Sandy Fielden, RBN Energy
The US energy midstream sector will remember 2012 as the “Year of the Tank Car”. Venerable pipeline companies were reduced to investing in rail terminals. Although reluctant at first, coastal refiners embraced the margin boost that crude by rail provides them. Producers signed up to move landlocked crudes by rail to coastal destinations in search of higher prices. Petroleum shipments increased 46% from 370 M carloads in 2011 to 540 M carloads in 2012. Rail car manufacturers struggled to meet an order book of 40,000 rail cars and the backlog for new delivery is 18 months. Today we begin a crude by rail series.
We discussed the crude by rail “phenom” all through last year as the development gathered steam. A lot of our analysis was centered on the region that saw most rail loading terminal development – North Dakota (see From a Famine of Pipeline to a Feast of Rail and our earlier blog on rail shipments to the East Coast - Rail it on Over to Albany). By August of last year the Bakken rail terminals coming online had started to have an impact on crude pricing in the region as rail became the preferred form of transport out of the Bakken (see Railing Against the Pipelines). We delved into the tank car business and the railroads in the context of natural gas liquids (see A Tank Car Train for Hire). In December we looked at the crude by rail destination terminals owned by Plains and Nustar at St. James, LA (see Back to the Delta). In this series we will cover crude by rail “soup to nuts” including loading terminals, destination terminals and transport economics. In this introduction we review the expansion of crude by rail during 2012 and the market trends that lie behind the Year of the Tank Car.
Crude production drives rail
In the year to November 2012 US crude oil production increased by 0.9 MMb/d (Energy Information Administration data). The crude basins that experienced the greatest growth were the Bakken (200 Mb/d), Eagle Ford (300 Mb/d) and Permian (270 Mb/d). Canadian production also increased 250 Mb/d in 2012. The growth is US production is forecast to continue - by 2.5 MMb/d between 2012 and 2017. Pipeline infrastructure to deliver crude to market has not been built quickly enough to keep up with growing production. As a result existing pipelines to market are congested – particularly in the Midwest at the Cushing, OK hub. That congestion has caused prices for inland crudes based on the West Texas Intermediate (WTI) benchmark at Cushing to fall vs coastal locations that pay higher international prices based on Brent North Sea crude. Although it is a more expensive transport solution than pipelines, the delays in pipeline construction and wide crude price differentials have made rail shipments economically viable.
Railroads and railcar companies benefit
As a result crude by rail traffic went through the roof last year. The Association of American Railroads (AAR) reports that more than 200M carloads of oil (roughly 350 Mb/d) were moved on US Class I railroads in 2012. That’s a 300 percent increase over 66M carloads last year (117 Mb/d). Another 100 Mb/d was moved by rail in Canada during 2012. The railroads are the obvious beneficiary of this increase in crude shipments but it should be remembered that petroleum represents only a tiny fraction of the total goods carried by rail – just two percent of tonnage and three percent of revenue in 2011. Nevertheless the increase in crude has been welcome at a time when the railroad’s staple commodity – coal has been declining – because of competition from natural gas for power generation. Coal shipments on major US railroads fell nearly 11% in 2012 to 6.03 million carloads. A good deal of the new US domestic oil production results from the use of hydraulic fracturing techniques (see Tales of the Tight Sands Laterals). The railroads have also benefitted from increased movements of the sand and other materials required for “fracking”.
Burlington Northern (BNSF) has been the main beneficiary of the boom in rail traffic. It owns the majority of the tracks in North Dakota and Montana, at the heart of the Bakken. BNSF also own routes connecting south to major refining centers in Illinois and along the Gulf Coast. BNSF saw petroleum volume increase from just 3.5 Mb/d in 2008 to 240 Mb/d in 2012. BNSF is planning capital improvements to haul 40 percent more crude in 2013. The second largest carrier in the Bakken was Canadian Pacific (CP). That company moved less than 1.0 Mb/d in 2009 but increased shipments to over 100 Mb/d in 2012.
Rail tank car manufacturers have also benefitted from the boom. Union Tank Car Co. is working at full capacity and American Railcar Industries Inc. has a backlog through 2014. Trinity Industries Inc. - the biggest railcar producer - began converting wind-tower factories last year to help meet demand for tank cars. In the first two weeks of January 2013 manufacturers received orders for more than 2,500 new tank cars and there is a backlog of 40,000 cars on order. If you buy a rail tank car today the wait for delivery is 18 months. Prices have shot up in the last two years in part because of new safety features required by regulations. The average new tank car purchase price increased from $74M in 2011 to $100M in 2012 and will increase to $133M in 2013. The shortage is exacerbated by manufacturers who keep many of the tank cars they produce to supply their own leasing businesses, where rates in some cases have more than quadrupled to $2,500 a month.
The boom in traffic is set to continue. About 1 MMb/d of new rail-unloading capacity is being built or planned in the US during 2013. That is three times the current shipping level. The following trends are emerging:
Unit trains: Crude by rail logistics are embracing efficiencies to keep costs low. The unit train – meaning 100 cars or more is more efficient but requires more extensive loading and unloading facilities that are now being built out.
Single line hauls: Although railroads connect to most locations in the US, the journey times are impacted by the need to move cars onto a different carrier line and by congestion in the Midwest. For example it is more efficient to move crude from North Dakota to Albany New York by a single line haul on CP and then by tanker or barge down the Hudson River to the East Coast than to navigate multiple railroads across the Midwest to reach the East Coast by rail.
Rail to water: For refineries that have existing coastal or inland waterway access deliveries of crude by barge or tanker are often more convenient than by rail. Companies such as Marquis and Gateway operate rail unloading terminals along the Mississippi river (see A Good Year for the Barges Part II). These terminals offload crude from North Dakota or Canada onto barges for onward delivery to refineries in the Mississippi delta. Although some refineries on the East Coast are building rail unloading facilities there will still be advantages to waterborne deliveries particularly in the Gulf Coast region.
Pipeline companies hit the rails: Pipeline companies are getting in on the rail bonanza. Enbridge shipped 1.3 MMb/d of Canadian crude imports into the US in 2012. Most of that crude was shipped via the Enbridge Mainline – the largest crude oil pipeline system in the world. During 2012 Enbridge also constructed a rail loading facility in North Dakota at Berthold to supplement their pipeline capacity in the region. In November 2012 Enbridge announced plans to invest in the Eddystone Rail Company that will develop a unit train unloading facility near Philadelphia that will deliver Bakken oil to East Coast refineries.
Advantages of bitumen by rail: Canadian Bitumen shipments by rail are increasing to destinations on the East Coast and the Gulf Coast. These heavy crudes have to be mixed with 30 percent diluent in order to flow in pipelines. The pipelines out of Western Canada are so over subscribed that bitumen crudes are being discounted heavily in the Midwest. Rail transport offers two advantages. First the amount of diluent required to move bitumen crudes by rail is minimal or zero. Special heating equipment is used to heat the crude prior to unloading at the destination. That means more crude is shipped and the cost of diluent is saved. Second rail provides flexible destinations for shippers – meaning that higher crude prices on the East Coast or the Gulf Coast can be realized.
Rail – the new export pipeline: Rail is now being seriously considered as an export option for Canadian crudes. The TransMountain and Northern Gateway pipeline projects to deliver Canadian crude to the West Coast for export that we discussed earlier this month (see West Coast Pipe Dreams) are threatened by environmental opposition. Rail routes already exist to move crude to the West Coast (albeit more expensively). Proposals exist to develop a terminal on the West Coast of Canada at Prince Rupert or to ship Canadian crude by rail to the US for export from a terminal in Washington or Oregon. These projects do not require any permits for the rail part of the journey but could face opposition to developing marine terminals.
West Coast growth: Crude oil movements by rail to the Western US are being advanced. Tesoro initiated rail movements from North Dakota to their Anacortes, WA refinery (40 Mb/d) in 2012. There are now several rail terminals being developed in the Northwest US to receive crude oil - including the recent acquisition of Cascade Kelly Holdings by Global Partners that includes waterborne facilities to move crude by barge or tanker to refineries on the West Coast. As we discussed recently in a blog about declining production of Alaska North Slope (ANS) crude that feeds many West Coast refineries (see After the Oil Rush) higher crude prices on the West coast make rail shipments from inland attractive.
California is complicated
Delivering crude by rail to the California refining market is complicated by stricter environmental regulations in the Golden State – including the Low Carbon Fuel Standard, or LCFS, that requires California refineries to run crudes produced in environmentally friendly ways. Terminals are being developed however including a Plains/US Development Group facility at Bakersfield. Other proposals are on the table to ship crude by rail to California from West Texas and New Mexico.
One issue that has so far thankfully not received a great deal of attention is the safety risk of moving crude by rail. A recent Manhattan Institute report determined that rail accidents occur 34 times more frequently than pipeline ones for every ton of crude or other hazardous material shipped comparable distances. The AAR acknowledges the likelihood of a rail accident is double or triple the chance of a pipeline problem. A single incident could easily change the entire debate about rail versus pipeline safety.
The crude by rail express came from nowhere on the radar screen just a couple of years ago to become one of the biggest US energy developments of 2012. Many believed it was all a flash-in-the-pan that would evaporate once new pipelines were built to relieve inland crude congestion. However the signs are that continued increases in crude production will sustain significant crude by rail traffic in the coming years. The enormity of the changes in US crude oil delivery logistics means that nimble rail options – often combined with waterborne movements – have proven faster and more flexible than traditional pipeline development. In the rest of this series we will provide more detailed coverage of rail terminal developments and transport economics.