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U.S. legislators aim to phase out old railcars

Crude by rail has made headlines for all the wrong reasons in recent months.

Derailments and safety issues regarding older railcars has made for plenty of fear-inducing news articles for cities and towns of all sizes, even though rail accidents have actually declined.  A new bill being put forward by senators from six states looks to use a new fee to incentivize phasing out outdated railcars that could be more hazardous during a derailment.

The bill, co-sponsored by Senators Diane Feinstein (D-CA), Charles Schumer (D-NY), Sherrod Brown (D-OH), Bob Casey (D-PA), Mark Warner (D-VA) and Jeff Merkley (D-OR), would add a fee for the use of older railcars, and be paired with tax breaks to upgrade to newer tank cars, reports the Associated Press.

The fee would start at $175 per car shipping oil, ethanol and other flammable liquids, and increase to $1,400 per car by 2018. It is estimated that the bill would raise $600 million which could be used to train first responders, clean oil spills and relocate tracks around populated areas.

Sen. Ron Wyden (D-OR) said he hoped the bill would offer a market based incentive to improve tanker safety. “The idea is to speed up the phase-out of older tank cars,” Wyden said. He added it “allows us to move in a much faster and more aggressive fashion to make oil by rail transportation safer.”

A study commissioned last year by the Railway Supply Institute, which represents tank car owners and manufacturers, said modifying the flammable liquids tank car fleet would cost the industry more than $4 billion. Industry representatives have said the upgrade could take more than a decade to finish.

The U.S. Department of Transportation and Canada’s Ministry of Transport announced new regulations last week as well. The new regulations include enhanced breaking standards, new specifications for railcars built after October 1, 2015, a retrofitting schedule for older railcars, reduced operating speeds, more accurate classification of unrefined crude products and new rail routing standards. A summary of the new rule can be found here.

A shift back towards heavy crude

Companies that ship their crude by rail are beginning to remove light crude diluents in an effort to cut costs. The nondiluted crude also has the added benefit of being safer to ship.

Heavy crude and raw bitumen have higher boiling and flashpoints, placing them outside Packing Groups 1 and 2, used to classify the more volatile types of crude oil for transport, reports Reuters.

Normally, rail is more expensive than shipping by pipeline, but undiluted rail shipments offer better returns because shippers do not need to add between 15% and 30% condensate per barrel.  “The business is moving back to where it started, which is as a vehicle to move undiluted heavy oil,” said John Zahary, chief executive of Altex Energy, which operates crude-by-rail terminals.

The Canadian National Railway is pushing to increase the amount of so-called neat bitumen being shipped in order to improve both economics and safety. “It’s the wave of the future,” James Cairns, Canadian National vice president of petroleum and chemicals, told a recent conference. “When we move bitumen it doesn’t even move as a dangerous commodity. The safest crude you can move by rail is a heavy, neat bitumen crude.”

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Important disclosures: The information provided herein is believed to be reliable; however, EnerCom, Inc. makes no representation or warranty as to its completeness or accuracy. EnerCom’s conclusions are based upon information gathered from sources deemed to be reliable. This note is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument of any company mentioned in this note. This note was prepared for general circulation and does not provide investment recommendations specific to individual investors. All readers of the note must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider a company’s entire financial and operational structure in making any investment decisions. Past performance of any company discussed in this note should not be taken as an indication or guarantee of future results. EnerCom is a multi-disciplined management consulting services firm that regularly intends to seek business, or currently may be undertaking business, with companies covered on Oil & Gas 360®, and thereby seeks to receive compensation from these companies for its services. In addition, EnerCom, or its principals or employees, may have an economic interest in any of these companies. As a result, readers of EnerCom’s Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this note. EnerCom, or its principals or employees, may have an economic interest in any of the companies covered in this report or on Oil & Gas 360®. As a result, readers of EnerCom’s reports or Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.