed the hope that, with the increased use of positive train control technology, the accident rate due to human factors would decrease.  In addition, he noted a long term objective to develop autonomous track detection technology to put on passenger and freight trains that would continually evaluate and monitor the track condition. 

Rob Hall, Acting Director, Office of Railroad, Pipeline and Hazardous Materials at the NTSB, then spoke crude by rail accidents and the differences and similarities between crude by rail derailments and derailments of other hazardous materials like chlorine.  Hall reviewed the specifics of tank car technology and capabilities of old cars versus newer rail cars.

Bill Schoonover, Deputy Associate Administrator Field Operations at PHMSA, told the group that crude by rail shipments have been a “game changer for us.”  He told the group that PHMSA received 150,000 comments on the notice of proposed rulemaking regarding crude by rail shipments.  He also reviewed all the non-regulatory efforts that PHMSA has taken to address the issue.

For a Canadian perspective, Peter Coyles, Special Advisor to the Director General Transport Dangerous Goods, Transport Canada, Transport Dangerous Goods Directorate, spoke about the mood on crude by rail in Canada.  Coyles explained that the Lac Megantic derailment “really challenged the Canadian public,” and the Canadian public is “on the lookout” for DOT 111’s in their communities.  Coyles reviewed the timeline and actions leading up to Canada’s decision to order that all DOT 111 tank cars be updated within three years.  Coyles also noted that Canada has fewer rail routes for shipping crude by rail, and that Canada makes more use of pipelines than rail for these shipments. 

The first day of the Crude by Rail Conference ended with a presentation from Matt Elkott, Vice President – Surface Transportation Equity Research with Cowen and Company.  Elkott told the audience that the positive Wall Street perspective on the growth in crude by rail shipments has offset the negative impact on railroad stocks from the reduction in rail shipments of coal, noting that rail stocks have significantly increased despite the 13% drop in coal rail shipments.  Elkott told the audience that rail stocks and crude by rail shipments have a high and positive correlation. 

The second day of Railway Age’s CBR conference began with the keynote address given by Richard Timmons, President of the American Short Line & Regional Railroad Association.  Timmons reviewed the Short Line Safety Initiative which began as a pilot program but is now a permanent program utilizing federal funds.  The safety analysis that forms the basis for this initiative provides short lines with useful assessment and evaluation tools to improve safety.  Timmons provided information about the details of the assessment process to be utilized and how the resulting data would be used and distributed. 

Next, Robert Fronczak, Assistant Vice President, Environmental & Hazmat, AAR, provided a report from the AAR’s Tank Car Committee.  Fronczak’s presentation began with a review of the relevant data on crude by rail shipments, including carloads and incidents.  He discussed AAR’s voluntary efforts to address crude by rail safety, including improving tank cars.  In addition, he reviewed AAR’s steps to improve track integrity with continuous inspections of track and brakes.  Fronczak also addressed the implications of retrofitting the existing tank car fleet, including cost and timing. 

The third presentation came from David Potter, a lawyer at Oppenheimer Wolff & Donnelly, who provided a presentation on CBR insurance and liability considerations.  Potter’s talk focused on the risk exposure crude by rail incidents create, specifically: personal injuries, death, property loss and business interruptions.  While the traditional defendant in rail accidents has been the railroad, crude by rail litigation could also bring in shippers or tank car manufacturers as defendants.  In addition, growing public concern over crude by rail accidents could have an impact on the decisions of Judges who preside over resulting law suits.  Mr. Potter also explained that in these lawsuits courts will evaluate whether railroads were in compliance with their own internal plans, as well as emergency orders and other applicable agreements or regulations.   

Continuing with the discussion of CBR insurance and liability considerations, John Durante, Senior Vice President of Marsh, gave a talk about the changing insurance implications for CBR shipments.  Durante told the audience that, while underwriters are asking railroads for more information about shipments, they have not cancelled policies over crude by rail concerns.  Durante discussed the possibility for shippers, tank car companies and transloading facilities to consider insurance coverage to address the possibility of a crude by rail accident, including coverage for pollution, casualty and contingent liability. 

The last presentation of the conference was given by Glen Rudner, General Manager from the Security and Emergency Response Training Center (SERTC) at the Transportation Test Center in Pueblo, Colorado.  Rudner described the emergency response training for crude by rail that is offered at the training facility.  In addition to a three-day course, in the next six months SERTC will offer a web and video based training for emergency responders.  Ruder told the audience that starting in early July, a total of 15,000 emergency responders will be trained over the course of a six month period.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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