Paul Blackburn 612-599-5568 paul@paulblackburn

1. Pipeline Versus Rail The False Choice Paul Blackburn 612-599-5568 paul@paulblackburn.net

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

3. 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

4. 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

5. 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

6. 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

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

8. PRIMARY SOURCES OF NEW CRUDE OIL IN MARKET

9. WILLISTON BASINCRUDE OIL FORECAST North Dakota Pipeline Authority July 8, 2014

10. WILLISTON BASIN TYPICAL WELL PRODUCTION DECLINE North Dakota Industrial Commission

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

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

13. CANADIAN RAILROAD EXPORTS Source: National Energy Board of Canada

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

15. 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

16. 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

17. FORECAST US PETROLEUM USE

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

19. MARKETS DEMAND DIFFERENT TYPES OF CRUDE OIL

20. COASTAL REFINERIES RECEIVE ALMOST ALL OVERSEAS IMPORTS

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

22. 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

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

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

25. CRUDE OIL PIPELINES & PROPOSALS

26. WILLISTON BASINTRANSPORTATION OPTIONS North Dakota Pipeline Authority July 8, 2014

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

28. US RAILROAD LINES

29. RAIL CRUDE OIL OFFLOADING TERMINALS ON THE EAST COAST

30. RAIL CRUDE OIL OFFLOADING TERMINALS ON THE WEST COAST

31. 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

32. 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

33. 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

34. 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

35. 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, 9/12/2014

36. 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

37. 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

38. RAIL VERSUS AND PIPELINE SAFETY

39. 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

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

41. 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

42. RAILROAD SAFETY

43. DERAILMENTS

44. 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

45. TANK CAR SAFETY DESIGN • Improvements to DOT-111 rail cars (life 30-40 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

46. 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

47. 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

48. 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

49. 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

50. 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