Special Report: Oil Volatility and the NTSB

(BRK.A), (BRK.B)

Shipments of Bakken Formation crude oil have brought billions in revenues to BNSF Railway, and new opportunities to Berkshire Hathaway’s tank car manufacturer UTLX. It has also put Berkshire and BNSF in the middle of disputes over the safety of these shipments and the source of various hazards.

On one side are environmentalists and communities along rail lines that have cited volatility concerns as to the flash point of Bakken Formation crude oil, claiming it is a special hazard as compared to the transportation of other crude oils. On the other side is the AFPM, a trade association representing 400 refining and petrochemical companies, which is suing over BNSF Railway’s $1,000 per tank car surcharge in a battle to keep costs low in producing crude oil from the Bakken Formation.

BNSF’s surcharge is designed to incentivize shippers to move to tank cars that meet new Department of Transportation standards. Technically, BNSF is not calling its $1,000 per tank car charge a surcharge, rather it says it has raised its rates and is discounting rates for shippers using new DOT 117/TC-117 tank cars. A court will decide whether that holds up and certainly key to that may be whether Bakken crude is more hazardous than other cargo.

The AFPM has disputed that Bakken crude oil is more hazardous a cargo than other crude oil, or other chemicals hauled by railroads. AFPM’s position is that the surcharge on tank cars ignores the root cause of derailments, which they assert is tied to poor track conditions and human error.

Will the Surcharge Stand Up?

In a letter to Transportation Secretary Anthony Foxx, AFPM stated that “Any effort to enhance rail safety must begin with addressing track integrity and human factors, which account for sixty percent of derailments. Investment in accident prevention would result in the greatest reduction in the risk of rail incidents.”

Now, the head of the National Transit Safety Board has weighed in on the issue.

NTSB’s Christopher Hart Dismisses Volatility Concerns

Concerns that the oil from the Bakken Formation are of higher volatility and create a greater risk in the case of accidents were downplayed in recent statements by the National Transportation and Safety Board (NTSB) chairman Christopher Hart.

Hart, in a radio appearance on radio station KFGO-AM in Fargo, North Dakota, stated that the NTSB’s accident investigations of rail accidents found that Bakken crude volatility isn’t a significant issue.

“The biggest contributor to a large explosion or fire is how much product is released, rather than the volatility of the product,” Hart said.

The Department of Transportation is working to reduce the amount of product of all types released in a rail accident by mandating new tank car standards that  require jacketed and thermally insulated shells of 9/16-inch steel, full-height half-inch-thick head shields, and re-closeable pressure relief valves and rollover protection for top fittings.

The Department of Energy Report

A U.S. Department of Energy (DOE) report in March 2015 looked at the volatility of light sweet crude from the Bakken Formation in comparison to other crude oils in the same category. The report was prepared by Sandia National Laboratories with the assistance of a technical team that included the University of North Dakota Energy & Environmental Research Center.

In its report, the DOE found no link between crude oil properties and the chance or severity of a fire caused by a derailment. Instead, the report found that the kinetic energy created by the derailment was a larger factor in the size of a fire than the volatility of the crude being transported, the researchers said.

Is Bakken Crude More Volatile?

As for the volatility of crude oil from the Bakken Formation, Turner, Mason & Company conducted a study in 2014 for the North Dakota Petroleum Council (NDPC) which found that Bakken crude “appears to be generally similar in vapor pressure and light ends content to most light crude oils, and there are certainly crudes, particularly those produced from tight oil formations, which are higher in those parameters.”

Congress Looks at Bakken Crude

The U.S. Congress took up the issue of the safety of transporting crude oil from the Bakken Formation last year.

In September 2014, the House Science, Space, and Technology Committee held an energy and oversight hearing with experts from the Pipeline and Hazardous Materials Safety Administration, the Department of Energy, ND Petroleum Council, Turner, Mason & Company, and the Syracuse Fire Department. The hearing examined the characteristics and behavior of crude oil from the Bakken region.

At the hearing, officials testified that the increased risk of an incident has to do with the increased volume of product being transported and not the volatility characteristics of Bakken crude.

BNSF’s Role as a Common Carrier

As a common carrier, BNSF Railway can’t refuse under most circumstances to carry cargo, despite the potential loss or damage presented by the cargo.

And, while BNSF’s growing role as a mobile crude oil pipeline has meant billions in new revenue, it also has presented new risks in regards to fire in the event of derailment, collision, or other accidents.

BNSF has responded by pushing for safer tank cars, and has boosted training for both its crews and emergency responders in communities along its routes.

New Tank Cars and Retrofitting Existing Fleets

Under Enhanced Standards for New and Existing Tank Cars for use in an HHFT—New tank cars constructed after October 1, 2015, are required to meet the new DOT Specification 117 design or performance criteria.

The standards will require replacing the entire fleet of DOT-111 tank cars for Packing Group I, which covers most crude shipped by rail, within three years and all non-jacketed CPC-1232s, in the same service, within approximately five years.

An HHFT (high-hazard flammable trains) is defined as a train carrying 20 or more tank carloads of flammable liquids, including crude oil and ethanol.

The need for replacement and retrofitted tank cars impacts a wide-range of shippers that transport by rail. Those shippers include shippers of LPG, oil producers and refiners, and ethanol producers that own their own tank cars or lease them from leasing companies. It also impacts BNSF Railway’s own fleet of tank cars.

Retrofitting existing tank cars is an important bridge to safer shipping of flammable liquids, as the current backlog of new tank car orders sits at a record 52,000 units.

A Significant Portion of BNSF’s Revenue

One thing that’s not in dispute is how significant the transportation of volatile liquids is to BNSF. Petroleum, Ethanol and LPG make up roughly 7-percent of BNSF’s freight hauling. In 2014, BNSF moved enough petroleum to fill the gas tanks of 350 million vehicles.

Another thing that’s not in dispute is that the move for safer tank cars benefits Berkshire’s UTLX, a manufacturer and retrofitter of tank cars that has been hiring and opening new facilities due to the unprecedented demand.

Berkshire has also been expanding the number of tank cars that it owns.

Berkshire’s Marmon Holdings, Inc., the unit of Berkshire Hathaway that owns UTLX, acquired substantially all of GE Railcar Services’ owned fleet of railroad tank cars as of September 30, 2015. Roughly 25,000 full-service and net-leased tank cars are covered by the transaction.

Still One More Dispute in the Wings

With NTSB’s Christopher Hart dismissing the volatility issue of Bakken crude as an extraordinary hazard, BNSF’s dispute with the AFPM may mean it is now in a weaker position to justify its tank car surcharge, which is something that could potentially cost Berkshire and BNSF millions down the road.

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.