Down To The River – Crude Inland Barge Traffic Tumbles As Differentials Narrow

Data from the Energy Information Administration (EIA) shows that inland barge movements between the U.S. Midwest and the Gulf Coast increased 10 fold between January 2011 and October 2013 to nearly 160 Mb/d in response to soaring crude production and pipeline congestion. Since then barge traffic on the Mississippi River (the main waterway between the two regions) plunged 80% to 27 Mb/d in April 2015 – the latest month reported. Today we explain why.

We last reported on the inland barge market in March 2014 as part of a blog series on the Jones Act (see Rock The Boat Part 6). According to Kirby Corporation – the largest owner – there are 3,705 inland tank barges in the U.S. These barges move crude oil, condensate, refined products, NGLs and petrochemicals along 12,000 miles of navigable inland waters – mostly along the Mississippi River system but a growing number along the Gulf Intracoastal Waterway (GIWW) between Corpus Christi and Texas and Louisiana Gulf Coast refineries. The inland barge market is distinct from the coastal barge market that involves larger ocean going articulated barges (ATB) with over 140 MBbl cargoes. Inland barges are smaller – ranging in size from 10 MBbl to 30 MBbl. We described these vessels in Part 1 of our “Good Year For the Barges” series. The smaller 10 MBbl barges are more commonly used in the upper Mississippi and Illinois River where the water draft (depth) is shallower. Barges are normally chartered-out as “unit tows” consisting of two to three barges and a towboat, under term contracts for 1-5 years or for shorter terms in the spot market. Inland barges are subject to the terms of the 1920 Merchant Marine Act – known by the industry as the Jones Act (see The Sea and Mr. Jones). The Jones Act is a federal statute requiring that all goods transported by water between U.S. ports be carried in U.S.-flag ships, constructed in the United States, owned by U.S. citizens, and crewed by U.S. citizens and U.S. permanent residents. Because of the regulations, operating expenses are higher for Jones Act vessels (as much as 2.7 times non-flag alternatives according to a U.S. Maritime Administration (MORAD) study in 2011). Subscribers to RBN’s Backstage Pass service can download a copy of the 2014 “Rock The Boat” Drill Down Report that describes the impact of the Jones Act on the crude oil market.

During the past four and a half years the U.S. inland barge market experienced rapid growth as a consequence of surging domestic crude production. Barges provided a handy alternative route to market for crude from expanding shale plays such as the Williston Basin in North Dakota and the Eagle Ford in South Texas as well as for increasing imports of Western Canadian heavy crude trying to reach U.S. Gulf Coast refineries. In particular, when production outpaced pipeline capacity Bakken and Canadian crudes were stranded in the Midwest and producers had to swallow steep discounts to get their barrels onto crowded pipelines. To bypass this congestion shippers turned to alternatives such as rail and/or inland barges to get their crude to market destinations where prices were higher. In many cases this “workaround” involved loading crude onto rail tank cars and then transshipping it onto barges for the final leg of the journey to market.  The combination made sense because rail load terminals could be built relatively close to production even if there was no convenient waterway (as in North Dakota) and barges can deliver to refineries that have waterborne access (a high proportion – especially in coastal regions). Taking crude deliveries by barge saved refiners from having to build their own rail unloading facility – making the rail-barge combo a flexible and quick to market solution. The economic incentive to use rail and barge routes to market was provided by wide price differentials between discounted prices paid for “stranded” crude without pipeline capacity and crude delivered to coastal refineries where it competed with higher priced international imports. Inland waterborne barge movements increased particularly between the Midwest – the center of congestion – and the Gulf Coast where 50% of the nation’s refining capacity resides. Most of those movements used the Mississippi River and its tributaries. There were other growth areas in inland waterborne crude-by-barge traffic including routes along the East, West and Gulf Coast that we will cover in a later episode of this series.

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