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U.S. releases extensive draft rules for shipping crude oil by rail

A worker climbs off a crude oil train after setting the handbrake at the Eighty-Eight Oil LLC's transloading facility in Ft. Laramie, Wyoming on July 15, 2014. The U.S. Department of Transportation has released extensive draft rules for shipping crude oil by rail, including slower-speed requirements that industry executives warn could cause major disruptions to the nation’s rail network.

Rick Wilking/Reuters

The U.S. Department of Transportation has released extensive draft rules for shipping crude oil by rail, including slower-speed requirements that industry executives warn could cause major disruptions to the nation's rail network.

A string of explosive accidents over the past year or so prompted lawmakers across the U.S. and Canada to re-evaluate safety legislation. The new U.S. rules – which echo Ottawa's recent measures – aim to phase out old rail cars and reduce speed limits for trains carrying crude oil.

The proposed rules include phasing out 50,000 older DOT-111 cars deemed unsafe within two years, which is faster than Canada's three-year scheduled phase-out announced in April. DOT-111s make up the majority of the oil-by-rail fleet, meaning railroads will likely scramble to retire or retrofit old cars.

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The Department of Transportation has proposed three speed restrictions: 30, 40 and 50 miles an hour, based on the age and safety specifications of the tank cars and the trains' braking systems. Transport Canada recently passed new rules to reduce the speed limit for key trains carrying dangerous goods to 80 kilometres an hour.

The changes are expected to have sweeping effects on railways, oil refiners and producers across the continent, with concerns that slower trains will push up costs that will be passed on to consumers.

Norfolk Southern Corp. chief executive officer Charles Moorman said train speeds of 25 to 30 miles an hour would be "extraordinarily disruptive" to all rail business, not just crude oil. "We have compelling evidence that any significant speed restriction would be in fact disruptive to the point of almost shutting down the North American rail network," he told analysts on Wednesday.

A spokesperson for Canadian Pacific Railway Ltd., whose rail network stretches across 4,700 miles in the United States, said the company will "actively work with the industry to take a closer look at what the DOT [Department of Transportation] has announced."

The company recently expressed concern about speed restrictions. "We don't get better with speed [limits] … We get worse," CP CEO Hunter Harrison told analysts in a conference call last week. "Now you can't … continue to move stuff on rail, cutting the speed back, but don't want to add any infrastructure. That's a timetable to disaster."

The DOT also proposed safety features for new tank cars with more advanced braking systems and thicker hulls, which is likely to benefit rail car manufacturers, whose shares rallied on the news.

"This long-anticipated rule making … provides a much-needed pathway for enhancing the safe movement of flammable liquids in the U.S.," said Edward Hamberger, president of the Association of American Railroads (AAS) – of which Canadian National Railway Co. is a member. He added that the rule "incorporates several of the voluntary operating practices we have already implemented."

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Canada's oil industry, which has increasingly turned to rail shipments as way to export oil amid a shortage of pipelines, is taking a close look at the new regulations.

Greg Stringham, vice-president of oil sands and markets for the Canadian Association of Petroleum Producers, noted U.S. rail operators have already voluntarily agreed to slow speeds in urban centres.

"The train speed can have some impact," he said of transportation costs. "From a Canadian oil perspective, we haven't seen a major impact of the interim directive that's in place. But it really depends on where they end up coming out of this."

He said speed issue is not as significant to the industry as U.S.-Canada alignment on tank car standards. "It's the tank cars that move back and forth across the border," Mr. Stringham said.

The focus of the DOT rules "would seem to be on the lighter crudes – particularly the Bakken," said Brad Bellows, a spokesman for Calgary oil producer MEG Energy Corp., which also owns midstream assets and leases tank cars to help get its in situ-produced bitumen to U.S. markets by rail.

"It's a very different product than what we're shipping."

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