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Shipments of crude and fuel oil by rail tumbled nearly 11 per cent in July, to 11,920 cars from 13,339 in June.DARRYL DYCK/The Globe and Mail

Oil producers in Canada and the United States could see their plans for aggressive expansion of crude-by-rail short-circuited if American regulators follow Ottawa's lead and force the industry to retire or retrofit tank cars built before 2011.

Industry officials warn that the railway supply industry will have a hard time meeting the rising demand for new cars while retrofitting existing ones that are seen as vulnerable to leakage and explosions during accidents involving crude-laden freight trains.

At a National Transportation Safety Board hearing in Washington this week, an American oil executive suggested that the older rail cars could be needed for the next decade if the industry is going to meet the challenge of moving booming crude production to markets.

Lee Johnson – an adviser to Hess Corp. who was representing the American Petroleum Institute – said the industry will have to rely more on new tank cars that will have to meet as-yet-unknown U.S. standards rather than retrofitted ones.

"We're going to move as an industry to enhance the legacy cars as quickly as we can and to replace them as quickly as we can," Mr. Johnson said. "But the reality of the marketplace is that there is very limited shop capacity for doing retrofits."

Two of Canada's biggest oil sands producers said Thursday that they are well positioned to manage any crunch because they are acquiring heated cars to move bitumen, and those cars typically are either being built or are newer models that meet current safety standards.

"We're okay," said Rhona DelFrari, spokeswoman for Cenovus Energy Inc., which is acquiring 825 cars to move 30,000 barrels per day – mostly oil sands bitumen – by rail by the end of the year. Imperial Oil Ltd. said the new regulations would have little effect on its joint venture with Kinder Morgan Inc. to build a 100,000-barrel-a-day rail terminal near Edmonton, because it is acquiring new rail cars.

But light-oil producers in the U.S. and Canada rely more heavily on the older DOT-111 cars that Transport Minister Lisa Raitt has targeted for replacement or retrofitting.

Shippers looking to buy rail cars are already facing a two-year backlog in some markets, said Steve Smith, chief operating office for TORQ Transloading Inc., which is building a 168,000-barrels-a-day crude-by-rail terminal in Kerrobert, Sask. He said TORQ's business shouldn't be affected because it handles oil sands crude that is shipped in mostly newer cars.

But he said Canadian light-oil producers could be hurt as the industry is forced to scramble for rail cars.

The Canadian Association of Petroleum Producers is worried that governments in Canada and the United States are not moving in unison on the rail safety measures.

"These shipments do cross the borders, so we have said and continue to advocate that there be a harmonized approach to things," David Pryce, CAPP's vice-president for operations, said in an interview. He said it is "too early to tell" what impact Transport Canada's new regulations would have on shippers.

The stricter Canadian regulations and smaller supply of rail cars could boost the leasing rates paid by companies that ship oil by rail and encourage them to look for other ways to move oil, said Benoît Poirier, a stock analyst with Desjardins Securities.

The vast majority of the tank cars hauled by the two major Canadian railways are leased or owned by energy producers.

Both Canadian National Railway Co. and Canadian Pacific Railway Ltd. charge oil shippers more to use older cars, an "economic incentive" to upgrade to the cars that have reinforced shells and protective shields.

"CN has supported the retrofitting or phase-out of the old DOT-111 cars used to transport flammable liquids and a reinforced standard for new tank cars built in the future, with the rail car owners assuming the cost as a normal course of business," spokesman Mark Hallman said.

Hunter Harrison, chief executive officer of CP, said capping speeds for trains carrying dangerous cargo at 80 kilometres an hour does not address the causes of railway accidents. CP, which has video cameras on the nose of most locomotives, is calling for cameras that record the train crew, as well as a reduction in the number of crossing at which road and train traffic meet.

With a file from reporter Carrie Tait in Calgary

Follow Shawn McCarthy on Twitter: @smccarthy55Opens in a new window

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