Paul Blackburn Pipeline Versus Rail The False Choice

The Industry and Media Frame Oil Transportation as a Societal Choice Between Pipelines or Rail THIS IS A FALSE FRAMING 2

OUTLINE The North American crude oil transportation market: supply and demand Existing transportation options: pipeline, rail, barge/ship Transportation choices Transportation safety The correct frame: make transportation as safe as possible and conserve oil to reduce the need to transport it 3

THE RAIL VERSUS PIPELINE FRAMING Crude oil is moving by rail because there is insufficient pipeline capacity Pipeline transportation is cheaper, therefore if more pipelines are built shippers will switch to pipelines and railroads will become less congested Pipelines are safer than railroads Therefore, citizens should support pipelines 4

RAIL SHIPMENT NUMBERS About 939,000 bpd of crude oil is being hauled each day on railroads throughout the US Railroad congestion is localized as oil transportation makes up only about 3.5% of railroad shipments In 2013, railroads carried about 395,000 more tank cars of crude than in 2005, but about 1.3 million fewer cars of coal BNSF estimates that the amount of farm commodities it shipped from North Dakota increased 50 percent from 2009 to 2013 The rail congestion problem is limited to particular bottlenecks in the northern plains caused by increased grain and oil shipments 5

CRUDE OIL SOURCES This presentation focuses on sources of oil involved in the rail versus pipeline debate At issue is landlocked crude oil remote from refining centers For practical purposes, the source of conflict relates to transportation of crude oil from the US Williston Basin and Canadian Tar Sands Williston oil is mostly light sweet crude oil Tar Sands oil is either diluted or undiluted heavy sour bitumen or medium sweet syncrude 6

US LIQUID FUELS SUPPLY (MBPD) 7 USEIA AEO2014 Early Release Rollout Presentation December 16, 2013

PRIMARY SOURCES OF NEW CRUDE OIL IN MARKET 8

WILLISTON BASIN CRUDE OIL FORECAST 9 North Dakota Pipeline Authority July 8, 2014

WILLISTON BASIN TYPICAL WELL PRODUCTION DECLINE 10 North Dakota Industrial Commission

NORTHERN GREAT PLAINS CRUDE OIL PRODUCTION TYPE 11 USEIA US Crude Oil Production Forecast-Analysis of Crude Types May 29, 2014

ESTIMATED WILLISTON BASIN OIL TRANSPORT BY MODE 12 North Dakota Pipeline Authority July 8, 2014

CANADIAN RAILROAD EXPORTS 13 Source: National Energy Board of Canada

DESTINATION OF CANADIAN 2013 CRUDE OIL EXPORTS 14 Source: National Energy Board of Canada

CRUDE OIL SUPPLY SUMMARY Bakken oil is mostly light sweet crude Bakken oil production is expected to start declining in the mid-2020s Existing combined rail and pipeline export capacity from North Dakota far exceeds forecast maximum production In 2013, Williston shippers decreased use of pipelines in favor of railroads Canadian rail exports have been modest at about 160,000 bpd 44% of Canadian exports by rail went to the East Coast, 45% to the Gulf Coast 15

CRUDE OIL DEMAND AND MARKETS US domestic demand for crude oil is about 9% below historical highs and is unlikely to increase substantially Increased domestic production reduces imports or is used to make petroleum products for export Refineries are designed to process different types of crude oils Refineries in the Midwest and Gulf Coast generally refine medium-heavy sour crudes; on the East and West Coast they process large amounts of light sweet crude oil 16

FORECAST US PETROLEUM USE 17

US PETROLEUM USE DOWN ~9% 18 Source: US EIA

MARKETS DEMAND DIFFERENT TYPES OF CRUDE OIL 19

COASTAL REFINERIES RECEIVE ALMOST ALL OVERSEAS IMPORTS 20

EIA REFINER ACQUISITION COST 21 North Dakota Pipeline Authority July 8, 2014

DEMAND AND MARKET SUMMARY US demand for petroleum fuel has dropped and is not forecast to increase substantially The East Coast is the primary market in the US for domestic light sweet crude oil The Midwest receives almost no overseas imports and refines mostly heavy to medium sour crude oils The Gulf Coast imports little overseas light sweet crude oil and instead processes overseas medium and heavy sour crude oil and local domestic oil (off-shore, fracked, and conventional) The West Coast imports some light sweet crude oil but primarily refines a mix of sour crude oils East and West Coast refiners pay higher prices 22

TRANSPORTATION OPTIONS Existing and planned pipelines Existing and planned railroad infrastructure Williston Basin and western Canadian transportation options 23

EXISTING PIPELINES 24 NO PIPELINES FROM ND TO WEST COAST NO PIPELINES FROM ND TO EAST COAST

CRUDE OIL PIPELINES & PROPOSALS 25

WILLISTON BASIN TRANSPORTATION OPTIONS 26 North Dakota Pipeline Authority July 8, 2014

US WILLISTON BASIN CRUDE OIL EXPORT OPTIONS OCTOBER Pipeline = 705,000 bpd; 2014 Rail = 1,260,000 bpd North Dakota Pipeline Authority October 2014

US RAILROAD LINES 28

RAIL CRUDE OIL OFFLOADING TERMINALS ON THE EAST COAST 29 Operator/ LocationCapacity x000 bpdIn-Service PBF Energy (refinery) Delaware City, DE 145 Expandable to 210 Operating Q Axeon Specialty Partners (refinery) Savannah, GA 91Q 2014 Axeon Specialty Partners (refinery) Paulsboro, NJ Unit train capableOperating 2014 Buckeye Partners, L.P. Perth Amboy, NJ 60-80Q Buckeye Partners, L.P. Albany, NY 135Nov 2012 Global Partners Albany, NY Eddystone Rail Company Philadelphia, PA 80 Expandable to 160 May 2014 Philadelphia Energy Solutions (refinery) Philadelphia, PA 140Oct 2013 Plains All American Pipeline Yorktown, VA60Dec 2013 Total Potential Capacity954,000+ bpd

RAIL CRUDE OIL OFFLOADING TERMINALS ON THE WEST COAST 30 CompanyCapacity X00 bpdIn-Service Washington Shell (refinery) Anacortes, WA 50? Tesoro (refinery) Anacortes, WA BP (refinery) Cherry Point/Blaine, WA 60Q Phillips 66 (refinery) Ferndale, WA small volumes Expandable to 30 Dec 2014 US Oil (refinery) Tacoma, WA ?2012 US Development Group Grays Harbour, WA Westway Grays Harbour, WA 27Q Imperium Renewables grays Harbour, WA ?? Global Partners of Massachusetts Port Westward/Calskanie, WA 65 expandable to 130 Q Washington potential subtotal 332 California Alon USA Bakersfield, CA 150Q Plains All American Bakersfield, CA 65Q Valero (refinery) Benicia, CA 70Q Phillips 66 (refinery) Santa Maria, CA 41Q California potential subtotal 326 TOTAL 658

PLANNED RAIL UPGRADES BNSF is planning $5 billion in track upgrades, including a 60- mile double-track stretch between Glasgow, MT, and Minot, ND, double track through MN, and multiple meet-pass sidings BNSF customers have invested more than $2 billion in rail cars and facilities As of April 2014, manufacturers had 50,000 crude oil tank cars on order; up to 10,000 can be built each year BNSF mis-forecast service demand and shippers are now paying the price By the end of 2014, BNSF plans to offer service from shale plays to more than 50 destinations that serve inland and coastal refineries and ports Other railroads are also planning upgrades 31

TRANSPORTATION SUMMARY It is not possible to ship crude oil by pipeline from the Williston Basin to the US East and West Coast, as these markets are accessible only by rail and/or ship No pipelines are planned between the Williston Basin and the US East and West Coast Planned US pipeline expansions go primarily to Oklahoma and the Gulf Coast which have limited capacity for additional light sweet crude refining Planned Canadian pipeline expansions go to the coasts but would require shipping by tanker to US refineries and likely would not serve the Williston Basin The oil industry has made substantial investments in railroad transloading capacity on the East and West Coasts 32

FACTORS FOR SHIPPER PREFERENCE FOR RAIL Williston Basin shippers have stated a preference for rail and support for pipeline projects is limited Rail offers greater flexibility both on the gathering and delivery side Rail has lower capital costs for shippers than pipelines Substantial new railroad loading and unloading infrastructure is planned Pipelines require long-term shipping contracts prior to construction; railroads do not Relatively short well life and high production costs in the Williston Basin means that long-term capital investments in pipelines may not be worth the risk 33

RAIL VERSUS PIPELINE COSTS Rail costs $4 to $10 per barrel more, depending on the market, but refinery profitability depends on regional crude oil price and competing transportation costs Rail can transport undiluted bitumen and this reduces overall transportation costs substantially 34

LIMITED SUPPORT FOR PIPELINES FROM SHIPPERS Pipeline projects cancelled due to lack of shipper interest include Dakota Express and Bakken Crude Express Of Enbridge’s 185 ND shippers, only 15 even asked for the Sandpiper Pipeline pro forma TSA Shipper protest at FERC: – “Virtually every governmental study shows that current pipeline and rail facilities are more than sufficient for the foreseeable future to transport Bakken crude oil production....” – “The use of extensive rail transport clearly indicates that the market regards the availability, pricing and terms of service of rail transport as equally desirable as the pipeline service....” “Crude oil take away capacity is expected to remain adequate as long as rail deliveries to coastal refineries keep growing.” Lynn Helms, Director ND Industrial Commission, 9/12/

THE RAIL VERSUS PIPELINE FRAMING Crude oil is moving by rail because there is insufficient pipeline capacity – for important US markets rail is and likely will be the preferred or only option Pipeline transportation is cheaper – refinery profitability depends on a number of market factors, not just transportation cost If more pipelines are built shippers will switch to pipelines and railroads will become less congested – the relatively short life of Williston Basin wells may not justify the risk of a long-term pipeline investments – the market has supported more rail than pipelines – the railroads are planning expansions to address congestion 36

TRANSPORTATION OPTIONS CONCLUSION Planned pipeline projects are unlikely to substantially reduce railroad congestion because they do not serve the markets served by railroads Ultimately, market forces are driving shippers’ pipeline versus rail decisions and citizens have little control over this Rail transportation of crude oil is likely to continue 37

RAIL VERSUS AND PIPELINE SAFETY 38

SAFETY DEPENDS ON METRIC Conventional wisdom is that pipelines are safer than railroads Both the rail and pipeline industries offer 99.99%+ safety numbers, but both have risks Rail worse than pipelines for human death and property destruction Rail better than pipelines for amount of oil spilled and impacts of spill on the natural environment Rail worse than pipelines for impact of CO2 released due to normal operations, but both promote carbon extraction 39

BETTER FRAMING The “which is safer” debate detracts from more important debates, including: 1)how to make each as safe as possible, and 2)how to reduce crude oil demand and therefore shipments 40

UNDERLYING CHALLENGES COMMON TO BOTH RAIL AND PIPELINE SAFETY Rail and pipeline safety improvements are both hampered by: – A lack of public information leading to limited proactive citizen involvement and political will – Insufficient inspection, enforcement, and regulatory reform power and funding – Regulatory language and culture that allows almost complete industry self-regulation in many safety matters and results in reactive regulation and hostility to citizen participation 41

RAILROAD SAFETY 42

DERAILMENTS 43 LocationDate Oil Cars Derailed Lac Mégantic, Quebec July Gainford, Alberta October Aliceville, Alabama November Casselton, North Dakota December Plaster Rock, New Brunswick January Philadelphia, Pennsylvania January Vandergrift, Pennsylvania February Lynchburg, Virginia April

RAILROAD SAFETY NEEDS Tank car safety design Track inspection and maintenance Increased regulation of short line track Crew size Positive train control Route selection Spill response Cargo information disclosure 44

TANK CAR SAFETY DESIGN Improvements to DOT-111 rail cars (life years) ~92,000 tank cars are moving flammable liquids and ~78,000 require retrofitting Use only cars designed for explosive liquids Head shields, thermal shielding, thicker steel, improved fittings and couplers, pressure relief valves Critical issue is time required 45

TRACK INSPECTION AND MAINTENANCE Track problems cause the most derailments and result in the worst accidents FRA track inspection rules do not consider population density or sensitive areas Voluntary agreement requires 1 additional internal and 2 geometry inspections per year for track carrying >20 oil cars Installation of test equipment on locomotives would allow near-continuous monitoring 46

IMPROVED REGULATION OF SHORT LINE TRACK Short line track used for crude oil trains should be maintained to the same standard as mainline track Lac Mégantic and Aliceville derailments were on short line track 47

CREW SIZE Federal regulations do not specify how number of crew Although many trains carry two crew, the number should be standardized for crude oil trains 48

POSITIVE TRAIN CONTROL Positive train control means the installation of equipment that automatically controls trains to override human error to prevent accidents Not expressly required for crude oil trains but is required on passenger routes and for trains carry toxic-by-inhalation materials 49

ROUTE SELECTION Railroads required to assess route safety for some hazardous materials, but not crude oil Railroads have voluntarily agreed to assess route safety for crude oil trains State and local governments should review railroad judgments about route safety and require changes where needed, rather than leave this solely to railroads 50

EMERGENCY AND SPILL CLEANUP RESPONSE Oil trains currently exempt from preparing and filing response plans that comply with Oil Pollution Act requirements, and instead prepare only “basic” plans Require that railroads prepare and that federal, state, and local governments approve response plans Fees for local first responder hiring, training and equipment Community notification 51

CARGO INFORMATION DISCLOSURE Improve accuracy and first responder access to train manifests Allow community access to information about types of commodities passing through their communities to allow emergency planning 52

PIPELINE SAFETY 53

PIPELINE SAFETY NEEDS Increased inspection and enforcement More knowledge about excavation damage Increased use of automatic and remote- controlled valves Improved integrity management Increased public information Standardized leak detection requirements Spill response capabilities for submerged oil Regulation of gathering lines Maintenance of cover 54

INCREASED INSPECTION AND ENFORCEMENT PHMSA’s authority is limited mostly to paper and post hoc investigation When adjusted for inflation, fines are about the same as in the 1960s Limited number of actions taken by PHMSA 55

EXCAVATION DAMAGE Lack of tracking and analysis of incidents PHMSA has not yet completed report required by 2011 legislation 56

AUTOMATIC AND REMOTE-CONTROLLED VALVES Issue has been debated for years Not uniformly required Oak Ridge study showed effectiveness In 2010, PHMSA issued Advanced Notice of Proposed Rulemaking for hazardous liquid pipelines and received comments, but no actions since then 57

IMPROVED INTEGRITY MANAGEMENT Congress required report on integrity management in 2011 NTSB recommended audit of PHMSA’s performance-based safety programs PHMSA issued an ANPRM Nothing released to public 58

INCREASED PUBLIC INFORMATION The public has no meaningful access to PHMSA regulatory materials and no meaningful opportunity to participate in any pipeline-specific PHMSA regulatory processes related either to pipeline safety or spill response 59

STANDARDIZED LEAK DETECTION PHMSA has no minimum leak detection standards In 2010, PHMSA issued an ANPRM on leak detection but has not taken any public steps since then 60

SUBMERGED OIL In 2011 Congress required a study of dilbit, which spilled and sank in the Kalamazoo River Rather than study this material fully, PHMSA limited the study to whether the risks of dilbit to pipeline operations was greater than for conventional crude oil, but did not study the behavior of dilbit on release 61

MAINTENANCE OF COVER Federal regulations require that pipelines be buried at minimum depths when constructed, but do not require that pipeline operators maintain this depth 62

CONSERVATION: THE SAFEST AND BEST OPTION FOR CONSUMERS The differing decreases in petroleum fuel use among the states indicates that some states are taking successful actions to promote oil conservation Rather than focus expressly on increasing oil production, policy makers should encourage oil conservation, as this provides greater energy and financial security for Americans 63

Thank you! 64

Paul Blackburn PO Box Minneapolis, MN