UPDATE 4-Canada to phase out old railway oil tankers; won't wait for U.S.

Wed Apr 23, 2014 4:52pm EDT

(Recasts with official announcement and reaction from industry, U.S. government)

By Randall Palmer

OTTAWA, April 23 (Reuters) - Canada will require that older rail cars used for carrying crude oil be phased out by May 2017, the government said on Wednesday, moving ahead of the United States to ban the controversial cars in light of burgeoning oil-by-rail traffic and a deadly accident last year.

The unilateral move is in response to recommendations made by the country's Transportation Safety Board following last July's fiery rail-car derailment in Lac-Megantic, Quebec, which killed 47 people.

The phase-out was among a series of measures outlined by the government on Wednesday that are aimed at improving the safety of transporting crude oil by rail, an increasingly common practice in North America, where a shortage of pipeline capacity has forced shippers to find alternatives.

The faster phase-out in Canada raises the possibility that these older cars will be diverted for use exclusively in the United States if Washington does not move with similar speed.

"We understand the necessity of harmonizing with the United States on these matters," Transport Minister Lisa Raitt told reporters.

"But on this one, we can move faster and we will move faster, and we want to ensure that since we're seeing this increase in crude on the rail, we want to ensure that we have the safest system in place."

The U.S. and Canadian railway associations applauded Ottawa's move, conscious of the fact that they can be liable for accidents involving unsafe cars that they haul but do not own.

"Transport Canada has indeed recommended an aggressive timeline and we are confident that the industry will do all it can to meet it," Association of American Railroads Chief Executive Edward Hamberger said.

However, American Petroleum Institute spokesman Brian Straessle voiced concerns that the decision might not be fully supported by facts and said it was important not to "just shift risk from one part of the transportation chain to another".

VULNERABLE TO PUNCTURING, LEAKAGE

The type of cars that derailed and exploded in the center of the small Quebec town of Lac-Megantic last July are known as DOT-111 cars, and are seen as being vulnerable to puncturing and leakage.

Since October 2011, new oil tank cars have been built to a higher standard, known as CPC 1232. The CPC 1232 standard will be the minimum requirement in Canada three years from now.

The Railway Association of Canada says there are about 78,000 of the older DOT-111s carrying flammable liquids in North America. Raitt put the number at about 65,000, of which one-quarter to one-third are in Canada.

Within 30 days, Ottawa will also prohibit use the least crash-resistant of the older tank cars for carrying crude oil or ethanol. The cars are considered dangerous because they lack continuous reinforcement of their bottom shells. Raitt said there are about 5,000 of these in service.

Raitt also announced the government would require speed restrictions, stricter inspection standards and emergency response plans for the rail carriage of dangerous goods.

The U.S. Department of Transportation said on Wednesday it has been working closely with Canada on rail safety and applauded the new measures.

"We will continue working closely with them based on our existing work, including the possibility of an even more advanced tank car than is currently in use. Our countries have different processes, but we have the same goal," Kevin Thompson, an associate administrator in the department, said in a statement.

The new tanker standard that the United States is working on would go beyond CPC 1232, but the process of developing it is time-consuming. Canadian Pacific Railway Ltd President Keith Creel estimated on April 3 that it would take 12 to 18 months for the new standards to be set.

Transport Canada said it intends to meet or exceed any new standards developed by the United States. Raitt declined on Wednesday to say whether Canada would grandfather in, or give a pass to, those cars that have been built to the stricter CPC 1232 standards since 2011.

Norfolk Southern Corp Chief Executive Charles Moorman said on Wednesday that if U.S. regulators also order a fast phase-out, it could have a "limiting impact" on the shipment of crude by rail and "would probably present some problems for us".

Many of the biggest crude-by-rail players in the United States - from BNSF Railway Co to refiners such as Phillips 66 - have already stopped using older cars or are buying new ones.

This month refiner PBF Energy Inc started accepting shipments only in cars that meet the post-2011 CPC 1232 standards.

A flood of orders for the newer cars has raised concerns about capacity constraints at North American railcar makers such as Trinity Industries Inc, American Railcar Industries Inc and Greenbrier Cos Inc.

The U.S. Railway Supply Institute estimates 33,800 tank cars can be made every year. But rather than going solely to replace old tankers, many of the cars are snatched up to meet the demand created by increased oil production in North Dakota and Alberta. (Additional reporting by Patrick Rucker and Valerie Volcovici in Washington, Louise Egan in Ottawa, Kristen Hays and Terry Wade in Houston, Julie Gordon in Vancouver and Solarina Ho in Toronto; Editing by Peter Galloway and Jeffrey Hodgson)