Alto Ingredients Inc (ALTO)

[betthe4horse]

Proposal Threatens to Aggravate Shortage of Railcars to Move Oil

Thousands of Tank Cars Are Likely to Be Scrapped or Redeployed Under Federal Safety Move

http://online.wsj.com/articles/thousands-of-tank-cars-likely-to-be-scrapped-under-new-rules-1407859765

Proposed federal regulations on hauling flammable liquids threaten to aggravate a shortage of railcars for transporting oil.

The proposal, which likely will mean scrapping or redeploying thousands of tank cars, could make it more expensive to ship oil and other fuels as crude-by-rail shipments have soared with U.S. oil production. The plan could also extend the wait times for new cars

Implementing new standards will hinge on the capacity of the railcar industry to upgrade existing cars or replace entire fleets with new cars. Demand for replacement cars is likely to collide with the crude-oil industry's growing need for additional cars. The backlog of orders for new tank cars was 52,589 at the end of the second quarter, according to the Railway Supply Institute.

Related coverage
Secrecy of Oil-by-Train Shipments Causes Concern (May 22)
Railcar Shortage in U.S. Pushes Up Lease Rates (May 29)
Quebec's Lac-Mégantic Fears Return of Oil Trains (July 4)
North Dakota Fracking: Behind the Oil-Train Explosions (July 7)
U.S. Seeks New Rules for Rail Transport of Fuel (July 23)
With production capacity for new tank cars about 35,000 cars a year, industry analysts say the railcar industry could have difficulty expanding production fast enough to accommodate the short time frames proposed by regulators for ushering out older tank cars for transporting flammable liquids. At current production rates, cars ordered today couldn't be delivered until 2016.

Meanwhile, the capacity for extensive retrofitting is even murkier. Most railcar repair shops in the U.S. are regional operations intended for small-scale work. Car maker Trinity Industries Inc. TRN -1.94% is expanding a maintenance shop in Arkansas to retrofit tank cars on a large scale.

Tank cars have provided quick, flexible transportation of oil extracted from shale rock through hydraulic fracturing in locations far from pipelines. The sharp increase in rail shipment of crude has contributed to transportation bottlenecks for other cargo, such as grain and automobiles.

Many of the cars that would be most at risk for being scrapped under proposed regulations are owned by railcar-leasing companies or ethanol producers. Almost all the nearly 30,000 tank cars now used to haul ethanol would have to be extensively retrofitted or replaced. The government estimates that the retrofits alone would cost the industry about $1 billion.

But Bob Dinneen, president of the Renewable Fuels Association, which represents ethanol producers, figures the cost would be significantly higher. "We want to do whatever we can to improve safety, but as I look at this proposal, [the government has] been disproportionately focused on the tank car," Mr. Dinneen said. He has said that regulations should be crafted for specific flammable commodities based on the frequency of fires and explosions that occur during train derailments.

Industry groups and car owners have 60 days to comment on the regulations, which were proposed by the U.S. Transportation Department last month.

Regulators proposed a 2018 deadline for removing all the older, general-purpose tank cars, known as the DOT-111s, now used by the ethanol industry. DOT-111s have been involved in several crashes in recent years, including the explosion of a crude-oil train in Lac-Mégantic, Quebec, last year that killed 47 people.

Even 20,000 newer tank cars built to a higher standard than the DOT-111 could be subject to retrofits under some of the regulatory options being considered. Most of those newer cars have been in service for less than three years and are used by the oil industry.

Car owners say that retrofitting an older tank car could cost as much as $60,000, while the government estimates the cost at about $30,000 a car. Even if the actual cost is in between, tank-car owners say they are still concerned about earning sufficient returns from older, retrofitted cars. Tank cars can remain in service for 40 years.

"Given the great expense of this retrofit, and the older age profile of the our [tank cars], in most cases we're more likely to try to redeploy the cars into other types of service or send them to scrap," Brian Kenney, chief executive of car-leasing company GATX Corp. GMT -0.32% , told analysts last month.


Chicago-based GATX has about 13,000 tank cars transporting flammable liquids, about 4,900 of which carry crude oil and ethanol. The remaining 8,100 tank cars haul other types of flammables generally considered less dangerous than oil from North Dakota's Bakken Shale, which has been identified as particularly volatile.

U.S. freight railroads shipped about 330,000 carloads of ethanol and 408,000 carloads of crude oil last year, according to the Association of American Railroads and the Renewable Fuels Association.

Regulators are soliciting feedback on options for upgrading tank cars. Two options would require tank cars hauling flammable liquids to have tanks with steel that is 9/16-inch thick, which is one-eighth inch thicker than on most cars now in service for flammable liquids. The tanks proposed by the government also would feature steel plates on both ends, better valves and heat-resistant exterior insulation that would be covered with metal. The government projects that the sturdier design would make tank cars 17% to 21% more effective against punctures in a crash than the DOT-111.

In lieu of replacing more than 90,000 tank cars that couldn't meet the tank-wall requirement, the government is offering car owners the option of adding an outer jacket made of steel that is one-eighth-inch thick. But the jacket and other requirements would increase weight. The steel jacket alone would lower a car's 30,000-gallon capacity by about 800 gallons, forcing shippers to deploy more cars, according to rail-industry analysts.

Questions remain about whether there is enough production capacity available to retrofit existing cars or replace them in time to comply with the government's schedule to phase out the older tank cars. If the new regulations take effect next year, the approximately 50,000 tank cars in crude-oil service would have to comply in 2017.

"We would have liked to see a little bit longer period," said Rick Webb, CEO of Watco Cos., a Kansas-based operator of short-line railroads that has a joint venture with car manufacturer Greenbrier GBX -1.80% Cos. to retrofit tank cars. "Putting a jacket on a car is not easy and it's costly."

If tank-car owners simply opt to purchase new cars, which would cost at least $150,000 apiece, the car market would be left with more older tank cars than could likely be reused for other bulk materials, analysts said. The glut would depress lease rates and undermine values for tank cars that don't carry flammable cargo.

"The people who own these cars are not going to put an overwhelming amount of money in them," said David Nahass, senior vice president of consulting firm Railroad Financial Corp. "There are going to be many cars that can't or won't be retrofitted, the market is going to be flooded with capacity."