Prompted by concerns heightened by several recent high profile train derailments and accidents, coupled with the boom in the number of oil-carrying trains, the Obama administration, through the Pipeline and Hazardous Materials Safety Administration (PHMSA), has proposed two new sets of rules aimed at addressing the perceived risks posed by the increase in rail transportation of crude oil primarily from the Bakken shale. These rules are similar to ones just issued in Canada that will also require the phase-out of older rail tank cars. See 79 Fed. Reg. 45,016 (Aug. 1, 2014) (comments are due on September 30, 2014).

Notice of Proposed Rulemaking

According to Transportation Secretary Anthony Foxx, the “Bakken crude oil is on the high end of volatility compared to other crude oils,…[and] its production is skyrocketing, up from 9,500 rail car loads in 2008 to 415,000 last year, a more than 4,000 percent increase.” To address their concerns, PHMSA, through a Notice of Proposed Rulemaking (NPRM), is seeking to require the phase-out of tens of thousands of tank cars now in High-Hazard Flammable Train service (defined as a single train containing 20 or more tank carloads of Class 3, i.e., flammable liquid material), within as little as two years, unless they are retrofitted to meet new safety standards. For trains transporting crude oils that exhibit certain physical properties, the new rules, if promulgated, will also require lower speed limits, better braking, and a formal sampling and testing program for volatile liquids, including oil.

These new speed limits—40 mph for trains with tank cars that do not meet the new standards, 50 mph maximum for those that do, and a 30-mph restriction for those that do not comply with stricter braking requirements—may affect the oil and gas industry mainly by slowing down transportation of crude. On the other hand, the tank car phase-out may pose real issues if it causes a shortage of transportation options before industry is able to meet the demand for new or retrofitted tank cars.

Under the proposed rules, the rail cars facing retrofit or phase-out—known as DOT-111 cars—account for 228,000 of the 335,000 active tank car fleet, and 92,000 of them move flammable liquids, such as crude oil and ethanol. Of these 92,000 tank cars, only 18,000 have been built to the industry’s latest safety standards. These older-model DOT-111 tank cars used to transport both crude oil have long been known to be vulnerable to failure in derailments. The Obama Administration has rejected calls from some for an immediate ban on shipping volatile crude in the older DOT-111 tank cars, claiming that the proposed phase-out appropriately balances the need to transport crude, but doing it safely.

The need for safer tank cars is not new. The rail industry voluntary took steps in 2011 to improve tank car design and since then all the tank cars built for this service meet a new industry standard, known as CPC-1232. However, two of the three options proposed by PHMSA for a new agency standard, to be known as DOT-117, require a greater shell thickness than CPC-1232 requires. But even when 55,000 of the newer CPC-1232 cars are in service by 2015, there will still be 45,000 older ones being used to meet demand.

Cost and Other Implications to Shippers

It would be a mistake to think that these rules would only have a significant impact on manufacturers of tank cars and rail carriers. On the contrary, oil and gas companies could be significantly affected by these rules. Almost all tank cars are owned or leased by the shippers of the crude oil. Those companies that own their tank cars would have to pay for their retrofit, repurposing, or disposal, and/or the cost of new tank cars. Although PHMSA expects that lease rates would not increase as a result of the new standard, it is hard to imagine that the lessor would not pass on some of these additional costs to the lessee. Finally, the agency acknowledges that rail carriers are likely to pass on additional fees to the shippers as a result of increased fuel and track maintenance required by the added weight of new or retrofitted tank cars.

Another potential cost to oil and gas companies is related to potential delays from slower speeds and reduced tank car capacity. As to the latter issue, the agency argues that the new tank cars would be allowed to have a higher Gross Rail Load (maximum weight) than the regular DOT 111 tank cars; therefore, there would not be a loss in oil capacity. The agency also expects industry to come up with new materials that weigh less but still meet their requirements. While those assumptions regarding capacity are debatable, there is no argument that reduced speeds will result in delays. The agency estimates the rail carrier’s cost of delay at $500 per hour. Regardless of the hourly cost, one would suspect that some of those costs will be passed on to the shipper.

Shippers will also have increased regulatory liability in at least one aspect of the rule. Current rules require the shipper to certify that it has properly assessed the hazards of the material and selected the appropriate shipping classification. Under the proposed rules, this certification will also include certifying that the newly-required written sampling and testing program is in place and properly implemented. Therefore, knowing violations of this sampling and testing program requirement could subject the shipper to civil penalties under 49 C.F.R. §171. The new sampling and testing program must include information about and justification of testing frequency, methods used, and quality assurance measures. This program also has its own costs to prepare and implement, which would have to be covered solely by the shipper.

Advance Notice of Proposed Rulemaking

In addition to the notice of newly proposed rules on tank cars, PHMSA also issued an Advance Notice of Proposed Rulemaking (ANPRM) seeking comments on plans to propose new regulations regarding the need for most trains carrying crude oil to prepare comprehensive oil-spill response plans. Currently, railroads do not have to create such plans, but PHMSA claims that derailments in Quebec, Alabama, North Dakota, Virginia, and elsewhere since last year have revealed gaps in emergency response training, equipment and staff. Specifically, PHMSA seeks comments about the volume of crude oil carried by a train that would trigger oil spill response planning, i.e., trains with 1 million gallons or more of crude, trains with 20 or more tank cars of crude oil, 42,000+ gallons of crude per train or another threshold.

Currently, railroads are not required to tell communities where they are shipping crude oil. Instead, railroads provide limited information on hazardous materials shipments to emergency response agencies by request. Even then, they only have to disclose what hazardous products they are shipping, not how much or when. State and local officials, however, are beginning to demand to know more details about hazardous shipments. Some railroads are cooperating, while others cite security and competitive concerns for not providing the requested information. It is unclear at this time whether the response plan requirements will impact only the railroad companies or whether they may also place some burden on the companies whose crude oil the trains will carry.