AFTER months of speculation and often-contentious discussion among crude oil shippers, rail tank wagon builders, railways and United States and Canadian government regulators, the North American railway industry finally has a ruling with a specification for new or retrofitted stronger tank wagons and guidelines governing the operation of crude oil movements.

Ironically, as all this came to pass, crude by rail (CBR) traffic began to fall from its 2014 peak, as Opec ramped up oil production, driving global prices down to a six-year low, and crude sourced through hydraulic fracturing, or fracking from regions such as the Bakken shale fields in North Dakota levelled off, and then dropped.

NapervilleIndeed, Bakken shale oil produced in the US is no longer being shipped to Canada for use in its largest crude oil refinery. Rather than importing Bakken shale oil from its closest neighbour, refinery operator Irving Oil has opted to use less-costly oil from producers such as Saudi Arabia. The refinery, located in Saint John, New Brunswick, is feeding zero barrels of Bakken crude into its 320,000 barrels of oil per day (bopd) refining capacity, which contrasts to a high of roughly 100,000bopd of Bakken crude shipped by rail in 2013.

Nevertheless, tank wagon production, at least for now, remains strong, as older wagons still need to be replaced or retrofitted to meet the new requirements set forth by the Pipeline and Hazardous Materials Safety Administration (PHMSA) and Federal Railroad Administration (FRA) in the US and Transport Canada (TC) in June.

The final specification for the now-official DOT-117 (TC-117 in Canada) non-pressurised tank wagon for carrying crude oil and ethanol adopts the most demanding of the technical requirements first offered for comment in the US Department of Transportation's (USDOT) August 2014 Notice of Proposed Rulemaking (NPRM): jacketed and thermally insulated shells of 14.3mm steel; full-height, 12.7mm-thick head shields; sturdier, re-closeable pressure relief valves; and rollover protection for top fittings.

Of concern to wagon builders and buyers (chiefly, companies that purchase the wagons and lease them to oil producers and refiners) is the tight timeline for the retrofitting or retirement of existing DOT-111 wagons and the newer railway-industry-sponsored CPC-1232 wagons constructed since 2011 and before the 2013 disaster at Lac-Mégantic, Quebec forced regulators to finally heed years of warnings by accident investigators in the US and Canada. Those "good faith" wagons now need to be upgraded to meet DOT-117 standards by May 1 2025.

The phaseout/retrofit schedule will see unjacketed DOT-111s removed from the most-volatile Packing Group I crude oil service by January 2018; jacketed DOT-111s by March 2018; and unjacketed CPC-1232s by April 2020. For Packing Group II, jacketed and non-jacketed DOT-111s may remain in service until May 2023; non-jacketed CPC-1232s until July 2023; and jacketed CPC-1232s until May 2025.

To enforce the timeline, the regulations require stricter testing and classification of crude oil offered for transport, with the FRA, PHMSA and TC set to enforce the regulatory package.

Regulators estimate that fleet renewal will cost about $US 1.7bn. Total costs for the entire regulatory package, including train routing and speed restrictions, is projected at $US 2.5bn.

The regulations remove the burden of reporting every oil train movement to state emergency response agencies. Instead, railways must promptly respond to requests for information initiated by local emergency responders.

The rule requires high-hazard flammable trains (HHFTs), defined as "consisting of a continuous block of 20 or more tank wagons or 35 or more wagons dispersed through a train loaded with a flammable liquid," to have in place a two-way end-of-train (EOT) device or a distributed power (DP) braking system. HHFTs are limited to 80.5km/h, with a conditional 64km/h maximum operating speed in densely-populated urban areas.

Trains meeting the definition of a high-hazard flammable unit train (HHFUT), defined as "a single train with 70 or more tank wagons loaded with class 3 flammable liquids, with at least one wagon containing Packing Group I materials," (which are defined as the most dangerous) must be operated with an electronically controlled pneumatic (ECP) braking system by January 1 2021, or reduce their maximum speed to 48km/h. All other HHFUTs must have ECP braking systems installed after 2023.

The urban speed limit will be lifted for trains consisting entirely of new or retrofitted wagons meeting the DOT-117 requirements.

USDOT is anticipating legal challenges from railways and fleet operators who say ECP braking is unreliable and unnecessary. Indeed rail industry officials and shippers were quick to declare their objections to the ECP requirement, with Association of American Railroads (AAR) president Mr Edward Hamberger describing the decision as "imprudent" and "without supporting data or analysis" while questioning the logic of making ECP compulsory. The railways similarly argued that braking distributed via mid-train locomotives and EOT devices would be just as effective.

"The ECP brake requirement ordered by the Department of Transportation is an 'operational requirement' and is not part of the PHMSA tank car standard rulemaking," Hamberger says. "The requirement for ECP brakes is aimed at tank wagons, not locomotives. Railways don't own tank wagons, they own locomotives [but] by default, locomotives will have to be ECP-equipped to be able to move wagons with ECP brakes. The decision whether or not to equip tank wagons moving crude oil belongs to freight rail customers or tank wagon owners, not the freight railways. If tank wagon owners decide not to equip wagons intended for crude oil service, railroads must decide whether or not to move trains carrying 69 or fewer crude oil tank wagons or travel no faster than 64km/h. Either scenario will decrease railway capacity and have negative consequences for both freight and passenger traffic."

The American Petroleum Institute adds that the ECP requirement will further stress an already impossible timeline for total fleet renewal. It warned that oil shortages will result as existing tank cars are withdrawn before builders can replace them: "We support upgrades to the tank wagon fleet and want them completed as quickly as realistically possible," the institute said. "The wagon manufacturing industry's own calculations show it does not have the shop capacity to meet the retrofit timeline, which will lead to shortages that impact consumers and the broader economy."

In contrast, tank wagon manufacturers greeted the timeline as "aggressive but appropriate" but Railway Supply Institute president Mr Thomas Simpson joined the chorus against ECP, saying "technical and logistical challenges" may not make ECP better than conventional distributed braking.

This may be the first time regulators have distinguished between packing groups with respect to tank wagon choice. Currently, all three packing groups may be carried in identical wagons, the only difference being in hazmat placarding and documentation. The timeline for tank wagon retirement or retrofitting is also tied to the lading's packing group.

One intended effect is to allow older tank wagons to transition from higher-risk crude to lower-risk ethanol service during fleet renewal. Gone from the final rules is the strategy to shift riskier wagons to tar sands service in Alberta, Canada, since diluted or synthetic bitumen proved itself to be unexpectedly explosive in a pair of early-2015 derailments in northern Ontario.

Without much explanation, the final rules excluded incentives to encourage voluntary degasification or stabilisation of crude oil before loading into tank wagons. But the USDOT hinted at more to come in subsequent rulemaking initiatives, saying the quest for safer transport of crude oil will now become a multi-departmental effort, with a focus on the volatility of the freight.

In the months following the rulemaking, there has been a significant shift in CBR market fundamentals. What was for a time regarded as a market favourite that could unseat intermodal loadings as the primary driver of incremental railway earning increases has tanked. The CBR picture has changed dramatically, and the future prospects for CBR are less sanguine.

According to the AAR, CBR loadings dropped by 16% in the second quarter of 2015 compared with their third-quarter 2014 peak. But that's only part of the story. As of late August, West Texas Intermediate (WTI) crude oil dropped below $US 40 per barrel for the first time since 2009. Opec pumped 31.51 million barrels a day in July 2015, the most per day since May 2012, when the price of WTI was $US 90 a barrel, with this production rate showing no sign of stopping. There's also the threat of increasing output to world markets if the US government's nuclear deal with Iran goes through and restrictions on Iranian oil exports are subsequently lifted.

Current prognostications indicate that oil may drift into the $US 20 range per barrel, and the analyst community suggests that this low price trend may last for years. In spite of these factors, domestic producers, presumably to hold onto market share, continue to decrease the cost of production and to churn out more oil into the vast ocean-sized glut that exists today.

As the price of crude falls, so the rail wagon markets struggle under the pressure. A look back at 2014 recalls expectations that retrofitting older CPC-1232 and legacy DOT 111 tank wagons was going to dominate repair shops and production. The glut of oil has softened CBR demand as the cost of transport by rail becomes a competitive drag on the total delivered cost of crude. Recent oil pricing has allowed many energy companies to take delivery of Opec-sourced crude for less than the cost of CBR.

The price of delivered crude along with increasing pipeline capacity has impacted wagon utilisation and decreased demand. There is anecdotal and factual information about tank wagons currently in storage, with rumours of thousands of tank wagons used in crude service moving into storage. Recently, US newspapers published articles quoting railway industry veterans Mr Carl Belke of the Western New York & Pennsylvania and Mr Ed Ellis of Iowa Pacific Holdings about storing tank wagons for crude service on their respective short line railways, in some cases without having ever been loaded.

It has been eye-opening to watch the CBR market move from wildcat to entrepreneurial to corporate to mature over the last five years. In a circumstance that may have been viewed as inconceivable, North American crude production, especially with crude at current price points, may become a combination of pipeline transported capacity with a much smaller amount of CBR, plus a second tier of CBR capacity, based upon destination. Oil drilling and energy companies would be able to own or lease wagons long-term that can be stored serviceable, ready to spring into action at certain price points.

It is the sheer volume, measured in barrels, of crude and the availability of pipeline capacity that causes this kind of shift in market fundamentals. Combined with global softness in demand for crude and the accelerated production of foreign oil producers, the pressure on CBR has been nothing less than extraordinary.

Now that CBR "isn't coming to the rescue anymore," as Wall Street analyst Mr Tony Hatch wrote recently, the market dynamics and the discussions about the market become that much more interesting. The longer WTI stays below $US 60, the more market expectations will continue to be adjusted. There will be a point when WTI goes back up in price. When it does, the CBR story will continue to evolve.