Growth in crude oil shipments by rail will continue even after pipelines are built to move the oil from the new shale-oil fields popping up around the country, railroad industry executives say.
Their comments at the RailTrends conference in New York last month, hosted by analyst Anthony Hatch and Progressive Railroading
magazine, were included in a memo to clients summarizing the conference by analysts at investment house Stifel Nicolaus.
The fastest growing carload segment in the freight rail industry, albeit off a low base, is crude oil as production of shale oil booms in Montana, North Dakota, Texas, Pennsylvania, Colorado, and other states, according to Stifel's coverage of the event.
U.S. rail carloads of crude petroleum surged in the third quarter of 2012 to almost 65,000 carloads (more than 500,000 barrels per day) from about 51,500 carloads in the second quarter, according to the latest statistics from the American Association of Railroads (AAR). In the third quarter of 2011, railroads moved 16,789 carloads of crude. Through the first three quarters of 2012, the seven major U.S. railroad carriers were on pace to originate more than 200,000 carloads of crude oil for the year, up from 9,500 carloads in 2008.
Based on the latest figures, crude oil only accounts for 0.69 percent of total Class I carloads, but the number is an improvement from the 0.04 percent share in 2009. Railroads now haul almost 10 percent of domestic crude oil production, the AAR said.
Energy companies will continue to use rail because it gives them flexibility to move product to refineries where its most needed and they can command the best prices, and because pipelines take much longer to get built than new rail infrastructure.
Rail also has lower capital requirements than pipeline, can ensure higher quality because product is not diluted or contaminated through sharing of the same pipeline infrastructure, and can deliver crude much faster, experts at the conference said.
Most pipelines that are built likely will be aimed at the Gulf Coast refineries, leaving railroads as the primary transport mode to the East and West coasts, they said, according to Stifel.
Dakota Plains Holdings said in its presentation that railroads serving the Bakken Field in North Dakota have taken market share away from pipelines in the past 15 months. Oil-by-rail has increased from 17 percent of daily production to 51 percent of the the 800,000 barrels produced each day, as of September.
Car supply might hold back growth for the railroads because there is a two-year backlog of orders for tank cars from manufacturers such as Trinity Industries, according to industry experts. The AAR said in a paper published last month that some crude oil is moving in tank cars that are not optimal size because of the shortage of of tank cars for oil. There are more than 290,000 tank cars in North America, but the fleet is used to haul many different commodities. Tank cars are not interchangeable. Many crude shipments contain 28,000 gallons of oil instead of the ideal capacity of 30,000 to 32,000 gallons, the AAR paper said.
Railroads are also busy delivering specialty sand to drill sites for use with water and chemicals to fracture the shale seams and release the trapped oil. Through the first three quarters of 2012, Class I carriers are on pace to originate nearly 300,000 carloads of industrial sand for the year, up from 112,000 in 2009. There is no specific break down of how much industrial sand is "frac sand," but the AAR surmises that most of the growth in industrial sand shipments is due to oil development.
(For an in-depth analysis of the transportation and logistics activity underway to support the shale oil development, see "Steel-wheeled Pipeline" in the January issue of American Shipper.) - Eric Kulisch