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Rail News Home Rail Industry Trends

May 2013

Rail News: Rail Industry Trends

Shales in the West well beyond the Bakken drive crude oil traffic for many railroads


— by Jeff Stagl, Managing Editor

When it comes to identifying shales in the western United States that present traffic-building potential for railroads, the gorilla in the room is the Bakken Shale. Hundreds of wells in the 200,000-square-mile formation in parts of Montana, North Dakota and Saskatchewan, Canada, are producing about 800,000 barrels of crude oil and consuming mountains of frac sand each day, most of which is moved by rail.

But there are well more than a dozen other shales and basins in nine states west of the Mississippi River that either are, or at some point could be, generating crude and/or natural gas traffic for numerous railroads because of booming well development.

Among them: the Barnett, Brown Dense, Eagle Ford, Fayetteville, Granite Wash, Haynesville-Bossier, Mancos, Mississippian Lime, Niobrara, Tuscaloosa Marine and Woodford shales; and the Anadarko, Arkoma, Denver-Julesburg, Greater Green River, Park, Permian, San Juan and Uinta basins.

A shale is a sedimentary rock formation that contains trapped deposits of crude or natural gas, while a basin is a geologic tract of land that features rich petroleum deposits. Crude or gas is extracted via horizontal, hydraulic fracturing or other drilling techniques.

The western drilling renaissance that began in 2011 is projected to last quite a while if the U.S. Environmental Protection Agency doesn't ban or strongly regulate hydraulic fracturing and the price of oil doesn't remain well below $60 per barrel for an extended period. A former western oil boom in the 1980s fizzled in a few years because many new wells came up or eventually went dry, but the current drilling success rate in the West exceeds 90 percent.

"I've heard that this traffic is sustainable for at least 10 years," says Ed Ellis, president of Iowa Pacific Holdings L.L.C., which operates two Texas short lines in the Permian Basin.

It might last even longer than that as producers seek to tap more oil in more locations amid a scarce availability of pipelines, which typically take anywhere from three to 20 years to develop because of various stringent environmental regulations.

The nature of today's wells and how they're drilled, and the prescence of several oil-containing layers at some shales bode well for rail in the long term provided there's enough rail capacity in place, said BNSF Railway Co. Assistant Vice President of Economic Development Vann Cunningham during an April 29 presentation at the American Short Line and Regional Railroad Association's annual convention in Atlanta.

"I think this can last 15 to 20 years," he said. "The boom will slow down, but then it will be steady."

With the boom figuring to continue for the foreseeable future, many oil producers and refiners likely will keep investing millions of dollars in freight cars and crude-by-rail facilities, indicating their ongoing commitment to the mode.

Land(s) Of Opportunity

Many of those dollars are being directed at non-Bakken plays, where a number of U.S. railroads already are registering some traffic, and envision more to come. A non-comprehensive list of the roads and the plays they serve include:

  • BNSF, Union Pacific Railroad, Kansas City Southern, the Pecos Valley Southern Railway Co., Southwestern Railroad Inc., Texas-Pacifico Transportation Ltd., and Iowa Pacific's Texas-New Mexico Railroad and West Texas and Lubbock Railway in the Permian Basin, which is becoming a more significant oil play.
  • BNSF, UP, Hondo Railway, the Gardendale Railroad Inc. and Texas, Gonzales & Northern Railway Co. in Texas' Eagle Ford Shale, which is home to more than 230 drilling rigs and has the potential to become North America's most active oil and gas play, according to the Eagle Ford Task Force.
  • BNSF, UP, KCS, the Great Western Railway of Colorado L.L.C. and Hudson Terminal Railroad in Colorado's Denver-Julesburg Basin and/or Colorado's and Wyoming's Niobrara Shale, which is projected to boost production from about 190 million to 235 million barrels annually by 2013's end.
  • BNSF, Farmrail System Inc., the Panhandle Northern Railroad L.L.C. and Stillwater Central Railroad in Oklahoma's and Texas' Anadarko Basin, which is close in proximity to the massive oil trading hub in Cushing, Okla.

A number of railroads also serve Texas' Barnett Shale, which according to oil field services provider Baker Hughes is now the busiest U.S. oil field, with 264 rigs as of late March — more than either the Eagle Ford or Bakken shales.

Moreover, the Mancos Shale — which covers portions of Colorado, New Mexico and Utah — is projected to become a major oil and gas play, and the oil-rich Monterrey Shale in California might emerge as a significant producer one day despite some concerns about earthquakes potentially being caused by hydraulic fracturing along fault lines.

Eastern Influence

While rail volumes in the Bakken continue to ramp up at a brisk pace, traffic generated at other plays mostly is in the infant stages, says BNSF Vice President of Industrial Products Sales John Miller. The Permian Basin and Eagle Ford Shale are registering activity, while the Powder River Basin area and Niobrara Shale are showing promise, he says.

"I see rail, some pipeline and some pipeline-to-rail in these areas," says Miller.

Volume growth outside the Bakken likely won't come close to matching that shale's meteoric rise as a carload generator. BNSF now moves about seven or eight unit trains per day out of the Bakken, carrying about 600,000 barrels of oil. And daily volume is projected to continue climbing, to 700,000 barrels by year's end and to 1 million barrels by some point in 2014.

The difference compared with several years ago is that Bakken crude now is being transported to more destinations, says Miller. BNSF expects to move crude to more than 50 destinations by 2014's end.

"First it went to Cushing and then St. James, [Louisiana], and now it heads in all directions, including the East Coast," says Miller. "It tells the story of rail's flexibility."

BNSF is involved in the early stages of helping to move Bakken crude eastward, such as to a PBF Energy refinery in Delaware City, Del., that's served by Norfolk Southern Railway and a Philadelphia Energy Solutions refinery in Philadelphia.

"Refineries there are suited to light sweet crude oil," says Miller.

On average, CSX Corp. is helping to move about seven to nine unit trains of crude each week from western plays to the East Coast. That traffic is expected to ramp up significantly by year's end, says CSX Director of Marketing-Chemicals John Tuttle.

"Going from West to East has to be by rail because of a lack of pipelines flowing to the East," he says.

The Class I also is starting to note interest in the Permian Basin and Niobrara Shale, where a number of rail loading facilities are slated for completion by 2013's end. The hang-up to more western crude heading eastward is a lack of rail unloading facilities at refineries or destinations in the East, says Tuttle.

Overall, the consensus on railroads' crude boom is that it's here to stay, but more a question as to what extent, including the flow of oil to the East, he says.

"This is a dynamic and large moving target," says Tuttle, adding that there are huge stakes for all the parties involved in the West-to-East moves.

Running The Plays

Count UP among the western stakeholders. The Class I, which serves several western plays, expects to increase crude volume this year, as well volumes of frac sand, steel pipe and other drilling materials, because of recent trends.

Similar to other railroads, UP's crude volume has skyrocketed since 2010. The Class I moved 4,400 carloads in 2010, 25,000 carloads in 2011 and 140,000 carloads in 2012. In first-quarter 2013, the railroad's crude volume shot up 107 percent compared with first-quarter 2012.

The majority of the volume growth can be attributed to the Bakken, where UP interchanges crude traffic with BNSF and Canadian Pacific. But business in the Eagle Ford, Niobrara and Permian Basin is contributing to the gains, says UP spokesman Tom Lange. For example, the amount of frac sand, steel pipe and other drilling materials moved into Texas is increasing, he says.

"The crude business is a growing area for us and will continue to develop," says Lange.

Ditto for KCS. The Class I, which also serves several western plays, expects to increase crude volume in 2013 versus 2012's total because of additional destinations served.

KCS generates outbound traffic in the Permian Basin (west Texas), Niobrara Shale (northern Colorado and southern Wyoming), and the Bakken (North Dakota), and inbound frac sand traffic in the Permian, Barnett Shale (Fort Worth, Texas), Haynesville Shale (northeast Texas and northern Louisiana) and Eagle Ford Shale (south Texas).

"Crude oil from all shale plays will increase. No single play will drive volume growth over another for our customer base," KCS officials said in an email.

There also are several promising plays on the railroad's network that have yet to be developed, such as the Tuscaloosa Marine Shale in south-central Louisiana, Mississippian Lime Shale in south-central Kansas and Oklahoma, and Brown Dense Shale in north-central Louisiana and south-central Arkansas.

"We understand that [such] shale plays are younger, more expensive areas to extract oil and gas," KCS officials said. "Natural gas prices have an impact on exploratory well development."

All Eggs In One Basket

A number of short lines also are either counting on future shale development or already deriving traffic from various non-Bakken plays.

For the Gardendale Railroad (GRD), all of its traffic is generated at one shale: the Eagle Ford in southern Texas. Owned by Ironhorse Resources Inc., GRD operates a line midway between Laredo and San Antonio.

The short line had abandoned 49 of its 50 track miles in 1994 after a Del Monte Foods plant — the railroad's only customer — ceased production. The short line kept one mile of track open at a UP interchange.

As oil production began increasing at the Eagle Ford in late 2010 and into 2011, GRD began to acquire land to stage and store tank and frac sand cars, as well as other cars and drilling materials. The railroad first leased 100 acres and then obtained an extension for another 150 acres, says Ironhorse Resources Executive Vice President Matt Cundiff.

"Now, we have an option for an additional 220 acres, which would double our footprint," he says.

Last year, GRD built 11 miles of storage, mainline and interchange tracks, and constructed a new interchange yard, while customers built an additional 17 miles of tracks.

"So, in 24 months, we went from essentially zero miles of track to 28 miles," says Cundiff. "We have nine customers now from the four or five we had in late 2011 and early 2012."

GRD plans to build additional infrastructure on the leased acreage over time. The short line moved about 500 carloads in 2010, and carloads this year are projected to total about 22,000. But after the short line rang up 2,000 carloads in March, traffic is trending higher for the year, says Cundiff.

"It wasn't in our wildest dreams that traffic would grow as it has," says Ironhorse Resources President Greg Cundiff, adding that some of the credit goes to GRD's strong relationship with UP, which moves some of the Eagle Ford crude to St. James.

Eye Squarely On Oklahoma

Farmrail System's Farmrail Corp. (FMRC) is registering similar explosive traffic growth in the Anadarko Basin in western Oklahoma. Carloads in 2012 jumped 38 percent to about 18,000 compared with 2011's total primarily because of crude traffic, says Farmrail System Chief Executive Officer George Betke.

In addition, crude's share of FMRC's traffic pie is growing drastically. The short line began moving carloads of oil in August 2011, and through 2011's last five months, crude accounted for 3 percent of total carloads. This year, that share will soar to a figure "on the order of 45 percent," says Betke, adding that the mark likely will surpass 50 percent eventually.

"We saw it coming because in 2007 and 2008, we brought in quantities of frac sand to the basin," he says. "But the magnitude of this has been surprising in just a couple of years."

FMRC needed to ramp up its train and engine personnel and add power to accommodate the burgeoning Anadarko Basin traffic. The short line acquired 12 locomotives (and now has 39 units in its fleet), and increased its workforce by 75 percent, says Betke.

The railroad also is addressing its infrastructure needs to help boost production. By mid-year, FMRC expects to complete a project that calls for rehabilitating a 49-mile, state-owned line between Clinton and Sayre, Okla.

The railroad also plans to build one passing siding and lengthen two passing sidings for 60-car trains. One of the projects likely will be completed this year and the other two in 2014, says Betke.

FMRC had been an agricultural products-centric railroad since the mid-1980s, and had ups and downs depending on the weather, he says. This year, wheat traffic isn't promising after a long dry spell and a few late frosts, says Betke.

"It makes you think 'Farmrail' is an outdated name," Betke jokes, adding that some people have suggested the short line call itself the Crude Railroad or Tank Farm Railroad or Oil Railroad. But the name has historic value and the company has no plans to change it, he says.

Texas Two-Step

Iowa Pacific's two Texas short lines are very much crude-centric, as well. The Texas-New Mexico (TNMR) and West Texas and Lubbock (WTL) railroads are tapping the Permian Basin, where about 450 wells are being drilled per month, says Iowa Pacific's Ellis.

"Producers have found that wells in the Permian have a lower decline rate than the Bakken, meaning the amount produced doesn't fall off as much over time," he says. "There's been talk of moving crude by pipeline, but ranchers and farmers in Texas don't want a pipeline across their land."

TNMR and WTL handled a record 2,033 carloads of crude and natural gas liquids in the first quarter compared with 170 carloads in first-quarter 2012. Most of Iowa Pacific's new crude business is handled by TNMR, which recently partnered with UP to open a new interchange facility in Monahans, Texas.

Much of TNMR's crude business moves in unit trains using UP run-through power, an arrangement that also extends to WTL for crude and frac sand, with sand unit trains flowing in from Wisconsin mines. Although most of both short lines' traffic growth involves UP, some new WTL business involves BNSF.

"We deal with traders, who are part of midstream players between producers and refiners," says Ellis.

Staying Power

Iowa Pacific bought the two short lines — which total about 260 track miles — in 2002 for $7 million to $8 million, but since has spent $45 million on infrastructure improvements, he says. The company built 12 miles of rail, installed 200,000 ties, beefed up bridges, put in turnouts and built locomotive shops.

"We did it in advance because we knew [the traffic] was coming," says Ellis.

Iowa Pacific plans to spend another $25 million in the next five years to install about 20 miles of heavy rail and another 100,000 ties, he says.

When Iowa Pacific bought the short lines, the company was seeking railroads that handled ag products or minerals because those commodities usually "are around for a while," says Ellis.

Now — as many railroads are discovering or banking on — crude has that staying power, especially since rail offers a faster speed to market and service in areas not accessible by pipelines.

"Our traffic took off in the first quarter, but it's really only the first inning," says Ellis.

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