With concerns over the volatile nature of Bakken crude growing and US regulators developing sweeping crude-by-rail safety rules, lawmakers and safety advocates are pressing for a new, federal requirement to stabilize certain types of crude before it is shipped by rail.
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While such a requirement is seen as unlikely, at least in the near term, the Obama administration may find its recent crude export rulings could create a de facto stabilization requirement. In effect, current US crude export policy and global oil market fundamentals may be enough of an incentive for industry to stabilize Bakken crude before it is shipped.
"It could be a perfect bureaucratic solution to a policy problem," Benjamin Salisbury, a senior energy policy analyst at FBR Capital Markets, said.
This idea builds off last month's revelation that the US Commerce Department would allow both Enterprise Product Partners and Pioneer Natural Resources to export crude that has been stabilized and processed through a distillation tower.
Under this apparent precedent, which Obama administration officials say does not mark a policy change, Bakken producers may look to export some of the roughly 1 million b/d now coming out of the growing oil play. To do this, analysts said, they would need to stabilize the crude to meet Commerce's export requirements. This stabilization would in theory make Bakken crude less volatile and safer to transport and would effectively create a stabilization requirement without a new federal rulemaking process.
"You could stabilize and go," said one analyst. "You'd still have to put it into rail cars and ship it to the coast, but at least you'd be selling it at a global market price instead of at the WTI discount. Who wouldn't do that? Everybody would do it."
There are obvious limitations to this solution, lobbyists and analysts said, including that Bakken producers are already permitted to export to Canada, a market they would likely prefer due largely because it is close. There's also the fact that building up the Bakken's stabilization and distillation capacity would cost millions of dollars and could take years to complete.
But at least one company, Quantum Energy, seems to be emphasizing the link between stabilization and exportability as it pushes its plans to build as many as five stabilization units in the Bakken.
Quantum's plans include building five 20,000 b/d micro-refineries in North Dakota and Montana that would be capable of stripping volatile natural gas liquids out of the crude, making it safer for transport.
"The result of that is that the liquid that flows out of the facility is less volatile, bottom line," said Russell Smith, an executive vice president with Quantum, which has offices in Williston, North Dakota. "To pretend that light sweet crude isn't more volatile than heavier crudes ... doesn't make any sense."
Smith outlined these plans in a meeting last month with US Department of Transportation and White House officials as the administration began its review of a new crude-by-rail rules.
These rules are expected to focus on rail speeds, braking technology standards and design specifications for tank cars.
HOUSE DEMOCRATS WANT NGLs REMOVED BEFORE SHIPPING
In a letter to Transportation Secretary Anthony Foxx last week, four California Democrats in the US House of Representatives, led by Representative Doris Matsui, asked regulators to address crude oil volatility concerns by requiring the removal of flammable natural gas liquids from the crude before it is loaded on to tank cars.
"In order for industry to comply, they would need to build small processing towers known as stabilizers that shave off NGLs from crude before it is ultimately loaded for transports," the members wrote. "Stabilizers are common in other parts of the country and we understand that this could also be feasible through equipment leasing."
Smith said his company's plans were focused on exports, rather than rail safety.
"We're not advocating if they do or if they don't [require stabilization]," he said. "Quite frankly, we don't care. Our business plan is centered around exportability."
In addition, analysts said such a stabilization requirement is unlikely in the near term, because it would first require an extensive collection of data by DOT. Analysts said DOT was unlikely to propose new stabilization rules for Bakken or any other crude type without proving first that it is more volatile than other crude and in need of additional safety regulations. Data collection and this finding would be necessary for the rule to survive any legal challenge, one analyst said.
DOT's Pipelines and Hazardous Materials Safety Administration has said preliminary testing shows Bakken crude may be more flammable than other crudes typically shipped in the US. And while there is no federal law requiring crude to be tested for volatility or vapor pressure, DOT has said shippers may be violating federal law by not correctly identifying on manifests what kind of crude they were carrying.
The American Fuels and Petrochemical Manufacturers in May said its analysis of 1,400 samples of Bakken crude, found that it is comparable in flashpoint, boiling point, corrosivity and other specifications to other light crudes and "well within the safety standards" for DOT-111 tank cars approved by the DOT for transporting oil.