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New U.S. rail rules will not revamp old oil tank fleet

Firefighters spray wagons at the site of the train wreck in Lac-Megantic July 14, 2013 file photo. REUTERS/Mathieu Belanger
Firefighters spray wagons at the site of the train wreck in Lac-Megantic July 14, 2013 file photo. REUTERS/Mathieu Belanger

By Edward McAllister and Nia Williams

NEW YORK/CALGARY (Reuters) - New U.S. rules to toughen classification standards for oil-train shipments will affect less than 3 percent of the tank cars now hauling crude across the country, leaving older, flawed models on the tracks, officials and industry sources say.

The emergency order released on Tuesday, a day ahead of a Senate hearing on oil train safety, may affect some bitumen cargoes from Canada, but will do nothing to curb the use of older DOT-111 cars many hold responsible for a string of recent fiery accidents, they said.

A train filled with crude oil from the Bakken region in North Dakota exploded in the middle of the Canadian town of Lac Megantic last July, killing 47. Since then, other derailments have caused huge fires left to burn out over days as emergency crews look on, fuelling a political backlash.

The U.S. Department of Transportation (DOT) order said that oil carried by rail could no longer be classified as the least hazardous type of flammable liquid, known as Packing Group 3, a measure it said would improve emergency response and "require the use of a more robust tank car."

Under the new U.S. order, all crude oil shipments must now be labeled in Packing Group 1 or 2, the DOT said. The labels are primarily used to help emergency responders understand the hazard of the contents in the event of an accident; in most cases, changing classification level involves simply relabeling a rail car.

But it can also affect which type of car is used. By prohibiting the least-stringent Group 3 designation, shippers will no longer be allowed to use tank car models AAR 203W or AAR 211W, according to a DOT official. If it is classified as PG 1, the most hazardous type of flammable liquid, it would also prohibit use of AAR 206W cars.

Those models, however, are scarcely used compared to the DOT-111, the dominant car type whose specifications are authorized by the Department of Transportation (DOT) rather than the industry's Association of American Railroads (AAR).

There are currently only 1,100 AAR 211W cars transporting crude in the United States, according to the AAR, less than 3 percent of the crude oil tank car fleet. There are under 100 AAR 203Ws and AAR 206Ws still on U.S. rails, the AAR said.

That compares with the 94,000 DOT-111s used to transport crude and other flammable liquids, according to data from the Railway Supply Institute. It estimates that some 39,000 DOT-111s are being used to carry crude, less than a third of which are built to a higher safety standards in effect since 2011.

The banned cars "are estimated to be a small portion of the total market of crude-by-rail shipments," said Divya Reddy, Director of Global Energy & Natural Resources at Eurasia Group.

It is too early to say exactly how the order will affect oil producers and shippers in the United States. The additional testing may give regulators more data with which to draw up new rules that could better target potentially dangerous cargoes, although such a process could take months if not years.

"We expect the emergency order to further improve the safe movement of crude by rail, in addition to all the other steps we are taking," said a DOT spokeswoman.

Other parts of this week's DOT order may have more impact for the market, industry sources say. A new requirement to test all oil cargoes for volatility prior to shipping has unsettled many shippers, who question how frequently and exhaustively they must test.

A NARROW IMPACT

Due to a surge in oil-by-rail shipments, which have risen from nearly zero to some 1 million barrels per day (bpd) over the past four years, tank cars are a scarce commodity, and even a small reduction in number may constrain traffic.

The classification order may have the most impact for a handful of companies that use the AAR-type cars for shipping Canada's heavy bitumen crude, a tar-like substance that has none of Bakken oil's explosive qualities and typically travels as PG 3, according to industry officials.

Axeon Specialty Products, which leases about 1,200 tank cars to transport heavy crude south from Canada to East Coast asphalt plants, said it does use some AAR 211W tank cars, but it was as yet unclear how much it would be impacted.

"Some of them are the AAR cars and that is why we are working with the cars owners to determine what we can and cannot do," said Axeon spokeswoman Claire Riggs. She was unable to say how many AAR 211 cars the company leased.

Axeon, owned by New York private equity firm Lindsay Goldberg, was until this week known as NuStar Asphalt.

The three-tiered Packing Group system is based primarily on the boiling and flash point of the oil. More volatile light oil, such as the Bakken crude involved in Lac Megantic, have lower boiling points and can ignite more easily.

Still, the DOT order has done little to quell critics who say that much tougher measures are needed to ensure the safety of mile-long oil trains now rolling across America.

Meanwhile, the model DOT-111 tank cars that regulators acknowledge need improvements, including pressure relief valves and reinforced steel jackets to lessen the chance of puncture, spillage and explosion during accidents, are still able to transport crude from North Dakota and elsewhere.

The AAR has called for an aggressive phase out of DOT-111 cars built before 2011 that do not meet current industry specifications. So far, no rulings have been made on taking older DOT-111 cars off the rails. The DOT is in the process of writing up new rules that are expected next year.

CANADA FIRST

The U.S. order echoes a similar ruling by Canada in October, after regulators cited the improper classification of a Bakken oil shipment in the deadly Lac Megantic accident.

The October 17 order requires shippers to retest the classification of their crude if the cargoes have not been tested since July 7, the day after the Lac Megantic accident.

Any crude oil not retested is automatically classified as Packing Group I, which indicates a degree of "great danger" in a product, according to Transport Canada's website. Shippers whose oil cargoes comply with PG 3 standards are still allowed to use that classification, however.

"Proper classification and safety marks enables first responders to take appropriate action following an incident," Adria Patzer, communications officer at Transport Canada said.

A series of explosive, but not fatal, accidents have followed over the past few months, tainting a trading boom that has allowed U.S. shale and Canadian oil sands producers to reach new markets more quickly than pipelines can be built.

Unlike the United States, Canada already had a requirement to classify dangerous goods prior to transport.

The short-term impact of the ruling prompted a rise in the number of crude cargoes being classified as PG I, the most risky category. But shippers and rail terminal operators in Canada's oil capital Calgary said that has had negligible impact on crude-by-rail operations overall.

"The vast majority of cars through our site are fit for the new regs, the few that aren't are being taken out of service," said Gary Kubera, CEO of Canexus Corp, the operator of Western Canada's first unit train terminal in Bruderheim, Alberta.

"We haven't seen any impact from this on throughput and I think it's too early to know if any meaningful cost impact is occurring."

Canadian oil producer Cenovus Energy Inc said it had not experienced any impact on its oil transportation operations as it was already meeting safety requirements.

(Additional reporting by Patrick Rucker in Washington, DC; Editing by Jonathan Leff and Marguerita Choy)

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