(Updates with closing prices in sixth paragraph.)
July 23 (Bloomberg) -- The Obama administration proposed phasing out thousands of older tank cars within two years and lowering speed limits as part of a set of new rules intended to reduce the risks of hauling crude oil by rail.
The proposal, which follows a series of fiery accidents, also would require improved braking systems and testing of oil before being loaded as well as thicker tanker walls. The rule applies to shipments of corn-based ethanol as well as oil.
“Today’s proposal represents our most significant progress yet in developing and enforcing new rules to ensure that all flammable liquids, including Bakken crude and ethanol, are transported safely,” U.S. Transportation Secretary Anthony Foxx said in Washington.
The regulations are designed to update standards to account for an increase in the use of trains to carry flammable liquids, particularly crude from places like North Dakota’s Bakken field where production is soaring beyond the capacity of pipelines. U.S. carloads of oil surged to 415,000 last year from 9,500 in 2008, according to the Transportation Department.
Costs to comply with the proposed rules may be as high as $6 billion over 20 years, the department estimated. Benefits in accidents avoided could be as high as $4.75 billion, it said.
Railroads fell while tank car producers rose in trading. Union Pacific Corp., the largest publicly traded U.S. railroad, dropped 0.3 percent to $102.51 at the close in New York and CSX Corp. fell 0.7 percent to $31.13. Trinity Industries Inc., the largest publicly traded rail carmaker, rose 0.2 percent to $45.12 and Greenbrier Cos. climbed 0.8 percent to $66.59. GATX Corp., one of the largest owners of tank cars, fell 2 percent to $65.82.
The U.S. proposal, which is subject to 60 days of public comment, would require better descriptions of the cargo, a risk assessment for routes and lower speed limits. Trains made up of non-compliant tank cars would be limited to 40 miles an hour in all areas, or 50 mph if the tank cars meet the new standards, according to the proposal. The speeds may be lowered to 30 mph for trains that don’t comply with the enhanced braking requirement.
The type of tank car most implicated in spills, known as the DOT-111, would be phased out or rebuilt to meet the new standards within two years for the most volatile crude oil, according to the proposal. For the least volatile oil, known as packing group III, the phase-out will be five years.
“A two-year timetable for phasing out the use of older DOT-111 cars in the most hazardous flammable service is aggressive, but can be met with appropriate retrofit packages and new car design,” said Jack Isselmann, a spokesman for the Lake Oswego, Oregon-based Greenbrier, in an e-mailed statement.
The agency proposed three possible standards for tank cars constructed after Oct. 1, 2015.
The first option would have a 9/16th of an inch shell, 1/8th of an inch thicker than models now produced, have electronically controlled pneumatic brakes and be equipped with rollover guards. A second option features a thicker steel shell without the brake or rollover features. A third option is based on a model, known as the CPC-1232, that has a 7/16th of an inch steel shell. The industry adopted those units in October 2011.
Requiring use of the most robust tank car option would add more than $3 billion to the cost for hauling crude by rail over a 20-year period, though with a potential benefit as high as $3.5 billion from avoided damage and death caused by accidents, according to department estimates.
Trains hauling cars that don’t meet the new standards would be restricted to speed limits of 40 miles per hour in all areas, under one scenario proposed by the department.
Lower train speeds, new braking requirements and the phase- out of older tank cars will drive up expenses, although the impact is difficult to calculate accurately, David Vernon, a New York-based railroad analyst with Sanford C. Bernstein, said in a note today.
“As those costs get passed through to refiners and producers, it will eat into the arbitrage opportunity of moving crude by rail and all else equal require a higher spread to maintain current volumes,” Vernon said.
The department predicts about 15 derailments in 2015 and five annually after that, without any changes to current safety standards. Ten accidents are classified as of “higher consequence” over the 20 years, the department predicts.
Edward Hamberger, the chief executive officer of the Association of American Railroads, a Washington-based group that represents companies including Berkshire Hathaway Inc.’s BNSF rail line, said in a statement that the proposal “provides a much-needed pathway for enhancing the safe movement of flammable liquids in the U.S.”
In a June 10 presentation to regulators, CSX Corp. said adding electronic controlled pneumatic brakes could cost as much as $15,000 per car and $50,000 per locomotive.
Union Pacific Corp., BNSF Railway Co., CSX and Norfolk Southern are reviewing the crude-by-rail safety proposals to understand better its impacts, the companies said in separate e- mail responses to questions. The Railway Supply Institute’s tank car committee plans to submit comments on the proposal after reviewing the details, the trade group, whose members include tank car owners and producers, said in an e-mailed statement.
The Transportation Department also said today its studies found that Bakken crude is more volatile and potentially flammable.
“We’ve confirmed so far that Bakken crude oil is on the high end of volatility compared to other crude oils and not only is it on the high end of volatility, it’s production is skyrocketing,” Foxx said.
The American Petroleum Institute in a statement disputed that characterization, saying multiple studies have shown Bakken oil is similar to other crudes.
Safety advocates and officials from North Dakota to New York in communities along the routes of oil trains have pushed regulators to update rules in response to a series of accidents, including an April derailment in downtown Lynchburg, Virginia, that ignited a fire and triggered a spill in the James River.
In July last year, an unattended train rolled downhill, derailing in Lac-Megantic, Quebec, and causing an explosion that killed 47 people, incinerated the town’s center.
Transport Canada in April mandated a three-year phase-out of tank cars ordered before October 2011, when the industry introduced a car design to include shields at the ends and protection for valves on the top. The agency also immediately banned tank cars that have weak underbelly support, those built before the mid-1990s, from carrying dangerous goods.