(John Kemp is a Reuters market analyst. The views expressed are his own)
By John Kemp
LONDON, Dec 11 (Reuters) - North Dakota’s Industrial Commission on Tuesday ordered that all oil produced from the Bakken petroleum system must be passed through surface separation facilities to ensure it is safe prior to transport.
The regulations respond to concerns about the flammability of Bakken oil following a series of train fires across the United States and Canada involving crude originating from the Williston Basin.
From Apr 1, 2015, all oil produced from the Bakken and associated formations must be passed through a gas-liquid separator or heater-treater.
The oil’s temperature must be raised to at least 110 degrees Fahrenheit to boil off the most volatile fractions which become highly flammable or even explosive if they become separated in transit.
The regulations prohibit blending crude with liquids recovered from gas pipelines or with any other natural gas liquids including gas well condensates, propane, butane and pentane.
North Dakota’s regulators have been fiercely criticised in the New York Times for being too close to the state’s oil industry and not being tough enough on safety and environmental controls.
On Nov 22, the Times published a lengthy and critical investigation entitled the “The Downside of the Boom” about how North Dakota “took on the oversight of a multi-billion dollar oil industry with a slender regulatory system built on neighbourly trust, verbal warnings and second chances”.
The Industrial Commission, which regulates oil and gas production in the state, consists of the governor, attorney general and agriculture commissioner.
The Times observed “North Dakota’s oil and gas regulatory setup is highly unusual in that it puts three top elected officials directly in charge of an industry that, through its executives and political action committees, can and does contribute to the officials’ campaigns.”
The implication is the state’s regulators are simply too close to the industry they are responsible for overseeing. Larger states or the federal government would be tougher and more effective enforcing environmental and safety rules.
But is that true? The swift introduction of crude stabilisation rules in North Dakota strongly suggests that local regulators have acted more quickly and effectively than the federal authorities.
There are still fierce disputes about whether light crude produced from the Bakken contains more volatile components than oil from other parts of the country.
Safety regulators and crude producers have published contradictory studies on the volatility of Bakken oil this year.
Trade groups claim Bakken is not unusually volatile and does not require treatment or stabilisation before being transported by pipeline, truck or railroad tank car.
Federal safety regulators, including the U.S. National Transportation Safety Board, the Pipeline and Hazardous Materials Safety Administration and the Department of Transportation have all cited evidence of abnormal volatility to justify proposed rules.
Federal regulators are still sparring with industry lawyers over whether there is any evidential basis for new rules at all.
The U.S. Department of Transportation has been working on new standards for tank cars since April 2012 and published initial proposals in June 2013.
New regulations have still not been finalised and the rulemaking has fallen behind schedule. The department does not anticipate publishing a final version until the end of March 2015 at the earliest (“Report on Significant DOT Rulemakings” Nov 2014).
Even efforts to introduce interim emergency rules following the oil-train disaster at Lac Megantic in Quebec in July 2013 got bogged down in fierce lobbying by oil industry lawyers and tank car owners.
By contrast, North Dakota has much faster to address safety concerns and will have new rules requiring basic stabilisation of crude prior to transport in place by the start of the second quarter of next year.
Conservative lawyers and industry lobbyists in the United States have enthusiastically embraced the concept of cost-benefit analysis.
The idea is that new rules and regulations (perhaps one day even new statutes) should only be introduced if expected benefits exceed expected costs.
The concept sounds reasonable: who would want rules which were expected to cost more than the gains they provide? But in practice it has been wielded by lawyers and lobbyists to hamstring the regulatory process.
Both costs and benefits are usually hard to quantify and subject to an enormous amount of uncertainty. Moreover, the costs and benefits almost always accrue to different groups in society, so regulations have important distributive effects.
In an ideal world, new rules would be subject to an objective cost-benefit analysis involving neutral government officials and representatives of all the stakeholders involved which would reach an outcome that is best for everyone.
But in the real world, the weighing of costs and benefits is much more uncertain and involves choosing between the interests of different groups.
In this case, oil safety regulations pit oil producers versus communities along the main rail routes, and crude oil shippers versus the railroads.
Making judgements about costs versus benefits, who pays and who gains, is inherently a political activity best done by elected officials rather than bureaucrats or lawyers.
North Dakota’s Industrial Commission, led by elected state officials, has produced workable improvements much faster than the federal rulemaking process.
It is still not absolutely certain whether the state’s crude oil really is more volatile than from other parts of the United States.
But in the absence of a definitive finding, North Dakota officials have concluded the balance of risks, in terms of safety as well as the reputation and sustainability of the oil industry in the state, requires a response.
One more big train conflagration, this time in a densely inhabited urban area like Chicago, would have plunged the whole shale industry into a political crisis, and with it the state’s economy.
The rules are a sensible compromise and show that local regulators can often react faster and more effectively than the bureaucrats, lawyers and lobbyists in Washington.
If only the federal government had been able to act as swiftly. (Editing by William Hardy)