Crude by Rail Requires Stronger Tank Cars, Investigators Say

Jan 23, 2014 4:52 pm ET

(Updates with costs, comments from industry group, analyst, former regulator starting in fifth paragraph.)

Jan. 23 (Bloomberg) -- Crude oil hauled by rail needs to be shipped in stronger tank cars and on safer routes, transportation investigators in the U.S. and Canada said following a series of accidents in North America.

The U.S. National Transportation Safety Board and Canadian Transportation Safety Board issued the recommendations today as part of a probe into the July derailment of rail cars filled with oil in Lac-Megantic, Quebec. The accident ignited an inferno that killed 47 people spending a Saturday night in the town’s center.

“The large-scale shipment of crude oil by rail simply didn’t exist 10 years ago, and our safety regulations need to catch up with this new reality,” NTSB Chairman Deborah Hersman said in a statement citing concerns about “the major loss of life” in accidents involving oil transported by rail.

The Canadian agency recommended tougher standards for the type of tank car involved in the Lac-Megantic disaster, improve route planning and require detailed emergency-response plans in communities where oil shipments travel. The NTSB made recommendations to make the tank cars safer in 2009.

Modifying the tank cars identified by the boards may cost leasing companies and shippers about $5.2 billion, according to estimates by Bloomberg Government today.

Neither board has the power to issue or enforce standards, which are overseen by agencies such as the U.S. Transportation Department and Transport Canada.

Record Volume

The boards acted after a BNSF Railway Co. train carrying Bakken formation crude crashed in North Dakota last month, forcing the evacuation of a nearby town, and a CSX Corp. train hauling crude derailed Jan. 20 near the Schuylkill River in Philadelphia.

Record volumes of oil are being hauled by rail as soaring production from Canada, North Dakota’s Bakken shale formation and Texas exceeds pipeline capacity. U.S. oil output at the highest level since 1988 has led to a 400 percent increase in oil shipments by rail since 2005, the NTSB said, citing Association of American Railroads data.

Through Jan. 18, the volume of U.S. rail shipments of petroleum and associated products increased 13 percent this year as overall traffic is up less than 1 percent, according to AAR data released today.

The Canadian board today recommended that tank cars designated as DOT-111 that haul crude should be stronger and better able to withstand a crash or blast.

“If crude oil is to be carried, it shouldn’t be carried in class-111 tank cars,” TSB Chairwoman Wendy Tadros said today at an Ottawa news conference.

U.S. Fleet

The NTSB has investigated rail crashes since 1992 when this type of tank car ruptured. Hersman has said they have “inadequate design.” The NTSB has recommended phasing out the cars if they can’t be retrofitted to be made safer.

In an note to investors before today’s recommendations, Wells Fargo & Co. analysts said modifying tank cars could cost $5,000 to $45,000 apiece. An estimated 70,000 to 80,000 cars are possible candidates, putting potential cost to upgrade the rail fleet at $350 million to $3.6 billion. Those costs probably will be passed on to the oil industry and other shippers, the analysts wrote Jan. 16.

“Enhanced safety standards on oil-by-rail could affect a major portion of the U.S. tank-car fleet at a time when we’re already capacity constrained,” said Patrick Hughes, an analyst at Height Analytics LLC, a Washington-based research firm. He didn’t say whether rules would add to transportation costs.

Root Cause

While reducing speeds around populated areas probably would win broad support from railroads and oil producers, changes to routes to avoid towns and cities would be difficult without access to track infrastructure, said Kevin Book, managing director of ClearView Energy Partners LLC in Washington, said in an interview.

The American Petroleum Institute, a Washington-based group that lobbies for oil companies including Exxon Mobil Corp., called for preventing accidents in the first place.

“This issue calls for close cooperation between the railroads, shippers and regulators, but the first step is to prevent derailments by addressing track defects and other root causes of rail accidents,” Sabrina Fang, a spokeswoman for the group, said in an e-mailed statement.

Cenovus Pledge

Oil producer Cenovus Energy Inc. of Calgary, which plans to boost its ability to move oil by rail to 30,000 barrels a day by the end of 2014, is evaluating the recommendations and will meet or exceed whatever regulations are put in place, Jessica Wilkinson, a spokeswoman, said in an e-mail.

Imperial Oil Ltd., an oil-sands producer that’s planning a 100,000 barrel-a-day rail loading terminal in Edmonton to ship crude, is reviewing the recommendations, Leanna Dohy, a spokeswoman, said in an e-mail.

U.S. Transportation Secretary Anthony Foxx last week met with officials from the railroad and oil industries, who agreed to spend 30 days examining steps to improve safety of trains hauling crude. Railcar suppliers complained about being left out of the meeting.

Foxx is motivated to act before his hand is forced by safety advocates or politicians, said Brigham McCown, a former administrator of the Pipeline and Hazardous Materials Safety Administration.

“People tying up projects like Keystone mean rail will carry more oil going forward, so I don’t see the calls for action abating,” McCown, now an industry consultant, said in a phone interview. “Secretary Foxx wants to get out in front of this issue. He wants to do it before Congress tells him to.”

‘Serious Stuff’

Chicago Mayor Rahm Emanuel, whose city is one of the nation’s main railroad hubs, today said the U.S. should impose a fee on energy producers and their industrial customers to improve railways and help pay for responding to accidents.

Emanuel, Obama’s former chief of staff, spoke during a meeting of the U.S. Conference of Mayors today in Washington.

“We love rail traffic, and we want more and more of it, but there’s a lot going on,” said Philadelphia Mayor Michael Nutter, who said his city’s rail yard is near an expressway. “This is not like a fire in a trashcan. This is serious stuff.”

Foxx, who was at the meeting, said the agency is also looking into railways. “There is no magic bullet here,” said Foxx, a former mayor of Charlotte, North Carolina. “We don’t think this is a situation where any one type of action is going to solve the problem.”

--With assistance from Paul Badertscher in Ottawa, Frederic Tomesco in Montreal, William Selway and Jim Snyder in Washington and Rebecca Penty in Calgary. Editors: Steve Geimann, Bernard Kohn