Crude-By-Rail Update: The DOT's Final Rule Is Out—How Can Producers And Midstream Transporters Comply With The New Classification Standards?

On May 1, the Department of Transportation—through its operating agencies the Pipeline and Hazardous Materials Safety Administration1 and the Federal Railroad Administration—issued its final crude-by-rail rule. The rule mandates more stringent standards for newly constructed tank cars—along with the retrofitting of older ones—and imposes new operational controls for high-hazard flammable trains.2 Despite the new rule, congressional and regulatory scrutiny remains focused on crude-by-rail transportation as accidents continue to occur, including a derailment on May 6 near Heimdal, North Dakota.3

Aside from the short- and medium-term macroeconomic effects of increasing costs and barriers to crude oil transportation from pipeline-starved shale plays, the rule imposes immediate requirements on the crude-by-rail industry.4 Primarily, the rule demands immediate compliance from railroads and tank car owners (e.g., new DOT-117 tank car specifications, speed limits, and braking and routing requirements).5

But producers and midstream transporters—"offerors"6 of crude oil—did not escape unscathed. Offerors along the supply chain must implement a new program for classifying7 "unrefined petroleum-based products" (i.e., sampling and testing).

Why is this important? It is important because throughout the rule's preamble the agencies reiterate their commitment to increased inspections and enforcement actions against offerors that misclassify crude oil8—a potential warning of future "Bakken Blitz" campaigns.9 And violations of the hazardous materials regulations (HMR) carry a stiff civil penalty of $75,000 per violation, which can increase to $175,000 per violation if injury or property damage occurs.10 And the agencies have the option of potential criminal penalties, carrying additional fines and imprisonment.11

So what does the rule require? The rule requires offerors to adopt a written sampling and testing program that at a minimum specifies:

A frequency of sampling and testing that accounts for any appreciable variability of the material (e.g., history, temperature, method of extraction [including chemical use], location of extraction, time of year, length of time between shipments); Sampling prior to the initial offering of the material for transportation and when changes that may affect the properties of the material occur (i.e., mixing of the material from multiple sources or further processing and then subsequent transportation); Sampling methods...