(Orange, Texas)

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July 20, 2013

Deadly derailment won't stop oil on trains



Last year the NTSB issued a safety recommendation to the Department of Transportation that suggested that all tank cars that carry crude and ethanol be outfitted with stronger protective equipment. The Lac-Megantic accident increases pressure on regulators to adopt at least some of the recommendations, experts say.

Rail shipments of crude have spiked because oil is being produced in North Dakota in volumes far beyond what drillers had predicted five years ago. Pipelines take years to build and can be difficult to acquire land and permits for, so drillers and refiners needed railroads to quickly move the oil.

There was also big money to be made.

North Dakota crude has been selling for significantly less than similar crude that coastal refineries had been importing from the North Sea and West Africa. Even with the extra cost of shipping by rail, the benefit to refiners' bottom lines is sizable.

Railroads such as Union Pacific and Burlington Northern Santa Fe were also eager to transport more oil by train. It has helped offset a steep decline in coal shipments, which occurred as the drilling boom led more utilities to produce electricity with natural gas.

But the torrid growth of crude shipments by rail isn't likely to continue.

Several new pipelines are planned, and prospects for controversial ones like the Keystone XL may be helped by the devastation in Lac-Megantic. Pipeline spills generally release more oil than train spills, but they are less frequent and not as dangerous to people.

Also, the price difference between North Dakota crude and imported crude, which had been as high as $35 a barrel in November, has recently fallen to just $3 a barrel, thanks in part to rising rail shipments.

Delivery of crude by rail will have staying power, though, experts say.

"Initially rail was a placeholder, but (refiners) like the flexibility and speed to market it offers," says Anthony Hatch, a transportation analyst and consultant.

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