RAIL EMERGES AS KEY FACTOR IN US CRUDE OIL LOGISTICS

Rail emerges as key factor in US crude oil logistics

News from the US on the energy front continues to rattle the windows. New statistics reveal that North American crude oil production jumped by over 1 million barrels per day (b/d) last year, helping push global crude production up 2% to the record level of 75.6m b/d. The jump in North American output, which increased to 12.2 million b/d last year from 10.4 million b/d in 2010, was largely the result of rising production in tight oil formations in the US. The country's crude oil imports fell to approximately 8 million b/d in February 2013, the lowest level in 12 years, as result of rising domestic output.
US natural gas production is also at record levels and continuing to grow as a result of rising output from unconventional sources, most notably shale gas. The country's gas production is poised to pass the 70 billion cubic ft per day level for the first time in 2013. Also, as a result of gas liquefaction projects now being developed, the US could be one of the world's largest exporters of LNG by the end of the decade.
Although some of the growing volume of clean-burning gas being made available is displacing coal as fuel in US power plants, the country' s coal industry is far from subdued. In March 2013 coal exports reached 13.6 million short tons, the largest monthly total ever. The volume put the country on track to achieve overseas shipments of more than 100 million short tons for a third straight year in 2013.
The magnitude of the developments now taking place in the US energy sector are forcing the leading independent owners of oil tankers, gas ships and bulk carriers to reassess their global strategies and adjust their investment plans and service portfolios accordingly.
One of the most remarkable outcomes of the growth in output from US tight oil formations over the past 18 months is the emergence of the rail transport mode. The majority of the new wells are located well away from existing pipeline networks and processing centres. Rail has proved the most cost-effective and expedient way of getting the new volumes of crude oil to the country's refineries.
Rail transport is a new phenomenon in the US crude oil logistics scenario. As recently as 2008 US railroads moved only 9,500 tank carloads of crude oil. This had jumped to 66,000 carloads in 2011 and last year over 200,000 carloads were moved. This level of traffic is the equivalent of 1.5m b/d of oil and about 1,600 trainloads of rail freight traffic.
The growth in US rail movements of crude oil is aligned closely with the emergence of the Bakken oil shale formations. Located primarily in North Dakota, the Bakken reserves extend into Montana and neighbouring Canada. As a result of Bakken, North Dakota's output had leapt from marginal volumes a few years ago to over 700,000 b/d by the end of last year, making it the second largest US oil-producing state after Texas. Bakken crude oil production is expected to top 1m b/d by the end of 2013 and could reach 1.5 million b/d by 2016 according to some forecasters.
The independent US railroad companies have proved themselves eminently capable of providing, on a fast-track basis, the necessary infrastructure in terms of sidings, terminal facilities, rail track, connections and leased tank cars. At the end of 2012 approximately 70% of the Bakken output, or 500,000 b/d, was moving by rail.
Whereas most of the Bakken crude shipped by pipeline goes to the Cushing entrepot facilities in Oklahoma, and eventually to refineries in the US Gulf region, railroads deliver this crude to a range of terminals and refineries at inland locations and on the US Gulf, East and West Coasts.
Laden unit trains of 120 and more rail tank cars departing North Dakota and trundling across the country are becoming an increasingly frequent sight. Each train carries, on average, 85,000 barrels of crude and can be loaded and discharged at dedicated terminals in 24 hours.
A 130,000 b/d rail terminal at St. James, Louisiana is an important destination for Bakken crude and the US Gulf region's ability to receive rail shipments from North Dakota will be given a major boost in 2014 when Kinder Morgan opens its new 210,000 b/d rail terminal in Houston. This facility will have the ability to trans-ship 100,000 b/d to a barge loading dock for onward distribution.
At the end of 2012 rail shipments of Bakken crude to the US East Coast were averaging 72,000 b/d. Destinations include most of the area's oil refineries and a trans-shipment terminal in Albany, New York where the oil from North Dakota is loaded onto US-flag tankers and barges for regional distribution. Predictions for the volume of Bakken oil reaching US East Coast discharge points by the end of 2013 are in the 150-235,000 b/d range.
US West Coast oil-processing facilities currently do not have quite the same rail infrastructure as those on the East Coast but this is being remedied. Tesoro already has the capacity to accept 50,000 b/d of rail-freighted Bakken crude at its Anacortes, Washington refinery and is moving ahead with plans to bring on stream a 120,000 b/d rail discharge terminal at its other Washington state refinery, at Port Vancouver, in 2014. Valero, the only other US West Coast refiner with a rail connection has the capacity to discharge 40,000 b/d of crude at its Tacoma refinery sidings.
Plans for additional rail discharge terminals at other Washington and California refineries have been drawn up and are poised for development. These facilities are being configured to accept heavier crudes from Canadian oil sands projects as well as lighter oil shale crudes.
All the participants in the US rail supply chain, from the railroads and crude oil producers through to the tank car manufacturers and leasing companies, have been making huge investments to support this new logistics solution. US railroads, for example, have been reinvesting more than ever before, including USD 23 billion in each of the last two years, to provide the necessary infrastructure.
Crude oil is only one of many products carried by the US rail tank car fleet of 290,000 units. As recently as 2011, crude oil accounted for only 5% of tank car shipments. This percentage climbed to 10% in 2012 and is forecast to continue to grow strongly.
New, higher capacity tank cars are being constructed to transport the light crudes of the type developed from shale oil formations such as Bakken. Given the US rail car weight restrictions, the ideal capacity for a tank car carrying Bakken crude is 30-32,000 US gallons, while that for a car engaged in the transport of the traditional, heavier crudes is 25,000 gallons.
US shale oil and gas developments have also prompted a boom in another type of rail freight - the carriage of "frac sand". A typical horizontal well uses between 3,000 and 10,000 tons of sand, or between 30 and 100 hopper carloads. Rail movements of industrial sand in the US last year approached the 300,000 carloads mark, three times the 2009 level. Frac sand has been the primary driver of the dynamic growth in this sector.
The loser in the changing world of US rail freight has been coal. The rising volumes of unconventional oil and gas produced in the US are serving to displace some coal in the domestic energy mix. In 2008, the peak year for US rail coal shipments, the traffic averaged 143,600 carloads of coal per week. In 2012 the weekly average dropped to 116,200 carloads. The one plus factor in this sector is the rise in US coal exports and the longer rail distances such shipments have to travel to reach key loading ports such as Norfolk, Mobile and New Orleans.
As rising oil and gas output pushes the US towards energy self-sufficiency, a goal thought to be impossible until very recently, the country's railroads are playing a crucial role in delivering these resources to the places where they are needed. Rail freight offers a flexible, fast-track solution to oil producers in fast-growing areas seeking a solution to the logistics challenge of getting their oil to market.
Although rail freight costs are higher than those for pipeline deliveries, the disparity between the Texas and global benchmark prices for crude oil still make it commercially advantageous, whenever circumstances allow, for US refineries to process domestic oil arriving in tank cars rather than in tankers from overseas loading ports.
The growing volumes of domestic crude displacing imported oil at home refineries are also creating another logistics challenge - the need to deliver finished products and light crude from Texas oil shale wells to coastal terminals and refineries around the country in a cost-effective manner. In the absence of sufficient US-flag tonnage there could be a need for a temporary waiver of the Jones Act to enable foreign tankers to play a role in the new, rapidly evolving US oil logistics scenario.
Source: BIMCO