Crude by rail is no longer king in the Bakken Shale play.
For nearly four years, oil shippers favored train tracks over pipelines when shipping light, sweet Bakken Shale crude from North Dakota to coastal refiners or oil transfer hubs. Railroads such as BNSF Railway Co. and Canadian Pacific Railway Ltd. pumped billions of dollars into their networks, while refiners snapped up thousands of tank cars and fuel logistics firms signed lucrative crude contracts.
But railroads' dominance in the oil business may be coming to a close. Thousands of miles of new pipelines, evaporating price advantages for buying inland crude, and continued protests over rail tank car safety have all taken their toll on the North American crude-by-rail industry.
Meanwhile, the global crash in crude prices has slowly but surely spread from oil majors' balance sheets to their actual production forecasts, which could cause rail volumes to fall further in 2016 (EnergyWire, Feb. 5).
Roughly five years ago, "when crude by rail really expanded in North Dakota, it came on as a way to move out the oil as quickly as possible," said Bridget Hunsucker, publications director at energy research firm Genscape Inc. "A lot of terminals came up quickly, and they were highly utilized at that time, but I'm not sure what the long-term plan really was."
Genscape, which tracks crude-by-rail movements throughout the country, has seen volumes moving out of the Bakken drop as low as 330,000 barrels per day in recent weeks, Hunsucker said.
In November, railroads moved 41 percent of oil produced in North Dakota, or about 480,000 barrels per day, based on the most recent data available from state officials. By contrast, pipelines took the lion's share of crude oil transport that month -- 52 percent -- eclipsing rail volumes in North Dakota for the first time since June 2012.
"It's flipped now," Hunsucker said. "That's just how the economics work. If you can get on a pipeline, you would want to."
Indeed, more Bakken oil producers have jumped the tracks as other options have come online, such as Kinder Morgan's 84,000-barrel-per-day Double H pipeline, which started pumping in 2015. An Energy Transfer Partners subsidiary is on track to finish the 450,000-barrel-per-day Dakota Access line in 2016, further displacing rail's share (EnergyWire, Jan. 22).
No guest of honor
Rising crude-by-rail shipments have defied challenges from pipelines, market swings and regulatory scrutiny following a string of oil train derailments and explosions.
Many analysts expected railbound oil to be a short-lived fad as tank car traffic crept up in 2010. But railroads, spearheaded by BNSF, had other plans, assembling mile-long strings of tank cars into "virtual pipelines" that offered oil companies more speed and flexibility than fixed steel (EnergyWire, Jan. 22, 2013). Last year, BNSF allocated nearly half-a-billion dollars for sprucing up its track network in North Dakota and even flirted with buying its own fleet of 5,000 tank cars, although it later abandoned that idea.
Railroads "really ramped up [spending] in the last several years, partially in response to added pressures by crude-by-rail," said Anthony Hatch, principal of New York-based freight transportation and research firm ABH Consulting. "They had to go in and debottleneck, add double tracks and add sidings so you can run longer trains, and all these kinds of things."
Then energy markets took a tumble, bringing down not just crude volumes but also demand for frac sand, steel pipes and other products typically moved by rail.
"It's like a guest who doesn't show up at a party," Hatch said.
Still, he pointed out that much of the crude-by-rail market falls outside railroads' purview, from the loading and unloading terminals to ownership of the tank cars that actually carry the oil. Even at their peak, crude volumes accounted for a small fraction of railroads' overall carloads, which are dominated by coal and container shipments. The infrastructure investments from railroads such as BNSF don't just apply to oil and will pay dividends for years, he said. "It's a long, long game they play."
Rail industry representatives have seized on that point amid lagging earnings and generally lower traffic, suggesting that when the time comes, they'll be ready to bounce back.
"By all accounts, rail service right now is excellent, but volume just isn't there," John Gray, senior vice president of policy and economics at the Association of American Railroads, said in an industry update describing a nearly 20 percent year-over-year drop in petroleum-related traffic last month. "At some point, the problems currently plaguing the energy and manufacturing sectors -- low oil prices, a strong dollar, uncertainties in emerging markets -- will sort themselves out."
In the meantime, railroads, refineries and everyone in between have scaled back crude-by-rail operations.
Railroad CSX Corp. cited challenges from the "energy market transition" in a tepid earnings forecast for 2016. Global Partners LP, which runs a major crude-by-rail hub in Albany, N.Y., announced recently that it was trimming its workforce by 70 people, or about 8 percent, and would convert a crude-by-rail transfer facility in Oregon to handle ethanol instead.
Global Partners President and CEO Eric Slifka cited "severe headwinds in the crude oil market" as reasons for the shakeups at his company.
"We continue to be negatively impacted by fixed costs associated with our crude oil business, including railcar leases," he said in a Jan. 28 press release.
Even refining firms, nominally expected to benefit from lower crude prices, have started to shy away from rail. Alon USA Energy Inc., which won hard-fought regulatory approval to bring crude-by-rail to its refinery in Bakersfield, Calif., hasn't yet gotten around to building the terminal.
Based on crude price differences, "that project is not justified -- but that's not to say that it will never be justified," said Alon CEO Paul Eisman in a conference call last November. A spokesman confirmed that the company's position hasn't changed.
The market is so bad, some oil-by-rail shippers are having to pay $30 every day just to park their unused tank cars, as Sandy Fielden, director of energy analytics at consultancy RBN Energy, pointed out in a blog post last week.
He noted that rail shipments are "down across all regions" and that railroads have posted "sharply lower revenues" from the oil side of their businesses.
"The economics of moving crude by rail rarely make sense any more," Fielden said.