Oil industry concerned over BNSF's move to limit retrofit tank cars

NEW YORK (Reuters) - U.S. refiners and producers are seeking ways to counter efforts by BNSF Railway Co [BNISF.UL] to limit use of retrofitted oil tank cars following an Iowa derailment last month, Reuters has learned.

The crackdown by the country’s largest railroad, owned by Warren Buffett’s Berkshire Hathaway Inc, could take thousands of tank cars off a key rail line at a time when producers and refiners are scrambling to hire them.

Demand for oil tanker cars has surged in recent months as oil production in the largest U.S. and Canadian oil plays has outpaced pipeline capacity. The bottleneck has forced rail freight prices up and crude prices down.

Lease rates for the new tank cars, called DOT 117s, have surged to more than $1,000 a month per car from $400 a month late last year, according to two brokers.

Last month, 14 tank cars carrying sludgy, Canadian oil derailed and punctured in Iowa, sending some 230,000 gallons of oil into a state waterway. The tank cars were retrofits, called DOT 117Rs, according to state and federal officials.

After the incident, BNSF told shippers that it was going to ban the retrofitted tank cars in all new contracts, according to three sources familiar with the discussions. Shippers include refiners and producers like Phillips 66 and Exxon Mobil Corp, along with logistics companies such as Enbridge Energy Partners LP.

Since 2016, some 11,000 older tank cars have been retrofitted with thicker shells to comply with regulations issued in 2015 following a series of fiery derailments, according to the Railway Supply Institute. Thousands more will need to retrofitted by 2020 to comply with the new regulations.

Many of those retrofitted cars are used to carry crude.

The American Fuel and Petrochemical Manufacturers, the largest U.S. refinery association, said its members “have raised concerns with BNSF’s decision to refuse certain DOT-authorized tank cars and are currently considering options to address these concerns with the railroad.”

The options being considered by the oil industry include legal action and meetings with the head of the rail company.

ConocoPhillips, which owns the retrofitted tank cars that derailed in Iowa, owns a number of the redesigned cars. It deferred questions to the American Petroleum Institute (API).

The API said it would continue working with federal regulators to ensure oil transportation was safe.

BNSF spokeswoman Jessa Lewis said all companies involved in oil transportation by rail needed to work together to ensure only the safest tankers were used. The oil tank cars are owned by shippers, not BNSF, Lewis said.

She declined to comment on whether the company had told clients that the retrofitted cars would no longer be available for new contracts.

BNSF rail lines haul the most crude oil in the nation, accounting for nearly half of the 88,571 carloads moved in the last quarter of 2017, according to the latest data from the U.S. Department of Transportation.

Editing by Simon Webb and Peter Cooney