Railcar Bottleneck Looms for Oil

Changes Proposed for Tank Cars Could Disrupt Crude, Other Energy Shipments

Railcars loaded with crude oil traveled through Aurora, Ill., in June. The U.S. wants more puncture-resistant features added to such railcars. BLOOMBERG NEWS
One-third of the crude oil hauled from North Dakota’s Bakken Shale region by railcars could be forced off the tracks and into expensive truck fleets in the next four years, according to a railcar-industry trade group.The Railway Supply Institute says there aren’t enough shops to retrofit cars carrying flammable liquids in time to meet proposed federal deadlines, and that tens of thousands of cars will be idled as a result. The U.S. Department of Transportation wants tank cars carrying crude oil to be retrofitted with more puncture-resistant features in two years, and those carrying ethanol to be upgraded in three years. Those carrying other flammable liquids, such as heating oil and chemicals, have five years to be upgraded.“They can’t all be modified by the deadline, and the only alternative would be to yank them out of service,” said Kevin Neels, a transportation consultant for the Brattle Group, which studied the impact of the proposed regulations for the railway institute, which represents railcar-leasing companies and car manufacturers. The DOT is expected to complete standards and compliance deadlines for tank cars by early next year.
Without enough tank cars, producers of oil, ethanol and other flammables could be forced to curtail production or switch to other, more expensive types of transportation, mainly trucks. The oil “is either going to move by trucks or it’s going to stay in the ground,” said Mr. Neels, adding that expanding the use of pipelines and river barges would provide only limited additional capacity. Greater reliance on trucks would add traffic to congested interstate highways and expose more motorists to flammable cargoes, Brattle says.The American Petroleum Institute, the oil industry’s trade group, declined to comment directly on the Brattle report, but said it has warned the DOT’s Pipeline and Hazardous Materials Safety Administration of looming output disruptions and car shortages if the government sticks to deadlines proposed in July.
The Brattle study estimated that, if implementation of the new regulations starts next year, 33% of the crude oil shipped from the Bakken region by rail, or 177 million barrels a year, would be displaced from North American railroads beginning in 2018, the first year sturdier tank cars would be required for crude oil. Brattle predicts ethanol shipments by rail could fall about 34%, or 109 million barrels, in 2019, if the deadline for upgrading the car fleet is 2018.

The report “confirms what many of the shippers have been telling DOT,” said Bob Dinneen, president of the Renewable Fuels Association, the trade group for the ethanol industry. “You’d try to find some other way [to ship ethanol], but it’s clearly going to cause disruptions.” For the oil and ethanol producers alone, transportation costs could rise more than 100% between 2017 and 2024, according to the report.

Some industry executives say concerns about repair-shop capacity and service disruptions will evaporate once shop owners expand capacity in response to the new standards. Greenbrier Cos.—a smaller builder of new tank cars—is expanding to retrofit about 2,000 cars a year, up from about 600 now. “We expect others in the market will scale up in a similar fashion,” said a spokesman for Greenbrier, which is based in Lake Oswego, Ore.

The Railway Supply Institute, based in Washington, D.C., submitted the Brattle Group study to the transportation regulators as part of its last-ditch effort to persuade the government to extend the proposed deadlines.

The Pipeline and Hazardous Materials Safety Administration declined to comment on the filing, but said the agency will review it and more than 3,000 other responses on the proposed rules.

The government’s tougher standards are primarily targeted at 75,000 older tank cars, known as DOT-111s, which have the least crash-resistant components. An oil train with DOT-111s exploded in a rural Quebec town in July 2013, killing 47 people.

Most DOT-111s built before 2011 would need extensive modification, including installation of heat-resistant insulation on the outside of the tanks that would be covered with a steel outer jacket. The DOT has recommended thick steel plates for both ends of the tanks, as well as sturdier valves on them. Repair-shop operators say the curved-steel jacket sections must be welded in place manually, and that a car could take 12 weeks to retrofit.

The Brattle report said retrofits alone could cost car owners about $2 billion, plus $1 billion in lost revenue from idling cars that aren’t upgraded before the deadlines. The group said 6,400 to 6,600 cars can be retrofitted each year, well below the 16,800 cars a year that the DOT assumes.

Said Bill Finn, an engineer consultant for the Railway Supply Institute: “It’s just not possible to do what they’re saying can be done.”