An abundance of cheap natural gas from new domestic production sites is dampening demand for coal, eroding what has traditionally been a core source of revenue for U.S. railroads.
The number of carloads of coal hauled by U.S. railroads during the first 29 weeks of the year through July 21 is down 10 percent from a year ago to 3.3 million, according to the Association of American Railroads (AAR). Other commodities with negative growth this year include grains, iron and scrap, and chemicals.
So far this year, cumulative carload traffic is off last year’s pace by 2.6 percent. But railroads are more than holding their own financially because a decline in some sectors is more than offset by gains in intermodal, petroleum and motor vehicles.
The loss of coal business appears to be a permanent trend reflecting fundamental shifts in the U.S. energy market. New technological advances have enabled oil and gas companies to drill in massive underground fields in North Dakota, Montana and other states, unlocking fossil fuels trapped in shale formations. The “hydraulic fracking” method involves injecting a mix of water, sand and chemicals at high pressure thousands of feet below the surface in order to crack the shale and allow gas or oil to escape.
A tepid economy, the mild winter and a new U.S. Environmental Protection Agency regulation requiring all new coal-fired electrical plants to cut carbon emissions by half are also blamed for lower consumption of coal by utilities.
But low natural gas prices are the primary driver behind the utilities’ shift away from coal, energy experts and railroad officials say.
A quarter century ago coal generated almost 60 percent of America’s electricity, but today it accounts for only a third of electricity production, according to three-part series
on the demise of coal by National Public Radio’s
“All Things Considered.” In June, natural gas generated a third of all U.S. electricity for the first time in U.S. history, the program said.
Experts it talked to said coal’s share of electric supply could fall to 15 or 20 percent during the next decade. Four years ago, electricity generated by natural gas was twice as expensive as coal, but today gas is less than half the price of coal. Coal is selling for about $56 a ton, but it costs coal mines $70 a ton to excavate it, NPR
As power plants switch from coal to gas, mines are shutting down and laying off miners.
Arch Coal, for example, recently closed operations at its mine in Webster, W. V. Two years ago, up to 35 trains a month came through the facility to transport coal to utilities, but that number has since dwindled to about 20 trains per month, according to the report. Patriot Coal has filed for bankruptcy protection.
The Georgia Power Co. has dismantled the railroad siding at one of its power plants near Atlanta because it has switched to natural gas.
Burning gas instead of coal is also significantly reducing air pollution, including mercury emissions, carbon dioxide, sulfur dioxide and nitrous oxide.
Norfolk Southern Corp.’s second quarter coal revenue fell 15 percent to $755 million, contributing to a 6 percent decline in overall earnings versus the same period a year ago. For the first half of 2012, the eastern carrier’s coal revenue was down $200 million, to $1.5 billion.
At BNSF Railway, a Class I railroad serving the western two-thirds of the nation, coal volumes fell in the first quarter even though revenues slightly increased because of higher rates and fuel surcharges, according to the company’s financial statement. Last year, coal was responsible for almost 27 percent of the railroad’s revenues. More than 90 percent of the coal transported by BNSF is from the Powder River Basin in Wyoming and Montana.
But BNSF has compensated for the loss of coal volume with record volumes for outbound petroleum and inbound equipment for developing the shale oil and gas fields, Chief Marketing Officer John Lanigan said during a panel discussion on logistics trends in Washington last month.
The railroad is carrying large amounts of pipe, sand and clay for the fracking process and is bringing oil out of North Dakota in 100-car unit trains because there are limited pipelines to get the product to refineries, he added.
More than 500,000 barrels of oil are produced each day in the Northern Plains. Producers now believe the Bakken field can produce more than 1 million barrels per day, Tom Williams, vice president of industrial products sales, said in a video on the BNSF Web site.
Railroads move 25 percent of the oil extracted from the region. U.S. railroads moved 271,905 carloads of petroleum products this year through July 21, a jump of 39.2 percent versus the first 29 weeks of 2011, AAR figures show.
Intermodal units with consumer and other products also climbed 3.6 percent to 6.7 million for the period. At BNSF, intermodal now represents 31 percent of freight revenues.
BNSF currently serves eight unit-train facilities in North Dakota that ship crude oil to various markets across the nation and two more facilities will be operational by the end of the year, according to the video.
BNSF is expanding capacity to meet the needs of oil and gas customers by building new sidings and improving yards, as well as adding train crews in various regions.
Lanigan said the railroad continues to invest in its network despite the uncertain economy because it is looking to future demand for its services.
“We continue to invest because we believe over time that the reliability of the network, given our environmental and cost advantage (compared to truck), will draw more and more business to rail,” he said. - Eric Kulisch