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Oil trains, born of U.S. energy boom, face test in new safety rules

By Patrick Rucker

WASHINGTON (Reuters) - (This July 18 2014 story was corrected to show that the Greenbrier executive estimate of tank car capacity to 30,300 gallons, not 33,000 gallons. Also corrects impact of new tank car design weight in paragraph 23.)

North Dakota's Bakken oil patch has thrived thanks in large part to the once-niche business of hauling fuel on U.S. rail tracks. New safety rules may now test the oil train model.

Within weeks, the Obama Administration is due to unveil a suite of reforms that will rewrite standards conceived long before the rise of the shale oil renaissance, at a time when crude rarely moved by rail and few Americans had ever seen the mile-long oil trains that now crisscross the nation.

Taken separately, the changes appear incremental - a question of a fraction of an inch of steel in tank cars, a few miles an hour of speed or rerouting trains; stripping explosive gases out of the oil would be costly but not complex.

But refiners, oil producers, traders and even railroads have become so reliant on such shipments that the reforms, taken together, could upend a practice that has bolstered bottom lines across a wide swathe of industrial America. It may also complicate shipments of one-tenth of U.S. crude to refineries.

Executives have met formally with regulators and the White House more than a dozen times this year, often to resist anticipated reforms or propose alternatives - typically ones that put the onus on a different industry.

Regulators have so far withheld specifics of their rule proposals, but interviews with industry executives and a review of presentations reveal at least four major areas of concern.

An apparent agreement this week between railroads and oil drillers over new tank car standards may offer a way forward on one of the most contentious issues, one that has vexed regulators since a runaway train derailed and exploded in the Quebec town of Lac Megantic last July, killing 47 people.

Other elements are far from resolved, however. Industry officials are ramping up their rhetoric, beseeching the White House to drop measures that they say would cripple their business and only marginally improve safety.

How regulators balance public safety concerns with commercial imperatives will shape the industry for years.

"If it were not for Bakken rail deliveries, five or six refineries on the East Coast would be shut," Charles Drevna, president of the American Fuel & Petrochemical Manufacturers, an industry trade group, said of the stakes.

"Safety improvements are needed but that can be done without destroying the business."

The White House Office of Information and Regulatory Affairs is shepherding the regulation and officials have promised to present new standards by the end of the month.

TAPPING THE BRAKES OR ZAPPING THE GAS?

For the rail industry, the issue is speed. Executives fear that officials might limit oil trains to 30 miles per hour (48 kph)- tapping the brakes on the current 40 mph limit the industry agreed early this year.

"I would hope, as we look at this with the federal government, we could show them the modeling of how disastrous that could be to the entire fluidity of the U.S. rail system," CSX Corp Chief Executive Michael Ward told investors this week.

Passenger service on a major artery between Aurora, Illinois and Spokane, Washington, will be delayed 2.2 hours and freight along that 1,800-mile (2,900-km) route will be waylaid for more than six hours under such speed controls, according to a BNSF Railway Co [BNISF.UL] presentation to White House officials earlier this month.

That stretch of track would need roughly $800 million in years-long improvements to erase the disruption with knock-on effects along the route, the company has told regulators.

A 30 mph limit would spark a lobbying blitz from leaders of the farm, auto and passenger rail sectors that would be impacted, said Ed Hamberger of the Association of American Railroads.

"We have to let our customers know the costs - which would be huge," he said.

Producers and shippers are also anxious about whether regulators will try to impose a rule that Bakken producers must ‘de-gas’ some or all of the Bakken crude they ship in railcars, requiring the light-ends to be stripped out in facilities that would add to field expenses.

Few such facilities currently exist in the Bakken, making such demands impractical at the moment, but North Dakota operators like Continental Resources Inc point to self-funded studies of crude from the region to argue it is safe and does not need special handling.

A THICKER CAR

For oil companies, tank car design is the big concern since they fear a model that maximizes safety could shrink delivery size. Tank cars have a weight limit of 286,000 pounds (130 tonnes) on the tracks and every pound of steel meant to mitigate accidents limits the amount of crude oil it can carry.

Rail operators and tank car manufacturers want a shell 9/16th inch (14.3 mm) thick, while the oil industry says the 7/16th inch (11.1 mm) thickness in the current model tank car is sufficient.

That 1/8th inch of steel and other safety upgrades adds about 7,850 pounds of bulk, manufacturers say, and so could shrink each delivery by nearly 3 percent without other modifications.

Early this week, industry sources said American Petroleum Institute and AAR had agreed to a half-inch thick tanker design and a schedule to retire older, DOT-111 tank cars.

The trade groups, though, were staying quiet about the proposal and it had not won broad backing within the oil train industry.

But Bill Furman, chief executive of tank car manufacturer Greenbrier Co Inc, says additional weight in one element of the car can be subtracted elsewhere due to design advances.

"I don't get this capacity argument," he told analysts recently. "The basic car that is safe for use... will be about 30,300 gallons - exactly what we've been running in the industry for years."

With municipal and state authorities demanding attention to safety and regulators expected to respond, there is little doubt that costs will be coming in one form or another.

Fuel-laden freight trains cross commuter tracks as many as 20 times a day in the Chicago suburb of Barrington, Mayor Karen Darch estimates, and disaster is easy to imagine.

"One error or an operational mistake could turn our town into Lac Megantic," she said.

(Additional reporting by Susan Taylor and Solarina Ho in Toronto and Rohit T.K. in Bakgalore; Editing by Marguerita Choy)

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