Despite a string of recent successes by West Coast communities to block the construction of oil-by-rail facilities, the oil industry has no plans to give up using rail to move oil to the West Coast. And it isn’t hard to understand why. There are no plans for oil pipelines from North Dakota to California or Washington. And with indications that the Bakken field may already be declining, any investment in such a project is highly unlikely.
And unlike at East Coast refineries, those in the west don't have the option to buy light crude from Africa, delivered via tanker, which is a better option than buying Bakken oil from North Dakota or Montana, delivered by rail, when oil prices are low. That's why the oil industry continues to pursue its long-term plans to move oil west via train.
The company Global Partners has been a major player in oil by rail, with facilities on the East and West Coasts. However, with the recent drop in oil prices, it has stopped shipping oil to the east and recently wrote off $81 million to cancel leases for oil tank cars. Despite these recent setbacks, the company is attempting to buy an oil storage facility on the Columbia River in Oregon. And since the storage facility already has the required air permit to operate an oil-by-rail facility, Global Partners would not have to obtain any local approvals to operate the facility — thus avoiding any local opposition to the project. The most recent Bakken oil-by-rail derailment and fire occurred along the Columbia River in Mosier, Oregon, in June 2016.
Global Partners and others in the industry appear to be betting that oil prices will climb higher and make oil by rail a profitable option once again.
Miles Johnson of Columbia RiverKeeper explained to Northwest Public Radio what this acquisition would mean for Global Partners and for the area along the Columbia River:
“To us this is a pretty clear signal they think crude oil prices could increase again. And if they did, Global Partners would be sitting on a fully permitted oil terminal they could just put into operation without the type of review that a major oil terminal like the one in Vancouver has been receiving.”
Washington Governor Jay Inslee is also expected to make a decision in the next few months on the Tesoro/Savage facility in Vancouver — which if approved would be the largest oil-by-rail facility in the country. Dan Riley of Tesoro gave the simple explanation of why the company is pursuing the project in Vancouver, saying, “There are no pipelines to the west.”
In another move potentially paving the way for oil-by-rail shipments to the West Coast, a judge recently ruled in favor of Phillips 66, allowing the company to sue the San Luis Obispo County Board of Supervisors in an attempt to reverse the California county’s decision to reject an oil-by-rail facility there.
Industry Plans to Fight “Tsunami” of Opposition
The Surface Transportation Board (STB), an independent federal agency presiding over railroad disputes, made a decision in September of 2016 that changed the rules regarding oil-by-rail facilities. That decision essentially said that oil companies could not claim “pre-emption” for oil-by-rail facilities, a concept which allows rail companies to “pre-empt” any local laws regarding rail facilities. Oil companies have been trying to claim this same right, but the STB ruled that only rail-owned, not oil company–owned, facilities were subject to pre-emption.
This decision gave authority to communities when it came to decisions regarding new oil-by-rail facilities, and based on that ruling, the community of Benicia, California, rejected one such proposed project from oil company Valero.
This concept of letting communities decide their own fate didn’t go over well with the industry, a point made clear by an oil industry lawyer at the 2016 Energy by Rail conference.
Kevin Sheys is a partner at the Washington, D.C. law firm Nossaman, LLP, and at the conference, he gave a presentation that focused on the STB decision. In his presentation, one slide asked, “What Is The Energy By Rail Tsunami For the Next Four Years?” The following slide answered the question, stating, “Local Regulation of Crude Oil/Ethanol Unit Train Unloading Projects.”
Sheys offered up local oil-by-rail facility regulation as the biggest challenge facing the industry — one so big that he believes it will require direct action from the White House.
“I think that in the next four years, there is an issue that the administration will have to deal with,” Sheys told the conference. “… and the issue is local regulation of crude oil and ethanol unit train unloading projects.”
“There is a very significant loophole … Localities are blocking the refineries and the energy companies that are building crude-by-rail offloading facilities and ethanol transload facilities,” he went on. “They are doing it because these are not rail projects.”
It turns out Sheys was the lawyer for the Valero project in Benicia — the case that the STB ruled on in September of 2016.
“Valero,” Sheys said, “This is the one that pains me the most because it is my project. Valero sought a ruling from the Surface Transportation Board trying essentially to close this loophole.”
Sheys reiterated several times that he thought the federal government would have to deal with the issue either directly or via the Department of Transportation and then explained why he thought the issue would need to be resolved in the next four years, regardless of who sat in the White House:
“At some point, and I think it will be in the next administration, the prices for oil are going to come up. The demand and the options for Bakken oil are going to re-establish themselves and the refineries, particularly on the West Coast, that have been trying to get ready for this uptick will not be ready because these projects have been blocked. And somebody somewhere in the administration is going to have to explain how we solve that problem.”
He says, based on his experience working with Valero in Benicia, that the company considered Bakken crude oil as “essential” to Valero's competitiveness over the long term.
Rolling Pipelines Here to Stay
While new pipelines like the Dakota Access pipeline in North Dakota — combined with the current low oil prices — have led to drops in how much U.S. oil is shipped by rail, it is clear the oil industry will continue to use rail to move its product between places where there are no pipelines.
For another example, look to the current rebound in tar sands oil shipped by rail, a boom attributed to the lack of pipeline capacity. Goldman Sachs–backed company USD Partners also just announced an expansion of its tar sands–by-rail facility in Texas.
Would the industry prefer to move all of these flammable products via pipeline instead of rail? Most likely.
But that is not realistic. Which means, despite the known risks, the industry will keep expanding its options for moving oil in the “rolling pipelines” that are oil trains.