Ten Considerations To Mitigate Exposure Before Shipping Crude By Rail

Following two derailments of trains transporting crude in February, Sutherland attorneys Matt Gatewood, Susan Lafferty, and David McCullough issued the Legal Alert available here and copied below addressing ten considerations that any shipper or owner of crude should assess before shipping by rail.

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Last week’s derailments in West Virginia and Canada bring more scrutiny to the already heavily scrutinized shipment of crude by rail given the real-time media coverage of the incidents.

Last Friday, Oregon Senator Ron Wyden sent a letter to the Office of Management and Budget (OMB) regarding the safety of the CPC-1232 tank cars involved in the West Virginia incident. The Senator questioned the utility of the “supposedly safer” CPC-1232 tank cars, which also were utilized in the shipment that derailed in northern Ontario earlier this month. In a news release issued earlier this week, the Transportation Safety Board of Canada stated that at least 19 of the 25 derailed tank cars in the Ontario incident “were breached or partially breached and released various amounts of product.”

Both incidents remain under investigation. In West Virginia, in addition to the Federal Railroad Administration’s inspection of the derailed tank cars, the Pipeline Hazardous Materials Safety Administration (PHMSA) announced it is analyzing the nature of the crude oil. Specifically, PHMSA is evaluating the crude’s gas content, volatility, tank car performance and compliance with correct product classification. Such an investigation may ultimately lead to pursuing the owner of the crude oil for misclassification and failure to adhere to PHMSA regulations. Relatedly, the White House Office of Management and Budget is in the process of analyzing the new regulatory regime proposed by PHMSA to govern the shipment of crude by rail. The finalization of that regime, scheduled to have been completed by January 2015, has been delayed until at least May.

Any shipper or owner of crude should carefully assess the following to understand and mitigate potential exposure when shipping by rail:

• Contractual arrangements with the railroad and any other parties including notification requirements and liability shifting provisions. The nature of the contractual arrangement can directly impact whether the shipper is strictly liable in the event of an incident.
• Evaluation of liability exposure in the event of an incident in each state in which the entity is shipping crude oil. Certain states impose strict liability for a spill of petroleum, and response requirements on the owner of the oil being shipped—without regard to fault.
• Likelihood of enforceability of key contractual provisions including indemnification, choice of law and forum selection clauses.
• Compliance with all PHMSA and environmental requirements including knowledge of how new requirements are being applied to others in the industry. PHMSA requirements include registration and classification requirements.
• Policies and procedures for conducting internal investigations following incidents, training of investigative team, and understanding of privilege issues.
• Training of key personnel responsible for liaising with the media and government following incident on roles and how to deal with any “bad facts” that the company will need to publicly address.
• Consistency and thoroughness in documentation of negotiations and dealings on shipments for reference and preservation purposes.
• Sufficiency of documentation obtained from counterparty about the crude being shipped including, for example, Material Safety Data Sheets.
• Proper classification of crude being shipped.
• Understanding of industry’s standard of care when selecting the railcars to be used in the shipment. The standard of care may vary depending on the nature of the crude oil that is shipped. Failure to adhere to the industry’s standard of care can increase liability exposure in the event of an incident.