Callie Mitchell, RBN Energy LLC
News flash! Rail transportation has become a very big deal in the business of transporting crude oil, NGLs and petroleum products!! The whole world does not revolve around pipelines! Yup, the media has discovered that hydrocarbons can ride the rails. Never mind that liquid hydrocarbons have been moving in tank cars for 150 years. The news is that rail is having a market impact like never before. And that is because there has been a strategic shift in the way rail transportation is being used by the petroleum industry. In Part II of our series we’ll dissect the strategies being used and discuss how things are evolving in the world of tank cars.
In Part I, A Tank Car Train for Hire – NGLs on the Rails we focused on the Class I rail network, the history of petroleum transportation by rail, high pressure tank cars used for NGLs, the difference between unit trains and manifest trains, and the recent increases in rail activity for liquid hydrocarbons. In short, the average number of weekly petroleum and product carloads has increased to 17,000 after languishing in the 9,000-11,000 range for many years. So the use of rail by the petroleum segment is up about 70%. For the most part the increase is being driven by crude oil moving in dedicated unit trains of 100 cars or more. These trains are shuttling between the prolific Bakken play in North Dakota to terminals in Cushing, OK and Gulf, East and West coasts. But that’s not all that is going on. As we discussed in Part I, as NGL production in remote markets increases so has the use of rail cars to move that product to market. The only thing different is that LPGs (propane and butane) must be shipped on “high pressure” cars due to the high vapor pressures of those products.
How has the market changed?
It has been a long, long time since rail cars were a preferred way of moving liquid hydrocarbons. That is because pipeline transportation is much cheaper and pipeline logistics are considerably easier to manage. Decades ago in the early days of petroleum production, railcars were a necessary evil to get product to market, because the pipelines did not exist. But over time that changed.
When a pipeline could be economically justified, the pipe replaced rail – relegating railcars to lower volume, more remote business where there is not enough volume to justify pipelines. Because the rail volumes for this kind of business is low, almost all of this business is “manifest” – partial train loads shuttling cars between tank batteries, natural gas processing plants, refineries, rail terminals on pipelines and other destinations geared up to handle partial train-loads of products. In effect, until recently rail has been the backwater of the energy market and attracted little attention outside the tight knit cadre of traders and schedulers that specialized in tank car movements.
Then there was Bakken. For the first time in eons, crude oil production increased rapidly in an onshore play. And that play had few existing crude oil pipeline systems. Given the early uncertainly about Bakken crude production, the long distances from the Bakken to major refinery centers and the huge costs of building new pipelines, it became obvious that producers would be waiting for a while before pipeline capacity would be available.
And fortunately for all, producers were already doing lots of business with the railroads to bring proppant sand, drill pipe and other materials to staging locations near wellsites (see RBN Energy's recent Tales of the Tight Sand Laterals blog for more how sand is used for fracking). So just like in the early days of the petroleum industry, it was natural for producers to turn to the higher cost, labor intensive but faster to develop rail system.
And because the production volumes were increasing so dramatically, producers like EOG could move beyond the inefficient manifest train strategy by building their own loading and unloading terminals and operating unit trains between them – in effect developing a “milk run” system of trains running continuously between EOG’s loading and unloading terminal. As rail transportation volumes started to grow, some of the other benefits of rail started to become apparent. Pipelines are stuck moving product from A to B, where the pipeline goes. But rail cars could be moved to the highest value market, wherever that market might be. So if today the highest prices are on the Gulf Coast we send the cars that way. But if tomorrow the best prices are in the Pacific Northwest, that’s the way they go. That’s called optionality in the parlance of energy traders. Over the last couple of years the benefits of optionality have been embraced by a number of producers and midstreamers.
The Wide Area Network
Another thing many producers and midstreamers embraced was the unit train concept. Very early on in Bakken rail development it became clear that the benefits of unit trains can only be realized if the unit train can be loaded on one end and unloaded as a unit train on the other end. If a unit train must be ‘broken up’ into smaller pieces to unload it, the shipment loses its cost advantage and faster turnaround time. So to get the advantages of unit train shipment, and to realize the ‘optionality’ advantage of taking trains to the highest value market on a given day, you would need to have multiple unit train terminals serving diverse supply and market areas – in effect, a wide-area network for energy commodities.
That is just what US Development Group seems to be doing. his private company based in Pasadena, TX operates rail networks for both biofuels (they are the largest operator of railroad terminals for ethanol) and crude, building terminals in both the supply area and market area. Today on the crude oil supply end they have two terminals in the Bakken, one in the Niobrara and one in the Eagle Ford. Their main destination terminal is in St. James, LA but they are reported to be developing new facilities on the East Coast where they already rail biofuels.
Interim versus permanent
The ‘milk run’ unit train strategy being used by EOG, the Wide Area Network strategy being deployed by US Development and similar strategies being developed by other players suggest that rail is not intended to be an interim solution, eventually playing second-fiddle to the pipelines that will be built over the next few years. Where the volumes of product and geography make sense, it seems clear that rail is being developed as a base load transportation system to compete head-to-head with pipelines. With the cost advantages of unit trains and the optionality of networked destination terminals, the benefits of rail can outweigh the cost advantages of pipelines. This is a new way of thinking about the use of rail for transporting liquid hydrocarbons.
Today this approach to rail transportation is primarily confined to crude oil shipments from the big plays like Bakken and Eagle Ford. A lot of crude and almost all NGLs are being moved, of necessity, in small manifest train lots – just the same as it has been done for decades. But that business is changing too. For example, Oneok is reported to have started a unit train operation last year that takes NGLs from the Bakken down to Hutchinson (Conway), KS for fractionation. It is understood that the volume is around 400 cars per week (4 X 100 car unit trains). No doubt that route will be discontinued when the Oneok pipeline is completed next year. But other uses of the loading and unloading facilities are probably in the works.
When you look across all of these developments, it is apparent that the liquid-hydrocarbon-by-rail business is evolving rapidly and is morphing into three markets. First is the traditional manifest load market to get small volumes from remote producing locations to market. Second is the use of unit train rail as an interim solution until pipeline transportation is available. Third is a long term unit train rail transportation business that will be competing for barrels directly with new pipeline construction. All of this translates into a real renaissance for the transportation of petroleum by rail. And that’s a good thing for rail since the business of moving that other hydrocarbon – coal – is not doing so good.
Next time in this series we’ll dig into the numbers to understand exactly how much it costs to move product by rail, considering loading, transportation, switching, rail car leasing, unloading, inventory holding costs, etc.
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