Peak Crude Production Requires New Transport For Capacity, Variety

November 2014, Vol. 241, No. 11

Carol Freedenthal, Contributing Editor

Booming U.S. crude oil production, especially in areas that were not already big producing locations with good takeaway pipeline capacity, have made it necessary to find new ways of transporting the growing production coming from development of shale reservoirs.

The need was filled quickly and relatively easily, using rail for crude transportation from field to refinery or storage. New crude production from shale reservoirs in North Dakota’s Bakken area, Colorado and West Texas lacked pipeline capacity to meet the fast, increasing production. Rail transportation, practically unused previously, has provided relief and even more.

A recent Wall Street Journal article reports that it all began in May 2008 in Dore, ND when the first carloads of crude oil were picked up from the Bakken fields and transported about 1,000 miles to Cushing, OK storage terminals for further delivery to refineries. This was the start of “crude-by-rail,” a major change from traditional pipeline transportation in the U.S.

What began as a stopgap solution is far from that today. Crude-by-rail will be a part of the U.S. energy picture for some time because there are additional advantages besides the capacity to move crude to market. This permanence is easily proven by the growth in the last few years. According to the WSJ article based on federal government data, about 939,000 bpd, or about 11% of all oil going to U.S. refineries on the coasts and along the Gulf of Mexico moved by rail. This compares to less than 5,000 bpd in 2008!

Crude-by-rail is popular in the U.S. as well as in Canada. Crude moving in the northern country has quadrupled since 2012 and the forecast is to more than triple by 2016.

Cost of rail shipment of crude is two to three times the typical pipeline cost of $5/bl to move oil. But the advantages outweigh the additional cost. The economics for everyone, producer and shipper, far outweigh the increase. Maybe the most important advantage is the variability of markets available because of rail. Markets paying the highest prices for crude can be selected at the time.

Pipelines, because of their high capital costs, usually require long-term contracts for shipments. Pipelines are fixed, going point to point. Railroads are flexible with plenty of miles of track reaching all parts of the U.S. The crude oil pipelines in the country cover roughly 57,000 miles compared to nearly 140,000 miles of railroads.

To extend a railroad is relatively low cost compared with the big money per mile for a pipeline. This does not even include the difficulty and delay in getting regulatory permits in today’s environment for new pipelines. Building terminals to handle the loading/unloading of rail-transported crude is relatively cheap and can be done quickly; $50 million will build a lot of rail terminal facilities but is a drop in the bucket for pipeline construction costs.

Shipping by rail offers the producer flexibility in picking the highest paying market for his oil. The differential between Gulf Coast or West or East Coast buyers can be considerable. Crude-by-rail allows the seller to choose based on current markets and prices.

Rail transportation is quick and the movement of product to market can bring cash much quicker. Crude moving from the Bakken area, now the second-largest producer after Texas, is an example. Moving oil from the Bakken by rail to Gulf Coast refineries takes five to seven days. Pipelines take about 40 days.

The economic benefits to the producer/shipper are beyond question; the other big gainers are the railroads themselves. Their revenues were hurting for a variety of reasons, one being the loss of coal shipments as more generation plants switch to cleaner-burning natural gas.

Coal shipments have fallen an estimated 23% since 2008. Not only are these being replaced with crude shipments, but the profitability for crude transportation is about 15% greater than hauling coal. David Vernon, an analyst at Sanford C. Bernstein, estimates that crude generates about $2,500 per carload vs. $2,200 for coal. According to the WSJ article, major railroads’ revenue for moving crude has risen from $25.5 million in 2008 to $2.15 billion in 2013.

Once the crude-by-rail benefits were felt, nearly everyone has jumped in to make the transition, including some large crude oil pipelines. Major capital improvements have been needed for new terminals to load and unload. Some unloading facilities are separate from refineries but can unload tank cars and transfer crude to barges for delivery to the refinery.

By the end of 2013, North Dakota had 13 large rail-loading terminals. There was a surge of new or expanded facilities for unloading and transferring to refineries in about two dozen states and Canadian provinces. Terminals have been built to handle 100-car crude-carrying trains which are a little over a mile long. Each car carries about 700 barrels. Some facilities are being designed to accommodate even longer trains and many can now unload all of the cars at one time.

Even though the movement to crude-by-rail began as a stopgap measure to help the Far West oil producers, the advantages make it look like a permanent feature. The rapid growth will slow but its flexibility and speed will keep it going. For example, last December the Port of Beaumont welcomed a customer to its new terminal, a train carrying 43,000 barrels of crude from Colorado. The crude at the Jefferson Transload Railport was transferred to a barge which sailed down the Neches River to an oil refinery.

The major obstacle to crude-by-rail concerns safety. Pipeline transportation is the safest without question. Crude-by-rail is safe as long as the cars stay on the track. But derailing does occur and with a mile-long train of flammable liquid, it can cause a catastrophe. Since the surge in rail transport, there have been numerous accidents. The worst was in 2013 in Lac-Megantic, Quebec when a crude-carrying train derailed and exploded, killing 47 people and causing billions of dollars in damages.

In late 2013 in North Dakota another mile-long crude-carrying train collided with a grain train that had derailed. These were the big ones. There have been countless other smaller incidents where derailments resulted in fires or explosions. Texas had 28 accidents in 2012, 18 in 2013 and eight so far this year.

In July, the federal Department of Transportation (DOT) issued proposed rules to improve the safety of shipping crude by rail. The proposal, which is open for public comment, covers enhanced tank car design, fuel classification and operational requirements for handling crude and other flammable liquids. Many improvements to enhance crude-shipping safety have already been made through voluntary agreements and emergency orders.

One concern was that some crude, mainly from the Bakken, were more dangerous to transport than others because of the higher content of light petroleum products. A recent study, sponsored by the North Dakota Petroleum Council (NDPC), found no major differences between Bakken crude and other U.S. crudes.

The risks of shipping Bakken crude may be magnified because of the large volumes of crude coming from that area and the long distances that have to be traveled to get the crude to market.

Regardless of the regulatory action taken, crude-by-rail will continue to be a major factor in U.S. crude production. Railcar loading rose from 9,500 in 2008 to 415,000 in 2013, according to the DOT. The major changes ultimately will include updated standards for design and operation of crude-carrying tank cars, something the industry has sought for years. Final rules might include 40 mph speed limits on crude-carrying trains in all areas or in hazardous urban areas or locations with populations of at least 100,000.

Crude-by-rail has proven too valuable to be dismissed!

Find articles with similar topics
, ,