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2013 Was a Record Year For Oil-Train Accidents, and Insurers Are Wary

Bakken oil train explosions have mostly been far from populated areas, but one explosion killed 47 people.
 
 
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Aftermath of the explosion in Lac Megantic, Quebec.
Photo Credit: Sûreté du Québec

 
 
 
 

Spurred by the shale drilling rush that has progressed at breakneck speed, the railroad industry has moved fast to help drillers transport petroleum and its byproducts to consumers. Last year, trains hauled over 400,000 carloads of crude oil, up from just 9,500 carloads in 2008, according to railroad industry estimates.  Each carload represents roughly 30,000 gallons of flammable liquids, and some trains haul over 100 oil cars at a time.

But with this fast expansion has come some astounding risks — risks that have insurance companies and underwriters increasingly concerned.

A string of oil train explosions have highlighted the potential for harm. A train hauling 2.9 million gallons of Bakken oil derailed and exploded on November 8 in Aliceville, Alabama, and the oil that leaked but did not burn continues to foul the wetlands in the area.

On December 30th, a train collision in Casselton, North Dakota 20 miles outside of Fargo, prompted a mass evacuation of over half the town’s residents after 18 cars exploded into fireballs visible for miles. 400,000 gallons of oil spilled after that accident, which involved two trains traveling well below local speed limits.

“Those crashes are all on the radar of the insurance industry,” attorney Dean Hansell recently told Law360.

All told, railcar accidents spilled more than 1.15 million gallons of crude oil in 2013, federal data shows, compared with an average of just 22,000 gallons a year from 1975 through 2012 — a fifty-fold spike.

Bakken oil train explosions have mostly been far from populated areas. But around 1AM on July 5, 2013, over 60 oil cars exploded after a runaway train derailed in Lac-Megantic, a Canadian town near the Maine border, leveling dozens of buildings and killing 47 of the town’s roughly 6,000 residents.

The railroad company, Montreal, Maine and Atlantic Railway, went belly up, leaving behind clean-up costs estimated at over $180 million. Canadian regulators discovered the company carried only $25 million in liability insurance. Legal battles over clean-up costs and lawsuits from survivors are expected to take at least a decade to resolve — and for the time being, taxpayers are picking up the tab.

That tragic accident took place in a small town. An explosion in a major city could represent a far larger calamity. But neither oil and gas companies nor railroads carry enough insurance to cover the kind of catastrophe at risk when shipping crude by rail.

"There is not currently enough available coverage in the commercial insurance market anywhere in the world to cover the worst-case scenario," James Beardsley, an executive with Marsh & McLennan Cos.' Marsh Inc. insurance brokerage unit, told the Wall Street Journal in January.

Bakken Crude: A Hazard on the Rails

It’s not just that more oil is moving by train, it’s also that Bakken shale oil seems to be particularly dangerous, according to federal regulators.

On January 2nd, the Pipeline and Hazardous Materials Safety Administration (PHMSA) issued a rare safety alert, saying “recent derailments and resulting fires indicate that the type of crude oil being transported from the Bakken region may be more flammable than traditional heavy crude oil.”

A few weeks later, the National Transportation Safety Board (NTSB) and its Canadian counterpart, the Transportation Safety Board of Canada warned that an oil train accident could result in a “major loss of life” as they called for hazardous material shipping rules to apply to crude oil trains.

“The large-scale shipments of crude oil by rail simply didn’t exist 10 years ago, and our safety regulations need to catch up with this new reality,” said NTSB Chairman Deborah Hersman.

 
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