In the wake of recent accidents involving derailing of railroads carrying crude oil, the Association of American Railroads, a trade group representing the North American railroads including CSX (NYSE:CSX), Norfolk Southern (NYSE:NSC)and Union Pacific (NYSE:UNP) , proposed tighter safety regulations relating to tank cars carrying combustible liquids such as crude oil and ethanol. The Association of American Railroads has urged the U.S. Department of Transportation to enforce new tank car regulations that will require tank cars that carry combustible liquids to be retrofitted or phased out or replaced by new tank cars in order to make them safer.
Railroads do not generally own tank cars, therefore retrofitting old tank cars or purchasing new ones will be the responsibility of railroad’s customers such as oil producers or tank car manufacturers from whom such oil producers lease tank cars. The costs incurred by the railroad’s customers may have negative impact on the railroad’s business since the added costs may make it uneconomical to transport crude oil or ethanol by rail leading to the customers opting for pipelines or trucks to fulfill their transportation requirements.
- By What Percentage Can CSX’s Revenue & EBITDA Grow In The Next 3 Years?
- What Is CSX’s Fundamental Value Based On 2015 Results?
- By What Percentage Did CSX’s Revenue & EBITDA Grow In The Last 5 Years?
- How Has CSX’s Revenue Composition Changed Over The Last 5 Years?
- What Is CSX’s Revenue And EBITDA Breakdown?
- CSX Q4 2015 Earnings Review: Lower Fuel Expenses And Productivity Improvements Offset Impact Of Top Line Headwinds On Results
High Costs And Long Completion Times Are Involved In Retrofitting Tank Cars
At present, 92,000 DOT-111 tank cars are used to transport combustible liquids, Out of these, only 14,000 tank cars are compliant with the latest standards.  Oil producers or tank car manufacturers will have to incur costs of retrofitting or replacing the remaining 78,000 tank cars. This does not bode well for oil producers and tank car manufacturers since the costs of modifying the existing cars could run into billions of dollars. Tom Simpson, president of the Railway Supply Institute, believes that the cost of retrofitting a single tank car would cost around $30,000 to $40,000.  This implies a cost of $2.3 billion to $3.1 billion to retrofit the 78,000 tank cars.
Not only do retrofitting tank cars cost a substantial sum of money, it also takes a lot of time. Additionally, given the already existing backlog of tank car orders at various manufacturers, it could take more than ten years before the entire existing fleet of tank cars can be replaced.  Seeing that retrofitting existing tank cars involves substantial costs and time, oil producers may want to opt for pipelines and trucks as a medium for transporting crude oil and ethanol. This may lead to a loss of crude oil shipments for railroads. Though this accounts for only about 2%-3% decline in revenues, crude oil shipments have played an essential role in offsetting declines in railroad’s coal shipments.
However, given that carrying crude by rail is far more efficient than via pipelines and trucks in terms of avoiding spills and leakage of hazardous material,  the decision will depend on the enforcement of the retrofitting proposal by the U.S Department of Transport. If the U.S. Department of Transport makes it mandatory for oil producers to transport combustible liquids only in tank cars as proposed by the AAR, and if oil producers can manage to pass on costs to their customers, then railroads might not lose business from crude oil shipments.
- Railroad Tank Cars, www.aar.org [↩]
- Rail industry tussles over U.S. tank car regulations, November 21 2013, www.reuters.com [↩]
- Oil boom is creating years-long backlog for tank cars, October 28 2013, www.chicagobusiness.com [↩]
- Just the Facts – Railroads Safely Move Hazardous Materials, Including Crude Oil, www.aar.org [↩]