Crude Loves Rock'n'Rail

There is a bright future for crude by rail in the oil shale plays regardless of what happens to crude price differentials. That is because the flexibility of rail transport meshes well with the rhythm of shale oil development. Meantime Canadian heavy crude will be the focus for rail terminal development in the near term as continued pipeline delays force producers to look seriously at rail options. And the economics of raw bitumen by rail may end up undercutting pipelines. Today we look ahead to these trends.

During the past two years the US domestic crude transportation business has been revitalized by a huge increase in shipments of crude oil by rail. In the Bakken region alone over 600 Mb/d of crude is shipped to market by rail. The number of rail terminals in producing regions loading crude oil onto rail tank cars has increased from a handful at the end of 2011 to 88 and growing today. A further 66 crude oil unloading terminals have been built or are under construction. Today we summarize the crude oil terminal build out by region and by railroad.

Last week (April 29, 2013) the economics of crude-by-rail began to get real interesting as the differentials between inland crudes priced against West Texas Intermediate (WTI) and coastal crudes priced against Brent narrowed to less than $9/Bbl. The Brent/WTI differential traded at about $17/Bbl on average during 2012 and helped to justify the expansion of crude by rail to allow producers to reach higher priced coastal markets. Now the spread is less than the cost of rail transport from the Bakken to the East Coast. Today we delve into the costs of rail transportation and build a netback comparison for Bakken producers.

In the short term midstream companies with crude-by-rail unloading terminals at the Gulf Coast can deliver cheaper light sweet crudes from the Midwest and West Texas. Once new pipelines come online to deliver that crude direct to Houston that price advantage will disappear. At that point rail terminal operators need to diversify their business to survive.  Today we look at the fate of Texas Gulf Coast rail terminal operators.

By the end of 2014 an additional 1.7 MMb/d of pipeline capacity will open up from the Midwest and the Permian basin – bringing crude into the Texas Gulf Coast region. A good deal of that crude will pass through pipelines and/or storage in the Houston Ship Channel area. Ordinarily all that pipeline capacity should trump crude-by-rail due to lower transport costs. But the onslaught of rail could change the game, as over 200 Mb/d of new rail capacity is being built in the Channel area Today we discuss the logic of crude-by-rail in Houston.

As much as 240 Mb/d of light sweet crude from North Dakota is currently being shipped from the Bakken to St. James LA in what has become a pipeline on wheels. More crude is also moving to the Gulf Coast from Western Canada by rail and new destination terminals are being developed along the Mississippi River. But increased pipeline capacity to the Gulf Coast is a growing competitive threat to these rail destinations. Today we survey rail destination terminals East of the Mississippi.

Crude by rail is shifting to the West Coast in a big way.  By the end of 2012 unit trains carrying light sweet Bakken crude had begun to flow to Washington State refineries. In 2013 West Coast refiners and terminal operators have continued investment in terminals to receive oil from the Bakken and Western Canada. Today we survey developing West Coast crude rail terminals.

Last June (2012) the largest refinery on the East Coast was on the brink of closing - in part due to higher international crude prices (versus US inland grades). Since then the 330 Mb/d Philadelphia Energy Solutions refinery has reopened and along with several of its competitors the new owners have developed means to get access to lower priced crude from North Dakota and Western Canada using rail. Today’s episode of our continuing crude by rail series is a survey of East Coast rail offloading facilities. 

Cushing, Ok has historically been known as the “Pipeline Capital of the World”. That was before the pipelines got congested in 2011 and inventory piled up – creating a discount warehouse for crude. As producers waited for pipeline infrastructure to come to the rescue the railroads took up the slack. Now crude rail loading terminals are being operated and built in every production region in North America and it is reported that crude is being trucked out of Cushing and loaded onto trains. Today we complete our survey of crude loading terminals.

Western Canadian heavy crude oil producers have a lot of rail tank cars on order but so far none of the loading terminals in the production region can handle unit trains. The pace of terminal development in Alberta is far slower than North Dakota in 2012. Because you can ship raw bitumen without diluent there are potential cost savings over pipelines but the load and offload facilities are more complex. Today we conclude our mini survey of Canadian heavy crude loading terminals.

Western Canadian heavy crude production is set to increase by more than 1 MMb/d over the next 5 years. Pipelines out of the region are full and new capacity is not expected online until 2014. Just like the Bakken in 2012, producers are looking more seriously at rail. The economics of getting crudes like Western Canadian Select (WCS) to market by rail instead of pipeline are favorable because of heavy discounts versus Gulf Coast equivalent crudes like Mexican Maya. Today we look at the rail options for Canadian producers.

The dramatic growth in North Dakota crude by rail during 2012 included large unit train terminals built to load 80 Mb/d or more. At the same time smaller companies successfully operated alongside the big guys – loading manifest trains at out-of-the-way terminals. North of the border in Saskatchewan, Canadian railroads are advertising their terminal facilities but most have limited capacity. Today we continue our crude by rail series with a look at the plethora [1] of smaller Bakken terminals.

The US crude by rail industry has expanded rapidly since January 2011 as domestic crude production soared by 1.4 MMb/d over the same period. The growth of crude by rail followed pipeline bottlenecks in the Midwest that caused landlocked inland crudes to be discounted by upwards of $20/Bbl versus coastal destinations. That made shipping oil by rail to the coast a viable proposition in the absence of new pipeline capacity. Crude rail terminals in the Bakken now load over 400 Mb/d for shipment to coastal markets. Today we continue our survey of Bakken crude rail loading terminals.

North Dakota Bakken crude production continues to grow at record rates with nearly 770 Mb/d produced in December 2012 up 40 percent since January 2012. The North Dakota Pipeline Authority estimates that 64 percent of that crude was transported to market by rail in December. After local refinery consumption (80 Mb/d) that means 440 Mb/d moving by rail. Today we continue our survey of North Dakota crude rail loading terminals with an in-depth look at three midstream companies that between them can potentialy load 280 Mb/d of crude in North Dakota.

The latest crude production estimates from North Dakota show continued growth to a new record of nearly 770 Mb/d in December 2012. The North Dakota Pipeline Authority estimates that 64 percent of that crude was transported to market by rail in December – up from 58 percent in November. Today we continue our survey of North Dakota crude rail loading terminals with an in-depth look at three facilities that between them can load 250 Mb/d of crude.