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Union Pacific charges add approximately $1.71 per barrel in shipping costs

Union Pacific Corp. (ticker: UNP) announced that it will charge customers an additional $1,200 per car to ship crude oil by rail if they are using DOT-111 rail cars. The new charge will go into effect starting August 1, according to documents seen by Reuters.

The news makes Union Pacific at least the second major railroad to impose a charge on crude oil shipped in the older DOT-111 rail cars, which have been the focus of many safety concerns following several derailments, joining the Berkshire Hathaway (ticker: BRK) Inc.-owned BNSF Railway. In January, BNSF added a $1,000 surcharge for the use of DOT-111 rail cars shipping crude by rail.

For DOT-111 rail cars carrying an average of 700 barrels of oil, the $1,200 surcharge works out to an additional $1.71 per barrel shipped in transportation costs.

New rate structure meant to support the use of safer rail cars

The American Fuel & Petrochemical Manufacturers (AFPM), which represents U.S. refiners, sued BNSF following the announcement that the railway would charge extra for the use of DOT-111 cars, saying that the cars still had authorization for use by the Department of Transportation and should not be subject to additional fees, reports Law360. As a common carrier, the BNSF is legally obligated to accept crude for transportation that is in compliance with the DOT’s Pipeline and Hazardous Material Safety Administration’s (PHMSA) regulations, the industry group claims.

Union Pacific

DOT 111 Railcars Source: DOT

“Allowing railroads to penalize companies that ship crude oil in federally-authorized rail cars would circumvent PHMSA’s statutory and regulatory process for setting rail car standards for hazardous materials shipments,” AFPM’s complaint stated. “There can be little doubt of the purpose of BNSF’s surcharge to penalize and deter shipments of crude oil in general purpose DOT-111 tank cars.”

BNSF responded, saying “We believe that our rate structure appropriately supports customers who are working to move to safer car, which is in the interest of rail shippers, BNSF employees and the communities we serve.”

Phasing out the DOT-111

In May, the U.S. Department of Transportation released new standards for railcars shipping crude oil and ethanol, requiring more reinforcements in the hopes that more dangerous derailments might be avoided in the future.

The new standards require that all railcars built after October 2015 have 9/16-inch think hulls, 2/16-inch thicker than is currently required. The new railcars must also have increased reinforcements for valves where oil enters the car at the top and drains out the bottom, and full-height steel shields on the front and back of the cars.

The new standards also include a schedule to refit older railcars to meet the new standards. The first round of retrofitted DOT-111s will not be ready for use until January 2018, reports Reuters. Railway Age reports a complete fleet renewal would cost about $1.7 billion, while the entire regulatory package could reach $2.5 billion.

Exponential growth

Crude by rail has grown exponentially since 2010 as shale producers looked for more ways to move tight oil from shale plays to market. The Energy Information Administration (EIA) tracks the movement of crude oil by rail between Petroleum Administration Defense Districts (PADD), showing that crude by rail has increased from just 55 MBOPD in 2010, to over 1,000 MBOPD in 2014.

EIA CBR 2010

 

EIA CBR 2014

 

 

Shipments of crude by rail fell to 850 MBOPD in April from Q4 averages of 1,000 MBOPD, largely due to lower prices caused by the excess of supply, reports Reuters.


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