U.S. Rules Could Settle Tank Car Dispute For Oil-By-Rail Sector

New rules on moving hazardous materials like crude oil on U.S. railroads could settle a dispute between the energy industry and rail companies that boils down to a fraction of an inch of steel in the frame of each tank car.

U.S. Transportation Secretary Anthony Foxx wrote Thursday in a blog post that his agency would send its proposals to the White House for review next week. The proposal will include "options for enhancing tank car standards," he said.

Leaders of the energy and rail sectors will likely scrutinize how much the new design could disrupt oil-by-rail shipments that have increased in recent years alongside crude production in energy patches like North Dakota's Bakken.

The new standards could also help restore confidence in moving oil by rail, a practice that has been under scrutiny for many months in the wake of several fiery derailments.

The workhorse for oil-by-rail shipments in North America has long been the DOT-111 model, which will be mothballed in Canada from 2017 onward, and which most stakeholders agree is outdated.

The American Petroleum Institute, the U.S. oil industry's top trade group, has said a 7/16th inch thick frame is sufficient for crude oil shipments while the American Association of Railroads, the leading industry voice, has proposed a thicker 9/16th shell.

Where the DOT comes down in the dispute over 1/8th inch of steel could have major implications for the oil-by-rail sector. The thicker the tank, the less product that can be loaded, which quickly boils down to dollars and cents.

Once the regulators' proposal is received by the Office of Information and Regulatory Affairs (OIRA), part of the White House's Office of Management and Budget, the target turnaround time is typically 90 days.

"That said, reviews can last much longer, particularly when the regulation in question addresses controversial (or expensive) issues," analyst Kevin Book, managing director of Clearview Energy Partners, said in a research note.

Rail operators, oil producers and tank car manufacturers have for months failed to agree on the best model to serve the fast-growing domestic energy sector.

Of particular concern is North Dakota's Bakken region, where oil production is nearing 1 million barrels per day and roughly 72 percent of that fuel moves on the tracks because of a shortage in pipelines.

Officials have said that Bakken fuel could be more volatile and explosion-prone than other domestic crude oil.

A tougher tankcar design known as the CPC-1232 has been the industry standard since 2011. with many of those cars rolling out of factories in recent years to meet oil-by-rail demand.

The CPC-1232, with its 7/16th inch thick frame, could well be the starting point for the DOT, but all stakeholders are expected to make their case. After the rules leave OIRA they will be open to public comment.

Book said that recent signals out of two DOT branches - the Federal Railroad Administration, and the Pipelines and Hazardous Materials Administration - suggest DOT might propose adopting the CPC-1232 standard, even though AAR has called for the stricter standard.

Once the rules are finalized, industry will also have to weigh the costs of waiting for tanks built to the new specifications against upgrading their existing fleet.

Retrofitting the existing fleet of roughly 78,000 old DOT 111 cars currently carrying flammable liquids is expected to top $3 billion, rail industry sources estimate.

(Reporting by Patrick Rucker, editing by Ros Krasny and Andrew Hay)