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U.S. Refiners Scramble To Avoid Railcar Shortage

U.S. oil refiners as well as producers are frantically looking for ways to reverse a decision by the country’s largest railroad operator, BNSF Railway Co, to curb the use of retrofitted oil tank cars on its railroads as a safety measure after a derailment in Iowa in June.

Reuters reports that this decision could lead to the removal of several thousand oil tank cars from a crucial railway line and up the lease the rates for new cars substantially. Already, two brokers told Reuters, the lease rate for new oil tank cars is over US$1,000 apiece per month, up from US$400 per month at the end of last year.

In June, an oil train derailed in Iowa and spilled more than 200,000 gallons of Canadian heavy crude into a public waterway. Following the incident, BNSF said it will stop offering retrofitted tank cars—of which there are about 11,000 on U.S. railroads—in new contracts. Companies including Exxon, Phillips, and Enbridge use the cars and will be affected by the change.

BNSF’s decision comes at a bad time for shale producers, particularly in the Permian. The oil rush that some media have dubbed Permania led to a shortage of pipeline capacity in the prolific shale play that has resulted in a discount for crude pumped there as it sits and waits longer than usual to be shipped to the Gulf Coast refineries.

Canadian heavy oil producers are also suffering a worsening pipeline shortage, so for both groups, the railway has become the obvious alternative, even though it is costlier for them and, based on statistical data, riskier for the environment, as once more proved by the Iowa derailment.

However, pipeline opposition in both the United States and Canada has prevented the industry from adding much needed capacity, although the Permian is better placed than the Alberta oil sands: several large-scale pipeline projects are in progress there already.

By Irina Slav for Oilprice.

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