NEW YORK (Reuters) - A spate of high profile crude-by-rail accidents is making oil analysts consider how tighter rail safety standards could impact U.S. oil markets, by potentially crimping a mode of transport that has grown exponentially amid the shale drilling boom.
Any regulation or industry-driven move to hastily sideline a fleet of some 75,000 older tank cars commonly used for shipping crude could roil U.S. oil logistics, boost costs for refiners, and even hit output from North Dakota's giant Bakken field, oil analysts said.
The scenario that many view as more likely -- where older railcars could be gradually retrofitted or retired -- would be less disruptive but still raise transportation costs.
Tank cars known as DOT-111s are used to transport most of the 10 percent of U.S. oil production, or around 800,000 barrels per day, that is shipped by railroad. The cargoes have surged over the past half-decade, offering drillers in fast-growing shale plays like the Bakken a quick and flexible way to send barrels to consumer markets without relying on limited regional pipelines.
DOT-111 railcars built before 2011, which have been involved in several accidents, are under scrutiny for safety issues that make them more likely to puncture in a derailment.
Newer cars feature thicker steel and protective plates and fixtures, but the U.S. Department of Transportation (DOT) has so far allowed older cars to stay in circulation, even as the Association of American Railroads has called for their "aggressive" retrofitting.
Although the vast majority of crude-by-rail shipments arrive safely, pressure has been mounting to boost safety after a runaway train exploded in Quebec last summer, killing 47, and a collision in North Dakota last month produced a massive fireball, caught on video. Over the weekend, a train carrying North Dakota crude derailed in Philadelphia, although there was no fire or injuries.
"I view this as a potentially hugely significant tail risk," said Credit Suisse's Jan Stuart, referring to how new crude-by-rail safety measures could impact Bakken region oil logistics or production.
So far, the Department of Transportation has set a schedule for next year to draft new regulations, including updated tank car specifications, but it is facing pressure to move faster.
North Dakota Governor Jack Dalrymple on Tuesday became the latest politician to call for new tank car safety rules to be implemented immediately.
"Regulators have endorsed the new safety standards for newly built cars, but so far have not required any retrofitting," said Sandy Fielden of the RBN Energy consultancy in Austin. "If the existing fleet of older cars were to need retrofitting, it would be very disruptive."
In the fast-growing Bakken, where pipeline capacity has not kept up with oil production, more than 70 percent of output that is approaching 1 million bpd now moves by rail, according to the North Dakota Pipeline Authority.
Over half of the U.S. crude moved by rail hails from the Bakken, where the trend has allowed drillers to quickly send their barrels to refineries in the biggest fuel markets along U.S. coasts where they fetch higher prices, boosting profits.
"The most likely scenario is for regulators to gradually phase in safety improvements," said energy analyst Michael Wittner of Societe Generale. "That could increase transportation costs, but if there were a decision to replace older tank cars on short deadline, crude would be piling up in North Dakota."
Retrofitting the entire fleet of older DOT-111s would be costly and take up to ten years, the Rail Supply Institute, which represents tank car owners, said last year, in part because manufacturers are already struggling with a backlog of tank car orders. Newer DOT-111s feature safety improvements, but comprise only around 14,000 cars so far, according to the AAR.
Sidelining older DOT-111s could depress Bakken oil prices at the wellhead as producers compete for insufficient pipeline capacity, eventually hurting production, Fielden said. Any fall in deliveries by rail could force some coastal U.S. refineries to go back to buying more expensive crude imports.
If all older tankers were retrofitted, it could add between 20 and 40 cents per barrel to crude-by-rail costs, assuming a cost of $30,000 to $60,000 per car, according to a report this month from Turner, Mason & Company consultants.
Should producers have to rely just on pipelines, Bakken deliveries would plummet to less than 600,000 bpd at the most, less than 60 percent of daily output, according to the state pipeline authority.
Another risk under investigation by regulators is whether Bakken crude is more flammable than previously understood, the Department of Transportation said on January 2.
Because of its rapid output growth and isolated location from fuel markets, only a small portion of Bakken crude is processed in facilities known as fractionation plants, which strip out volatile gases like propane and butane, known as light ends. The plants can require large up-front investment, and years to build.
"Regulatory costs are going to go up, it's just a question of how high and how fast," said Robert McNally, president at U.S. energy consultant Rapidan Group. "I expect officials will try to find a sweet spot where timely and adequate regulations ... do not cripple Bakken economics."
Reporting by Edward McAllister and Joshua Schneyer; Editing by Marguerita Choy