New regulations in the United States and Canada requiring a total changeout of crude oil tank cars will be costly for the rail and energy industries given the relative short time span for making the transition, Fitch Ratings said.
Looking at the financial implications of the mandate to switch out the oil tank cars, Fitch said there could be less available funds for interest and principal for certain outstanding asset-backed security (ABS) transactions related to the new, more costly rail cars.
In addition, should the pricing spread between WTI and Brent crude continue to remain at historically low levels, the impact could be broader, Fitch said. (Narrower WTI-Brent price spreads generally mean pipeline oil transport is preferable to the rail option in areas such as North Dakota's Bakken Shale.)
Earlier this year, the U.S. Department of Transportation (DOT) and Transport Canada issued new crude-by-rail regulations concurrently, including requirements that tank cars made after Oct. 1, 2015 meet more stringent standards (DOT-117 design) (see Shale Daily, May 1). The current tank cars meeting DOT-1115 standards need to be completely replaced within two to three years.
Fitch said the existing cars could be converted to haul ethanol and extend their useful lives to 2023. And the "newer CPC-1232 [tank cars] made since 2011 will generally require retrofit within five years," Fitch said. Overall, the rail cars carrying crude and ethanol will be completely replaced or retrofitted with 10 years.
In addition to the tank car design changes, the cars all will need to be outfitted with electronically controlled pneumatic (ECP) braking systems by 2021, with an estimated cost of $10,000/rail car for the new brakes. "This will further add cost pressures despite their longer lead time for implementation," Fitch said.
After steady growth in oil rail shipments from 2009 through last year, so far this year they have been steadily declining each month. Fitch sees a continuation of the low WTI-Brent pricing spread for up to three years, during which it estimates the spread will average $5.
However, Fitch concluded that "in the near term, with limited pipeline options, including the vetoed Keystone XL pipeline, refineries should maintain their health demand for shipment via rail."
Fitch also pointed out that the impetus for the new rules on both sides of the U.S.-Canada border came from major crude rail train accidents (see Shale Daily, May 2, 2014), and in the first half of this year there already have been five more crude derailments, such as one in early May in Heimdal, ND (see, Shale Daily, May 7).