Dropped crude-by-rail case highlights regulator’s ‘steep learning curve’ – E&E News

Dropped crude-by-rail case highlights regulator’s ‘steep learning curve’

Transportation regulators have stopped pursuing a $12,000 penalty against a U.S. oil firm accused of mislabeling crude from North Dakota’s Bakken Shale play.

The Department of Transportation announced its case against Whiting Oil and Gas Corp. in February but dropped it two months later after the company pointed out it wasn’t responsible for the crude in question, a DOT official and a Whiting representative confirmed yesterday.

Whiting was one of three oil producers swept up in the Pipeline and Hazardous Materials Safety Administration’s “Bakken Blitz” — a series of unannounced inspections launched last year to make sure crude was properly tested and packaged before moving in rail cars.

On Feb. 4, PHMSA said it would seek civil penalties totaling $93,000 against Whiting, Hess Corp. and Marathon Oil Co. for misrepresenting the packing group of crude oil in shipping documents.

But executives at Whiting were left scratching their heads at the enforcement action.

“The first we heard of this [penalty] was a call from a reporter at one of the news services who asked for our response to it,” said Jack Ekstrom, vice president of government relations at Whiting. He said PHMSA’s press release went out two days before Whiting was formally served with a $12,000 notice of probable violation.

There also was a problem with the fee, as the regulator later acknowledged: Whiting wasn’t technically shipping the oil PHMSA sampled during an Oct. 9, 2013, field investigation near Alexander, N.D. (EnergyWire, Nov. 3). PHMSA dismissed the civil penalty April 17 and didn’t pursue further action against the truck carrier, Southern Energy Transportation Inc., according to agency spokesman Joe Delcambre.

Though it involved a modest amount of money, the dropped case reveals the challenges federal officials face as they investigate the complex oil supply chain. Rail-bound crude volumes have surged from fewer than 10,000 carloads in 2008 to more than 400,000 carloads last year, expanding options for North American refiners but also raising new safety concerns.

“We knew this was going to be a steep learning curve for these regulators,” said Chris Tucker, who regularly works with crude-by-rail shippers as senior managing director of FTI Consulting.

“But given some of the actions we’ve seen come out of these agencies, they still have a lot of homework to do,” he added.

‘Nothing to do with it’

Crude can follow a winding path from well site to refiner, particularly when railroads get involved.

“After the crude leaves our location, we have nothing to do with it,” said Whiting’s Ekstrom.

In many cases, fuel logistics companies or financial firms buy crude at the wellhead, then pay to bring the product to better markets for resale. Companies such as World Fuel Services Inc. get the crude to rail loading terminals, then hire freight giants such as BNSF Railway Co. and Canadian Pacific Railway Ltd. to move mile-long strings of tank cars to their end customers.

Labeling responsibilities differ between the U.S. and Canada, and crude-by-rail shipments may weave in and out of the two countries en route to the East Coast. Smaller railroads can be subcontracted to handle the crude for part of the journey, as was the case when CP hired the now-defunct Montreal, Maine and Atlantic Railroad to haul 72 cars of Bakken crude toward a refinery in New Brunswick last year. On July 6, 2013, the tank cars derailed and exploded in Lac-Mégantic, Quebec, killing 47 people and triggering a legal battle over who was responsible for the train’s flammable contents.

Canadian investigators suspected, and later confirmed, that the oil in the ill-fated MM&A train had been placed in the wrong packing group based on its flash point and boiling point.

Those early findings set the stage for PHMSA’s Operation Classification, nicknamed the Bakken Blitz.

Before the accident, shippers mainly worried about assigning crude to the correct hazard class — typically Class 3: Flammable Liquid.

“The rules on the books prior to Lac-Mégantic — related to testing and crude characterization — their primary purpose was quality assurance: product integrity as opposed to public safety,” said Tucker of FTI.

The three “packing groups” within Class 3 don’t correspond to different tank car requirements but can change the way a hazardous liquid is handled and offer workers a heads-up about a cargo’s risk profile.

In the wake of the Lac-Mégantic accident, PHMSA ruled that crude oil can no longer be treated as a Packing Group III material, the least-risky Class 3 subcategory. The regulator’s February emergency order put the final nail in the coffin for what was once a common industry practice: marking crude oil as a Class 3, Packing Group III material by default.

The shipping papers for Southern Energy Transportation still reflect that old habit, listing only two options for its tank car drivers to check on the form: Class 3, Packing Group III crude oil, or Class 3, Packing Group II natural gas condensate.

Calls to Southern Energy were not answered, and affiliate company Bridger Transportation did not respond to a request for comment. Whiting’s Ekstrom said that at the North Dakota well site where PHMSA conducted its inspection, the crude had been tested and classified correctly into Packing Group II before passing into Southern’s tanker truck.

Sending a message

PHMSA said both Whiting and Southern Energy “have reviewed their internal processes.”

“PHMSA continues to monitor compliance within the industry and will take appropriate enforcement action when warranted,” Delcambre said in an email yesterday. “It is the responsibility of the shipper to properly classify the hazardous material before shipment and to reflect that on their shipping document.”

Delcambre pointed out that Hess and Marathon, the two other companies named in PHMSA’s original enforcement announcement, later took full “corrective action” and paid $37,500 and $22,500, respectively.Federal regulations recommend PHMSA cut original penalties by up to 25 percent if there are signs of “systemic action to prevent future violations.”

In February, Transportation Secretary Anthony Foxx said the proposed fines “should send a message to everyone involved in the shipment of crude oil: You must test and classify this material properly if you want to use our transportation system to ship it.”

The 2013 inspection records and chemical analyses from PHMSA’s Operation Classification, obtained byEnergyWire through a Freedom of Information Act request, can be viewed here.

Twitter: @BlakeSobczak | Email: bsobczak@eenews.net

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