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Oil Execs: Ready for Tougher Rail Car Standards; Shipments to Grow

The growing emphasis on shipping U.S. crude oil production by rail will continue and the oil sector welcomes tougher safety standards now being contemplated by the federal Department of Transportation (DOT), several oil executives said Wednesday during 4Q2013 earnings conference calls.

The executives told financial analysts that they don't envision crude rail traffic slowing any as a result of the tougher standards.

With 5,300 new crude rail cars on order, Valero Corp. COO Joe Gorder said this is obviously an issue [for both the energy and railroad industries], but "DOT has the ball and they are working the regulations. They should have recommendations in place by Nov. 14, and the issue is also being worked by the American Association of Railroads."

On another conference call, Hess Corp. CEO John Hess said his company's rail cars "meet the highest standards of the day for [safety] specifications and maintenance." Hess worked with the rail car manufacturers two years ago to design the company's current cars to "state-of-the-art standards."

"These rail cars were precisely designed to move Bakken crude grades, and as such, they are equipped with features that include thicker steel, double-hull bottoms and pressure-release devices, so they are truly state-of-the-art rail cars. In addition, our experience is that rail industry people are just as focused on safety as we are."

Gorder, Hess and Gary Heminger, CEO of Marathon Petroleum Corp., all responded to questions on the subject from financial analysts on Wednesday. Heminger lumped the rail car issue in with several other major issues, such as oil pipeline permitting and drilling standards, that are currently being debated in Washington, DC. Like his counterparts, Heminger said he thinks the industry will adjust to whatever unfolds.

"As rail shipments increase and accidents inevitably happen, I think it is important to have a regular dialogue among our industry, rail operators and the government to make sure of the overall integrity of the system," Hess said.

In response to a question about some of the new cars being involved in explosive accidents, Hess said that was an incorrect rumor; none of the new cars have been involved. "The cars involved in the explosion [in Casselton, ND] (see Shale Daily, Jan. 3) were of the old, one-eleven [DOT-111] design," he said. "We worked with the industry for over a year on the new design, so we feel we are running one of the safest fleets in the industry."

Specifically, in response to another question, Hess said he did not anticipate that his company would have to change the composition of its Bakken crude oil specially for rail shipments.

There are 30,000 crude-carrying rail cars in the United States currently, and about one-third are built to the new, highest standards. It is the 20,000 cars built to a lesser standard that the DOT's National Transportation Safety Board and industry are likely to focused on, according to Hess, who said his company has pipeline capacity of up to 70,000 b/d that it also can turn to for shipments.

Valero's Gorder acknowledged that the discussions among industry and government representatives are all focused on tightening the rail car standards, and he is expecting discussions about re-routing crude-carrying trains around urban areas, classifying the cargoes and other issues.

"The one unknown issue that is sort of hanging out there is how long it would take to retrofit [the old rail cars], how long will [regulators] allow us to phase in any recommended changes," said Gorder, reiterating that the 5,300 new cars Valero has on order are the state-of-the-art design. "We're just waiting to see where that goes, but we believe the new cars would meet the standard.

"I don't see where this is going to have any impact on our plans to move crude by rail. We currently have more than 6,000 cars under lease, so we would just continue to replace those cars with the new ones [being purchased]. We don't see a lot of downside on our investment in rail cars.

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