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A lawsuit brought by AFPM, a trade association representing 400 refining and petrochemical companies, over BNSF Railway’s $1,000 tank car surcharge is the latest round in a battle between keeping costs low in producing crude oil from the Bakken formation and the safety of its transport to refiners.
With the Bakken oil boom, BNSF has become the largest transporter of crude oil in North America, moving some 600,000 barrels of oil per day, but the steep decline in worldwide oil prices has put pressure on Bakken oil producers due to the high cost of production as compared to oil from the Middle East.
The $1,000 per tank car surcharge started January 1, 2015, as BNSF pushed oil producers and refiners to shift to new safer tank cars that decrease the risk of fire in the case of derailment. With each tank car holding up to 34,500 US gallons, the charge adds just under 3 cents per gallon, or $1.26 a barrel.
BNSF’s Limited Options
As a common carrier, Berkshire Hathaway’s 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. In addition to pushing for safer tank cars BNSF has boosted training for both its crews and emergency responders in communities along its routes.
All Crude Oil is Not the Same
Crude Oil from the Bakken formation is classified as “light sweet crude,” a type of crude oil that has high volatility and flammability. The Wall Street Journal reported that “U.S. regulators recently called Bakken crude an imminent hazard because of what they believe is its unusually flammable nature…”
According to The Wall Street Journal, the oil derived from North Dakota’s Bakken shale has an 8 pounds per square inch Reid Vapor Pressure in warmer weather and 12.5 in colder weather. This is significantly higher than oil derived from the Eagle Ford Shale in Texas.
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. 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.”
In response to the lawsuit, BNSF issued a statement that called the surcharge “consistent with BNSF’s ongoing efforts to ensure the safe transport of crude on our network, including voluntary adoption of enhanced operating practices around crude oil shipments and requesting the federal government to make newer, safer tank cars the new standard for crude-by-rail shipments, replacing the older DOT-111 and non-modified CPC-1232 cars.”
© 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.