UPDATE 2-Tesoro replacing older crude railcars in its fleet -CEO

Thu Feb 6, 2014 5:55pm EST

* Entire fleet to have newest safety designs by mid-2014

* Railport project on target for late 2014, early 2015

By Kristen Hays

HOUSTON, Feb 6 (Reuters) - Independent refiner Tesoro Corp is replacing older railcars in its crude-by-rail fleet with ones that have the latest safety designs, Chief Executive Officer Greg Goff told analysts on Thursday.

He said 90 percent of Tesoro's fleet consists of railcars that meet the latest design standards embraced by the rail industry for all tank cars manufactured after October 2011. U.S. regulators have yet to impose such standards.

By mid-2014, Tesoro will have replaced the remaining 10 percent of its fleet, currently comprising older cars, with ones that meet the industry's newer design standards, Goff said during the company's quarterly earnings call.

Keith Casey, senior vice president of strategy and business development, told Reuters that as regulators consider imposing more stringent railcar standards, Tesoro decided to replace its remaining older cars "proactively, in advance of the regulations."

Refiners, railcar makers and railroads are in talks with regulators on stronger standards in the aftermath of several fiery crashes as oil-by-train transport has surged in tandem with the U.S. crude production boom.

It was the latest effort by a refiner to reassure the public about tank car safety following the crashes that sharply hiked scrutiny of moving oil by train.

Last week Joe Gorder, chief operating officer for Valero Energy Corp, the largest U.S. refiner, told analysts that all 5,320 railcars the company has on order meet the newer standards.

He said Valero could use the incoming newer cars to move crude and use the 6,000 cars it currently leases to move other materials, such as asphalt and ethanol, he said.

PBF Energy Chairman Tom O'Malley said last year that the refiner expects to use all newer company-owned crude railcars by the end of 2014 as its rail capacity expands, and all of Phillips 66's crude cars meet the latest standard.

Casey said Tesoro's replacement cars will be "jacketed," or have a more puncture-resistant shell, as well as heating coils capable of moving undiluted heavy Canadian crude.

While the change gives Tesoro the flexibility to start moving Canadian crude to its refineries, Casey said the company will initially stick to lighter inland U.S. crudes in cars with the additional protection against punctures or leaks.

New regulations under consideration by the U.S. Department of Transportation's Pipeline and Hazardous Materials Safety Administration could make all refiners, logistics companies and shippers that move oil by train replace or retrofit crude railcars made before October 2011.

The railcar industry estimates that some 80,000 tank cars that haul flammable liquids, including crude, don't meet the post-October 2011 standards.

Railcars involved in a runaway crude train that exploded and killed 47 people in Quebec last July were of the older design, as were cars that crashed into a derailed grain car in North Dakota in December, according to investigators.

Crude movements rose 71 percent in 2013 compared with 2012,

more than 10 percent of average U.S. output of 7.5 million barrels per day last year, according to the Association of American Railroads, the rail industry's trade group.

MORE SHIPMENTS

Tesoro began shipping Bakken crude via rail to its 120,000 bpd refinery in Anacortes, Washington, in September 2012, and has since begun shipping up to 12,000 bpd to its 166,000 bpd Golden Eagle refinery in Martinez, California.

In addition, Casey said other potential sources for rail shipments include the Niobrara shale play in Wyoming and Colorado and the Permian Basin in Texas and New Mexico.

The company also is seeking permits to build a $100 million joint-venture railport with Savage Services at the Port of Vancouver in Washington.

The project, which remains on target to start up in late 2014 or early next year, would receive railed crude and then load it on barges or tankers to go to West Coast refineries run by Tesoro and other companies.

Other refiners also receive crude via rail - particularly on the West and East coasts - to tap crudes that are cheaper than imports despite lacking pipeline infrastructure.

Goff told analysts that the recent crude train crashes have prompted more "public interaction" with proposed rail project permitting.

"We feel good about working through that," he said.

He also said Tesoro implemented emergency procedures more than a year ago to respond to a crude train incident within two hours anywhere on the route from North Dakota to Washington state.

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