According to a new set of data released at the end of March by the Energy Information Administration (EIA), crude-by-rail (CBR) movements jumped from 20 Mb/d in January 2010 to almost 1 MMb/d by December 2014. The big increase in CBR shipments has coincided with a 71% increase in U.S. crude production and has successfully helped alleviate a number of pipeline transport constraints. While overall crude-by-rail volumes have grown in the past 5 years, favored origins and destinations have changed considerably as the midstream industry has successfully re-plumbed the pipeline network to handle new crude flows. Today we review the new EIA report data on rail.
We’ve been covering the CBR scene ever since RBN started posting blogs back in 2012 – including our seminal series “Crude Loves Rock’n’Rail” that described how producers turned to rail over pipelines – first in North Dakota and later in other shale basins. Historically, crude-by-rail transport dominated the early oil industry in North America - underpinning John D Rockefeller’s monopoly. But it’s use declined after WW2 once pipelines were built to ship larger volumes of crude over longer distances. Pipelines have been almost always preferred since then because (once built) their freight costs are generally lower than using rail or trucks. More recently however, surging crude production from shale overwhelmed existing pipeline take-away infrastructure leading to significant constraints and price discounting – particularly in the Midwest. As a result, at the end of 2010, producers (led by innovators EOG and BNSF) turned to the railroads to deliver crude past congested pipelines to coastal markets where netbacks (crude sales price less transport costs from the wellhead) were considerably higher.
Up until recently, crude movements by rail were so unusual that the EIA didn’t bother to track them at all. But although it has taken a while (we analysts always want everything yesterday) the EIA is now (as of March 2015) providing data on rail movements of crude oil (you can see the data here). The rail data is an addition to existing surveys covering movements by pipeline, tanker, and barge and includes history back to January 2010. The monthly data tracks CBR activity between Petroleum Administration for Defense District (PADD) regions as well as within each region and across the U.S.- Canada border. According to the sources and information notes provided on the EIA website, reported movements of crude oil by rail are based primarily on analysis of carload data from the U.S. Surface Transportation Board (STB) as well as estimates of barrels per carload from other sources. Carload data from the STB are only available approximately 60 days after the end of each quarter so EIA predicts recent-month rail movements based on historical correlations derived from actual carload data with other regional crude oil supply data. As a result these estimates are subject to revision on a monthly basis as more accurate data become available.
Our first analysis of the new data is at the national level. Figure #1 shows monthly CBR historical data for total U.S. shipments back to January 2010 (blue line against the left axis) as well as total U.S. crude production (olive green shaded area against the right axis – also provided by EIA). The chart shows annual average barrels shipped by rail increasing 16-fold from 55 Mb/d in 2010 to 875 Mb/d in 2014 with the highest growth coming in 2012 (330% increase) and 2013 (180 %). The growth in CBR movements follows the same trajectory as crude production, which increased 71 % between January 2010 and December 2014. The strong relationship between growth in CBR and growth in oil production indicates that as production surged, more rail movements were needed to get “stranded” domestic barrels to market because midstream companies could not develop pipeline projects (that typically take years) fast enough to meet demand for take-away capacity. As we have previously described, in 2011-12, starting in North Dakota, producers and railroads developed numerous terminals that could load crude onto “unit” trains with 100 or more railcars - moving it quickly and efficiently to refineries at coastal destinations (see Year of The Tank Car). The railroads offered producers stuck with stranded crude two other advantages over pipelines – first a much lower development cost to build terminals (versus pipelines) and second - destination optionality. Lower costs translated into shorter up-front commitments to use rail terminals (one or two years versus 10 years for a pipeline). Destination optionality meant that once loaded onto a rail tank car, crude shipments could travel to any refining region across the U.S. where prices were most favorable.