Rail Oil Tankers, Victim of US Safety Rules, Also Unwanted in Canada

Thousands of oil train tankers soon to be deemed obsolete in the United States are unlikely get a second life in Canada's oil sands industry, undercutting a U.S. government forecast that the costly cars will continue in use in the energy sector.

If thousands of obsolete tank cars are scrapped, it could add hundreds of millions of dollars to the cost of the proposal, industry officials said - unwelcome news for regulators trying to craft a safety plan that does not add crippling costs to industry.

Regulators on both sides of the border are contemplating rules to prevent oil train accidents like the July 2013 Lac Megantic disaster in Quebec, in which a runaway train loaded with fuel from North Dakota's Bakken oil patch derailed, killing 47 people.

Those plans would modernize the current U.S. fleet of roughly 90,000 tank cars with puncture-resistant shells and other costly upgrades that government and industry sources expect to cost more than $3 billion.

The U.S. Department of Transportation has said the transition will be eased with about 23,000 existing cars going into service to cart Canadian oil sands crude - a molasses-like fuel, bitumen, that is less flammable than ordinary crude oil.

"No cars will retire as a result of this rule," the DOT's Pipeline and Hazardous Materials Safety Administration (PHMSA) said in its oil train proposal released in July.

But industry experts said it is not feasible to simply retrofit the older cars to the specifications needed to carry oil sands, making it likely thousands of cars will be scrapped.

"We don't anticipate we will see the cars here," said Julie Puddell, investor relations manager of Keyera Corp, which operates a loading terminal in Edmonton, Alberta, with Kinder Morgan Energy Partners LP.

While the general purpose cars can be used to transport bitumen diluted with a light fuel called condensate, many oil sands shippers prefer speciality-built tank cars with internal heating coils, because heat stops the bitumen from solidifying while in transit and makes it easier to unload at refineries.

Industry sources say adding heated coils to a standard tank car - which can have a useful life of forty years or more - would have prohibitive costs.

"There are ways to retrofit, but it could make them even more expensive than a new-build," Puddell said.

A spokeswoman for Cenovus Energy Inc, Canada's No. 2 oil producer which aims to ship 30,000 barrels per day of oil by rail by year-end, said the company was focused on leasing new heated and coiled cars.

And Valero Energy Corp has ordered more than 2,900 heated tank cars for delivery in the next twelve months to take bitumen to its St. Charles, Louisiana refinery and elsewhere.

Between rail and barge deliveries, the largest U.S. independent oil refiner expects to be receiving more than 55,000 bpd of bitumen from Canada by mid-2015. A Valero spokesman said the company principally relies on heated cars to move the fuel.

A U.S. Transportation Department official said the agency's proposal was open to amendment following a public comment period that ends on Sept. 30.

"Regulators are academic when they write these rules. They always underestimate costs," said Larry Bierlein, a veteran hazardous materials lawyer and former hazmat counsel to the Department of Transportation.

"That will become clear as the industry digests this proposal and prepares for the political push-back," Bierlein said.

(Reporting by Patrick Rucker and Nia Williams; Editing by Ros Krasny and Marguerita Choy)