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— by Robert J. Derocher
From a production and transportation perspective, the good news out of the Bakken Shale seems to keep on flowing. In North Dakota, daily oil production jumped 17 percent during the year's first six months compared with the same 2013 period, surging past the 1 million-barrels-per-day production milestone. And production in the Northern Great Plains Region — which includes the Dakotas and Montana — will continue to increase at a similar clip, according to the U.S. Energy Information Agency (EIA). By the end of 2014, the region will produce 1.1 million barrels per day (bpd); in 2015, it will produce 1.3 million bpd, or 20 percent more, EIA predicts.
And nearly three quarters of that oil continues to move out along the rails to a growing network of refineries and shipping facilities, according to logistics/supply-chain firm PLG Consulting. What's more, Bakken observers continue to forecast more gains.
"We're bullish on the future. This is going to continue for a long time," says Nathan Savage, senior vice president of Savage Services, which provides transloading services that connect crude producers to railroads in the Bakken, the 200,000-square-mile formation covering parts of Montana, North Dakota and Saskatchewan that contains large oil reserves. "We're investing heavily in this industry."
But there is what PLG President Taylor Robinson calls a "wild card" mixed in with the optimistic projections: the shadow cast by last year's Lac-Megantic disaster. Proposed rule changes by the Federal Railroad Administration (FRA), more questions from worried public officials and grassroots opposition from people living near crude-by-rail (CBR) routes — all triggered by the July 2013 Lac-Megantic, Quebec, derailment — could put a crimp in the growth of CBR from the Bakken, and in CBR, period.
"It's an unforeseen challenge that everyone's concerned about," Robinson says.
Despite that challenge, Class Is continue to report strong Bakken business that they, as well as market observers, expect will continue to grow.
"It's an important, if minor piece of the railroad renaissance," transportation analyst and consultant Tony Hatch says of the rails' Bakken business. "The railroads have created a whole new line of business. It will remain an important story."
Chapters of that story still are being written, with railroads continuing to release record-breaking traffic numbers. The Association of American Railroads (AAR) reported a 1.4 percent increase in CBR from all U.S. sources in first-quarter 2014. The 110,164 carloads were the most ever reported for crude in a quarter, although the AAR doesn't break out what percentage came from the Bakken.
PLG estimates the compounded annual growth rate in Bakken CBR volume will be 12 percent to 15 percent annually through 2018. And the second-quarter earnings and performance reports from several Class Is appear to bolster that vision, with rail shipments from the Bakken continuing at higher numbers during the year's first half — with more expected the next six months.
On July 17, Canadian Pacific President and Chief Operating Officer Keith Creel told analysts that the railroad expects to move about 140,000 carloads of crude oil on its North American network by the end of 2014, primarily out of the Bakken. In 2013, CP moved about 90,000 carloads of crude oil. Through the year's first six months, CP's crude revenue rose 15 percent, from $189 million during the first six months of 2013 to $218 million.
"Energy-related traffic was the third source of superior revenue growth," Creel told analysts. "[It was] driven by crude oil pricing gains that are the result of the creation of ramp-ups of newly constructed facilities on our network."
CN, which transported about 73,000 carloads of crude oil across its North American network last year, is poised to double that volume to 150,000 carloads by 2015, spokesman Mark Hallman says. CN officials expect to see half of that growth this year, and the other half in 2015.
CSX Corp. is posting similar results. Three CSX unit trains a day are making their way out of the Bakken, primarily to East Coast refineries and terminals, says Director of Market Development Wesley Ann Barton. And as more of those facilities come on line, the CBR volume will increase.
"Our business has pretty much doubled over the last year in the crude-by-rail space," Barton says. "As we and our competitors developed [crude] outlets, that's how you saw that business ramp up."
Barton did not disclose CSX volume projections for Bakken crude in 2015, but she expects "it will continue to be a strong market for us."
Union Pacific Railroad officials didn't provide Bakken shipment data; instead, they referred to the Class I's quarterly reports. UP's most recent report, released in July, indicated a 2 percent decline in crude oil shipments compared with the same 2013 period, the railroad's second-consecutive quarterly decline.
Meanwhile, BNSF Railway Co. currently is shipping about 750,000 barrels of crude oil per day from all CBR sources across its network, compared with about 700,000 barrels in 2013 and 500,000 barrels in 2012, says spokeswoman Roxanne Butler. She did not provide information on how much of the total daily shipments originated from the Bakken. BNSF and CP are the only two Class Is originating crude from the Bakken; BNSF handles 85 percent of it and CP, 15 percent, PLG's Robinson says. Including interchanges with other roads, BNSF handles the most crude, followed by UP and CP, with CSX and Norfolk Southern Railway not far behind CP, Robinson says.
While PLG and market observers closely track what's happening in the Bakken, the consulting firm also keeps a close eye on developments in Washington, D.C., as well as rail locales around the country, where concerns are springing up about CBR routes, refineries and transloading terminals.
"Let's face it: The world changed after Lac-Megantic," Nathan Savage says. "It causes everybody to reassess everything."
Mindful of some of those proposed FRA rule changes and growing public uneasiness with CBR, many railroads have gone on the offensive. Several roads have stepped up their hazardous materials training for first responders along their routes, implemented voluntary slow-downs on crude unit trains traveling through highly populated areas and beefed up safety training for employees. The AAR has been a staunch advocate of tougher tank-car standards while also expressing concern about the corresponding slower train speeds that could add to crude shipping costs, PLG's Robinson says.
"The railroads are very hesitant because they're ultraconservative about liability," he adds. "The Class Is are working very hard behind the scenes on all aspects of safety. They're doing everything they can on their routes to improve everything."
Hatch agrees, adding that many railroads were initially unaware of not only the scope of CBR shipments, but also of the volatility of the Bakken crude.
"The volatility of the product is significantly more than [the railroads] were led to believe," he says.
In the state of New York, a CSX crude route, Gov. Andrew Cuomo has ordered more train inspections. CSX's Barton says the inspections are "nothing new" for the railroad and have had little impact on running times. But the railroad industry continues to monitor federal and state actions that could impact service, she adds.
"We're respectful of the increased focus on safety. Our top priority is safety," Barton says. "Unintended consequences of any legislation or mandate do concern me, though."
One of Robinson's chief concerns is that another Lac-Megantic-type of accident could lead to an even greater regulatory backlash that would seriously disrupt CBR. Also threatening CBR growth, Robinson says, are increasing environmental scrutiny at the state level that could scuttle new terminal and transloading expansion; a tight rail-car supply, to be brought on by new FRA rules; the eventual addition of more pipelines in the Bakken; and a domestic glut of crude oil, which is driving prices down.
Despite the potential pitfalls, rail execs and industry observers remain optimistic that the Bakken CBR boom will continue.
Soon after a deal between Savage Services and Kansas City Southern to build a facility in Texas to handle Bakken crude collapsed last year, Savage Services struck another deal with refiner Tesoro Corp. to build a 120,000 barrel-per-day CBR unloading and marine loading facility at the Port of Vancouver, Wash. Savage Services also bolstered its position in the Bakken in April, announcing plans to add capacity to the crude transloading facility that opened two years ago in Trenton, N.D. When completed, the facility — which has a direct rail connection to BNSF's mainline — will have a daily throughput capacity of 175,000 barrels of oil, storage capacity of 450,000 barrels and more than 50,000 linear feet of train staging track.
"We wouldn't do this if we didn't think it could be done safely and in an environmentally friendly manner," Nathan Savage says. "None of us has all the answers, but we're all moving ahead."
Nathan Savage also believes that the proven success of CBR (excluding Lac-Megantic) means that railroads will complement some of the pipeline projects under way in the Bakken, rather than be competitive. CSX's Barton adds that CBR will continue to offer shipping flexibility to oil producers, enabling them to ship to multiple locations as needed, rather than relying on fixed pipelines.
"We provide a true arbitrage opportunity," she says. "It allows [producers] to play in a true commodity-driven market. That's been the beauty of the crude-by-rail model."
More rail-served CBR facilities are in the works. In August, Dakota Gold Transfer - Plaza L.L.C. announced plans to build a crude oil transload facility in Mountrail County, N.D. To be located on a 350-acre site in the eastern section of the Bakken and Three Forks shale oil producing areas, Plaza Terminal will aggregate crude oil produced in Mountrail and neighboring counties, using gathering pipelines and trucks.
The terminal also will provide crude oil services using on-site tankage. The terminal will be located on a private rail spur controlled by Dakota Gold under a long-term lease. CP will serve the facility.
"CP is pleased to be working with Dakota Gold on this project as our network provides flexibility to marketers and refiners to access key production areas for light, medium and heavy crude and for producers to get their product into all of the North American refining markets," Tommy Browning, CP's vice president of energy and merchandise marketing and sales, said in a prepared statement.
For their part, several railroads are moving ahead with extensive capital improvement and capacity expansion programs designed, in part, to accommodate growing CBR traffic. Of the record-setting $5 billion BNSF set aside for capex this year,
$1 billion is targeted for improvements and expansion on its Northern Corridor, including new double track and sidings in North Dakota and Montana. And CN expects to spend $700 million (in Canadian dollars) this year on facilities such as transloading and distribution centers to grow CBR business and improve network performance.
While the influx of capital spending likely will help railroads improve Bakken performance and output, several roads also have another target in mind: Western Canadian crude. Oil moving out of that region is on the increase. Hatch estimates the market is about two years behind the Bakken. "They need crude by rail to get the oil out of there," PLG's Robinson adds. "I don't think it will hit Bakken levels, but it will be close."
Sensing that growth, KCS announced an agreement in July to jointly develop a terminal in Port Arthur, Texas, with Global Partners L.P. The $75 million to $100 million terminal will be built by Global Partners and accommodate up to two KCS unit trains per day, serving as a destination for heavy crude from Western Canada. Targeted to open in 2017, the facility initially will have storage capacity for 340,000 barrels of oil. It's also designed to be expanded. KCS officials expect that CN and CP will originate the crude oil in Canada, says KCS spokeswoman Doniele Carlson. KCS connects with CP in Kansas City, Mo., and with CN in Cockrell, Ill., and Jackson, Miss. Crude would enter the Port Arthur facility via KCS, where it then would be transferred into storage tanks and later distributed via barge and vessels, with the potential to access area refineries by future pipeline connections. The facility will be built along the Sabine-Nueces Intercoastal Waterway, providing barge and vessel distribution directly from the facility, Carlson adds.
While expansion to handle western Canadian crude remains in its early stages, handling the record flows out of the Bakken remains a top priority for several Class Is. Hatch, like railroad officials, knows that an excellent rail safety record does not guarantee against another CBR disaster that could lead to a reversal of fortunes.
"[Lac-Megantic has] been a public relations nightmare, and the only way to get out from under this is to continue to perform without an accident," Hatch says. "There is a lot of pressure on railroads to produce."
Robert J. Derocher is a Loudonville, N.Y.-based freelance writer. Email comments or questions to firstname.lastname@example.org.