Citing Potential Cost, Ethanol Industry Opposes Inclusion in Crude-by-Rail Rule

Rail Crossing Photo Luke Sharrett Bloomberg

Ethanol producers are pushing back against their inclusion in a Transportation Department rule meant to address a fiery spate of crude-by-rail crashes, a decision the renewable fuel industry says could cost it more than $1 billion.

The notice of proposed rulemaking, made public July 23 by the Pipeline and Hazardous Materials Safety Administration and the Federal Railroad Administration, would require thousands of updated tank cars and impose speed and braking requirements.

“Ethanol is a fundamentally different product with fundamentally different characteristics than crude oil, especially the volatile crude oil coming out of the Bakken,” Monte Shaw, executive director of the Iowa Renewable Fuels Association, told Bloomberg BNA. “We are disappointed that there is a one-size-fits-all approach.”

The group, which represents companies including Poet LLC, one of the world's largest ethanol producers, plans to “ask for changes” in the rule, Shaw said.

“What the ethanol industry needs to do to ensure a safe situation for transporting our product is different then what the crude oil industry needs to do,” he said.

The industry is on track to produce 14.5 billion gallons of ethanol in 2014, almost all of which “is in a rail car at some point in time,” Shaw said. “You are talking about a lot of money.”

Ethanol Shippers Face Rule in 2020

The rule, which goes into effect for most ethanol shippers in 2020, could cost as much as $6 billion over 20 years, according to Transportation Department estimates that didn't provide a specific figure for the ethanol industry .

Bob Dineen, president of the Renewable Fuels Association, which represents ethanol makers such as Abengoa SA, said in an interview the rule has the potential to cost the industry “billions” and comes after the industry fairly recently made large purchases of tank cars the rule is seeking to phase out.

“We had the expectation they would have a 40 to 50 year lifespan,” Dineen said of the cars, which are known in the industry as DOT-111s and were designed in the 1960s.

Retrofit Cost Could Exceed $30,000 Per Car

The nation's ethanol industry owns a fleet of 30,000 tank cars, nearly all of which are DOT-111s, Dineen said. The cost of retrofitting those tank cars, according to Transportation Department estimates, “could exceed $30,000 per car,” a figure which Dineen said was “low.”

In addition, lowered speed limits in the rule could result in the addition of extra tanks cars to trains to make up for lost efficiency, Dineen said.

The rule, which would define trains with 20 cars or more of ethanol or crude oil as “high-hazard flammable trains,” comes as hydraulic fracturing and horizontal drilling techniques have led daily U.S. oil production to soar to more than 11 million barrels in the first quarter, according to a July 4 report by Bank of America Corp.

That follows a low of 5 million barrels per day in 2008, according to Energy Information Administration data.

Bakken Crude Called Volatile

The increased flow of oil has led to increased oil-by-rail shipments with oil carloads totaling 415,000 in 2013 and just 9,500 in 2008, according to the Transportation Department.

A lot of that crude hails from the Bakken Shale region in North Dakota, which PHMSA, in a study issued the same day as its proposed rule, said was more volatile and flammable than other lighter crude oils, contradicting previous studies released by the oil industry.

The American Petroleum Institute, whose members include shippers such as Exxon Mobil Corp., have opposed classifying crude oil from the Bakken region as more flammable than other types of crude oil.

“The best science and data do not support recent speculation that crude oil from the Bakken presents greater than normal transportation risks,” Jack Gerard, president and chief executive officer of the Washington-based lobbying group, said in a statement.

Exemption Said Unlikely

The Transportation Department is unlikely to treat the ethanol industry differently than the crude oil industry when the rule is finalized, according to analysts such as ClearView Energy Partners, a Washington-based consulting firm.

“Ethanol accidents were the progenitors of the regulatory process that begat today's rulemaking,” the Washington-based consulting firm said in a July 23 research note.

Fred Millar, an independent rail safety consultant, told Bloomberg BNA it's “completely implausible” for the ethanol industry to be exempted.

“It's not like they have a whole fleet of better designed tank cars, and it's not like they have a spotless safety record,” Millar said.

The Pipeline and Hazardous Materials Safety Administration directed Bloomberg BNA to its proposal document in response to a request for comment.

In the rule, the agency said it included ethanol in the proposal because the production of ethanol has increased significantly over the last decade, and it highlighted a 2009 ethanol train derailment near Rockford, Ill., that resulted in $1.7 million in damages, one death and an estimated 60,000 gallons of ethanol spilling into a stream.

Ethanol Shipments, Derailments Increasing

Between 2008 and 2011 alone, rail carloads of ethanol increased 40 percent from 292,000 carloads to 409,000 carloads, according to the agency.

“Not surprisingly, this growth in rail traffic has been accompanied by an increase in the number of rail accidents involving ethanol,” the agency said in the rule.

Ethanol shippers say blame for accidents involving tank cars hauling their product lies with the railroads which transport it and say more government oversight of rail track conditions and spending by rail companies on track maintenance is needed.

“We don't really have a problem with these rail cars until they drive them off the tracks,” said Shaw, of the Iowa Renewable Fuels Association.

The Association of American Railroads, which represents major U.S. railroads such as BNSF Railway Co., owned by Warren Buffett's Berkshire Hathaway Inc., declined to comment.


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