New US rail regs could cause tank car shortage, imperil production: industry

Washington (Platts)--23 Jul 2014 532 pm EDT/2132 GMT


New rail safety regulations proposed Wednesday by the Obama administration could cause a shortage in compliant tank cars, potentially shutting in or stranding production, officials in the oil and ethanol industries warned.

The sweeping regulations, the first changes to crude-by-rail rules in decades, call for a phaseout within two years of the use of legacy DOT-111 tank cars for transporting highly flammable liquids, including Bakken crude and ethanol.

Tank car manufacturers had previously said that it could take up to 10 years to fully phase out DOT-111s, as they already face year-long backorders for new builds. Tank cars are in high demand as it is, amid booming domestic crude and ethanol production, industry sources have said.

"I think the idea that you're going to basically phase out 70% of the country's tank-car fleet over a 24-month period is perhaps a bit fanciful," said Chris Tucker, senior managing director of FTI Consulting, which has several clients in the oil and gas industry. "I think more likely you'll see a focus on retrofits, but even that is going to take some time."

An ethanol source, who spoke on condition of anonymity, added: "Based on what I see, there is a strong demand for cars for both ethanol and crude use currently, and they are tough to come by."

According to the proposed rule, the DOT expects about 66,000 tank cars to be retrofitted and about 23,000 cars to be shifted to transporting less volatile Alberta oil sands crude.

The DOT is considering three options for enhanced tank car standards. The first would call for raising the thickness of shells from the current industry voluntary standard of 7/16 inch to 9/16 inch and require electronically controlled pneumatic brakes and rollover protection to be installed.

The second would also require a 9/16 inch shell, but would not require the ECP brakes or rollover protection.

The third would maintain the current industry voluntary standard, known as CPC-1232, of the 7/16 inch shell without ECP brakes or rollover protection. Retrofitting an unjacketed DOT-111 tank car to the first option would cost $33,400, plus $1,032 in out-of-service time and $1,019 in additional fuel and maintenance costs per year, the DOT estimated.

Retrofitting the same car to the second option would cost $28,900, plus the same out-of-service and fuel and maintenance costs, while retrofitting it to the third option would cost $26,730, plus those additional costs.

For a new tank car build, the 9/16-inch shell thickness and the addition of ECP brakes and rollover protection would add about $5,000 to the cost of the car, the agency said.

SHOP CAPACITY IN QUESTION

"The two-year retrofit requirement is a little faster than what many have said is feasible and that could lead to capacity issues and pricing pressure," said Ben Salisbury, an analyst with FBR Capital Markets. The DOT's estimated retrofit costs are in line with previous projections by consulting group Turner Mason of costs between 20-40 cents/b.

One oil industry source said it was not the cost of the retrofits that is so much the issue, it is the ability of the rail car manufacturers to perform the retrofits in a timely manner, so that production and shipments are not too negatively impacted.

"It's how fast you can get these cars in the shop and get this done, because you don't just take them off the track and do the retrofits," the source said. "In many cases, you have to clean them, because some of them have volatile gases and whatnot. Not all of the facilities have the ability to do the cleaning. So, what no one knows is the demonstrated shop capacity to do all these retrofits."

Given the range of options that the DOT is considering for tank car safety standards, companies are faced with a lot of uncertainty with any new tank car purchases," another oil industry source said.

"With the three options they're seeking comment on, if I'm in the process of purchasing anything, I'm freezing solid," the source said. "It's unclear what standards you're going to end up with. Everybody's in a little limbo for what this looks like."

The oil industry has lobbied federal regulators to keep shell thickness requirements at 7/16 inch, to avoid the most costly and time-consuming retrofits on older DOT-111 cars. The rail industry, however, has urged the thicker 9/16-inch shell, to help prevent punctures and leaks.

AVOIDING RAIL CONGESTION

The rail industry did get a partial victory on speed limits.

In the proposed rule, DOT asks for input on whether trains with legacy DOT-111 tank cars should be restricted to a speed limit of 40 mph in all areas, just in high-threat urban areas, or only in areas with a population of more than 100,000.

The proposed rule calls for a 50 mph speed limit if the train is using upgraded tank cars, but trains would be restricted to 30 mph if the tank cars do not have enhanced braking systems.

The rail industry had fretted that the DOT would impose lower speed limits of 30 mph or even 25 mph on all oil trains, which it said would gum up the already congested rails.

Earlier Wednesday, Norfolk Southern CEO Wick Moorman said a 25-30 mph speed limit would result in an "almost shutting down of the North American rail network."

"It would be extraordinarily disruptive [and] take a lot more trains and cars to move the same volume of oil," he said on an earnings conference call. "The resulting capacity loss is something the rail network could not manage."

The rail industry currently restricts speeds of trains with 20 or more carloads of hazardous materials, including crude oil, to 50 mph.

And under an agreement the Association of American Railroads announced in February with the US Department of Transportation, as of July 1, such oil trains that include at least one older DOT-111 car are traveling no faster than 40 mph in 46 federally designated high-treat urban areas.

Salisbury, with FBR Capital Markets, said the proposed rule "avoids the worst-case dislocations of very low speed limits."

--Herman Wang, herman.wang@platts.com --Edited by Richard Rubin, richard.rubin@platts.com




Copyright © 2016 S&P Global Platts, a division of S&P Global. All rights reserved.