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January 2013



BNSF Railway Article
Crude oil and intermodal will drive rail traffic for BNSF over the long term



BNSF Railway

— by Jeff Stagl, managing editor

The Williston Area Development Foundation manages a "Rockin' the Bakken" campaign and website to promote the expansion of crude-oil drilling in the Bakken Formation, a 200,000-square-mile shale that encompasses portions of North Dakota, Montana and Saskatchewan.

More commonly known as the Bakken Shale, the region already has been rockin' big time for BNSF Railway Co. In the past five years, the Class I's annual crude-oil volume in the shale has skyrocketed 7,000 percent from 1.3 million barrels in 2008 to a projected 89 million barrels in 2012.

BNSF's daily volume was expected to climb from 400,000 barrels at 2012's end to 500,000 barrels by the end of this year, while the number of unit trains operating per day was projected to increase from five in 2012 to eight in 2013.

Although domestic intermodal growth hasn't been anywhere near as rapid, it's been a boon for BNSF, too. Volume has climbed by 10 percent, or about 200,000 units, each of the past few years and is forecasted to continue registering double-digit growth for the foreseeable future.

Better yet for BNSF, crude oil and domestic intermodal business aren't just pegged for robust growth in the near term. The two traffic segments pose the greatest long-term traffic- and revenue-generation potential among all commodity groups.

In the Bakken — where the Class I serves 16 of the top 19 oil-producing counties in central and western North Dakota, and five of the six oil-producing counties in eastern Montana — daily crude-oil volume could double within the next five years.

"We see a path to 1 million barrels per day," says BNSF Chairman and Chief Executive Officer Matt Rose.

In the domestic intermodal sector, the railroad is positioned to divert more truck traffic in the coming years from a pool of about 10 million viable highway moves. Why? Cost-conscious shippers are dealing with higher trucking rates due to increasing fuel prices and tightening capacity.

"Big and small retailers are thinking more about their costs, including the cost of transportation, and the cost of transportation is winning out," says Rose.

But it's one thing to project the vast potential posed by the two white-hot traffic segments, and another to realize it. The key to achieving the latter: expanding capacity and enhancing service reliability to meet shippers' mounting needs as the markets continue to evolve.

The BNSF senior team is striving to do both. They're promoting the development of more flexible and customized services to boost operational consistency.

And to ensure the Class I can continue pursuing and accommodating much more volume, senior execs are willing to devote a lot of dollars for capacity enhancements, from new staging tracks, turnouts and intermodal facilities, to additional manpower and rolling stock.

Last year, BNSF budgeted a "very strong" $3.9 billion for capital expenditures and the railroad will continue to develop "robust capital investment programs," says Rose. (At press time, the Class I hadn't yet released a 2013 capex budget.)

"We will continue to focus on expanding and maintaining our network," says Rose.

In terms of expanding intermodal capacity, it's somewhat easier to address mainline, locomotive, rail-car and labor needs than any requisite new terminals, which are the "long pole in the capacity tent," he says.

"Land availability in very large metropolitan areas is a problem. We usually need to try and acquire land in outlying areas," says Rose, adding that such locations aren't always conducive to ideal intermodal operations.

For crude-oil business, just getting an initial network in place is capacity charge No. 1. Crude-by-rail traffic is projected to increase by 300,000 units in 2013, virtually offsetting a similar drop in coal volume in 2012. But coal is moved on a fixed network that's been in place for decades while crude oil is moved along a system that's just being established, says Rose.

"It's a challenge to keep up. Crude by rail has gone from zero to 60 mph in a very short time," he says.

Building Up In The Bakken

To keep pace, BNSF is trying to mold and enhance its crude-by-rail network as quickly as possible.

In 2012, the Class I allocated $200 million for trackwork — including new inspection tracks and high-speed turnouts, the replacement of bolted rail with continuous-welded rail, and track raising and replacement projects — as well as signal upgrades and equipment acquisitions.

The railroad also has hired more than 600 new workers the past two years to fill existing and newly created positions in North Dakota and Montana, such as crew members who deliver inbound materials (frac sand, pipes, etc.) to support drilling operations.

In addition, the Class I formed a dedicated Unit Energy Desk that works with customers to plan and coordinate unit train movements, and increased the size of unit trains from 100 tank cars to 104 or 118 cars.

BNSF likely will spend a similar $175 million to $200 million on capacity initiatives in 2013, but then take a short "breather" because infrastructure put in place essentially would be in tune with projected demand, says Rose.

Over the long term, the Class I expects to add capacity in the Bakken on an ongoing basis, especially in the Williston Basin in North Dakota and Montana, where BNSF operates 1,000 miles of track and serves 10 originating terminals.

"We might have to do some modifications in yards and add staging areas," says John Lanigan, who had served as BNSF's executive vice president and chief marketing officer since January 2003, but in November 2012 announced plans to retire on Jan. 15.

Oil companies will need to boost their capacity, as well, to ramp up production and ship more crude via rail. Producers have many rail-served facilities in the planning stages, but more destination and origination facilities are essential in the supply chain to meet mounting demand, says Rose.

The Williston Basin is a well development hotbed since that's where oil producers began to set up shop, says Lanigan.

"It's easier to build off of that than start one 100 or 200 miles or more away," he says. "It's a boon to us as long as any wells are along our right of way."

 

Eye On The 'Prize'

Although moving frac sand and other inbound materials to wells is just as vital to BNSF's fortunes as outbound crude oil since the traffic is interconnected, oil is the "prize at the end of the journey" that poses slightly more value, says Lanigan.

Crude by rail is a very long-lived and valuable opportunity for BNSF, and not a fad or flavor of the day, says Steve Bobb, who succeeded Lanigan as EVP and CMO.

"We provide value that isn't available from a pipeline service. We try to stay focused on all opportunities in all markets, and crude by rail illustrates that," he says. "You see what's changing in markets as the economy changes and as customers' needs change. We want to capture the opportunities as they occur."

Although not all other opportunities will be as "good or big" as the Bakken, BNSF needs to take advantage of what's hot in all markets, such as a rethinking in the lumber products and chemical sectors targeting where those products are manufactured, says Bobb.

Business in the Bakken continues to heat up because more refiners are finding that Bakken light sweet crude works better in their refineries than first thought, says Dave Garin, BNSF's group vice president-industrial products.

New entrants are establishing a presence in the region each month and some are becoming significant players, he says.

In addition, several long-established oil industry firms — such as such as BP and ConocoPhillips — now are participating in Bakken production.

"Everything is happening so fast. The amount of production is changing rapidly every day," says Garin, adding that total daily production in the Bakken is projected to reach 1.5 million barrels this year and ramp up to 2 million barrels over the next several years.

Because of the quick-developing market, BNSF needs accurate production forecasts two years in advance to ensure the necessary infrastructure and supply chain is in place, says Garin. The Class I develops its own forecasts for the Bakken, where BNSF generally handles half of all crude-oil traffic; the other half is handled by Canadian Pacific and pipelines.

The forecasts address tank-car and destination capacity, and service reliability and consistency. Tank-car capacity is adequate now, but more cars will need to be built soon. Meanwhile, destination capacity, too, will be an issue, says Garin.

In late 2012, Tesoro Corp. opened a BNSF-served unit train facility at its refinery near Anacortes, Wash. It became the first crude-oil unit train facility in the Pacific Northwest and the first unit train facility at a crude-oil refinery in the nation, says Garin.

"As the economics work out, we will see more of these 'refinery direct' moves," he says.

In addition to addressing booming growth in the Bakken, BNSF to a lesser extent is deriving slower, yet steadier volume growth in other oil-producing regions, such as the Eagle Ford Shale and Permian Basin in Texas, and Niobrara Shale in Colorado, says Lanigan.

Knowledge Is King

"Slow" isn't a word that comes to mind when BNSF senior execs describe domestic intermodal growth and the sector's potential. The "triple-crown effect" of public benefits — reduced air emissions, fuel usage and highway congestion — is helping to drive more highway traffic to rail, says Rose.

In addition, the shipping community is becoming more involved in modal decisions, and "there's increased awareness of the value of intermodal," Lanigan says.

"When you think back 20 or 30 years ago, intermodal was thought of as a damage-causing mode and moving at slow speeds," he says.

BNSF has developed an e-brochure that's designed to raise shippers' intermodal awareness even higher. The web-based promotional flier includes a "Why intermodal?" page that lists seven reasons shippers should consider the mode. Among the reasons: Intermodal provides transit times that are comparable to over the road and helps shippers reach new markets.

The e-brochure also provides information to debunk 10 myths about intermodal, including that the mode isn't as reliable or fast as over the road, is too complicated and only works in certain areas, and causes more theft and lading damage than trucking. One "reality" is that BNSF's transit times often meet or exceed single-driver truck delivery times, the e-brochure states.

But BNSF isn't solely trying to take business away from trucks; obtaining more of it with truckers also is a top objective. As recently as five years ago, BNSF had more of an adversarial relationship with truckers, says Rose.

"But they're our partners now," he says.

A Tailored Fit

Partnerships are increasing in part because of a Next Generation Intermodal (NGI) initiative BNSF launched three years ago. NGI offers different transit speeds and multi-modal rail options in the same shipping lane for seasonal or promotional freight, or goods needed to replenish inventories or cover store deliveries.

The service can be tailored to a shipper's needs, such as by ensuring inbound freight is delivered to distribution centers or certain retail stores on a tight schedule. BNSF collaborates with other asset-based motor carriers to guarantee equipment availability or provide drayage or other services.

Due to NGI, BNSF has developed partnerships with about 90 additional trucking companies over the past two years, says VP of Domestic Intermodal Katie Farmer. The Class I now has contracts in place with more than 250 motor carriers.

"NGI is a collaborative approach that helps shippers determine what's the right combination," she says. "We're having broader conversations with shippers and trucking firms."

NGI also is convincing more shippers about the service's flexibility, says Lanigan.

"There are more open minds than the conventional thinking that a dray has to be less than 100 miles," he says.

NGI's benefits helped BNSF and trucking firm Schneider National Inc. convince Pep Boys to begin using their joint domestic intermodal service in 2009.

The Class I and Schneider National committed to meet the automotive repair services and parts supplier's requirements that on-time performance average 98 percent and loads be accepted on short notice.

Over the past three years, loads per week have climbed from about 20 to 32. Pep Boys expects to use NGI more in the next few years because of expansions into new markets and a growing tire services market.

The ability of BNSF and its trucking partners to provide shippers the capacity they need now — such as chassis and direct rail routes to numerous markets — is key, says Bobb.

"With over the road, shippers aren't sure where capacity will be added since it's at the whim of highway expansions," he says.

BNSF also is counting on a beefed up sales force to attract more shippers to intermodal. A 12-member dedicated sales team — which has grown from a separate sales force formed within the intermodal group six years ago — calls on cargo owners in an attempt to make intermodal a larger part of their transportation strategies.

"They work with beneficial owners and call on the end user," says Farmer. "They also coordinate shipments with a carrier and the railroad."

Dedicated sales team members essentially provide free consulting services to cargo owners, says Lanigan.

"They can give them a 'what if' scenario about intermodal," he says. "It's been very educational."

Scratching The 'Flat' Surface

What might be educational to shippers who move their cargo on flat-bed trucks is that BNSF has developed a freight car capable of moving those goods via rail and truck. The new flat-deck car, which has been tested the past 18 months, is light enough in weight to work in intermodal, says Farmer.

 

Raildecks was the first company to develop a 53-foot flat rack product. The company worked with BNSF and Boyd Brothers to implement a pilot program to test the flat decks and develop a service offering. Their current product, the Raildecks 7.1 model, is manufactured by Reitnouer Trailers

The Class I plans to ramp up usage of the flat-deck cars over the next several years.

"Potentially there are a couple of million loads out there that we can go after," says Farmer. "The advantages are flexibility in the supply chain, reliability of service and visibility from over the road."

There also are millions of more intermodal loads BNSF can attract by offering warehouse storage and other freight-related services at additional logistics parks. The Class I currently operates logistics parks near Chicago in Joliet, Ill., and near Dallas in Alliance, Texas, and plans to open one in Edgerton, Kan., later this year.

BNSF aims to open a new logistics park about every two years and has analyzed Minnesota's Twin Cities, Houston and Seattle as sites for potential facilities, which would be developed at a smaller scale because of market size, says Rose.

Storage services are a top priority these days for potential park customers.

"We are seeing interest from developers and others wanting to establish warehousing," says Rose.

BNSF's proposed $500 million Southern California International Gateway (SCIG) intermodal facility in the Los Angeles area, which is projected to enter the construction phase in a year or two, would be the next logistics park to open after the Edgerton facility is operational.

The difference with the SCIG facility versus logistics parks developed in other areas is that warehousing already is well established in the L.A. area, says Rose. The SCIG facility is expected to eliminate more than 1.5 million truck trips from Interstate 710 annually.

Such projections have BNSF senior execs energized about the vast potential posed by the domestic intermodal and crude oil markets. If they can execute their plan to establish and refine services, and expand and enhance capacity in the sectors well in advance of the needs dictated by demand, more of the potential will be realized, the execs believe.

To say the stars have aligned — and continue to align — in both traffic segments is an understatement.

"As trucking companies face ever-present challenges and shippers become savvier about their shipping options, we will see over-the-road conversion on long-haul lanes continue to drive domestic intermodal growth," says Rose. "[And] there is no indication that production in the Bakken and other oil shale formations in the Williston Basin will slow anytime soon."



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