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We Can Run Those Tank Cars for Miles and Miles and Miles - Bad Orders in the Crude-by-Rail Market

Just like every other kind of mechanical equipment, rail tank cars require maintenance every once in a while. Valves can leak.  Linings wear down.  Railings, platforms, and brake equipment need periodic repairs.  And not surprisingly, the more miles you put on a tank car, the more maintenance it is going to need.  As the crude-by-rail phenomenon has grown, so has the rate of ‘bad orders’ – rail cars that must be taken out of service for maintenance.  Handling bad orders is a new issue for many producers and refiners just now getting their feet wet in the business. Everyone agrees that this is a very important issue, and the rail industry is not taking it lightly. Today we explore the implications of bad orders in the crude-by-rail market and how progressive solutions are on their way.

In a couple of short years, there will be over 375,000 tank cars hauling hydrocarbons in North America. A large majority will be moving crude and NGL’s from the shale production plays. New plays have hit the market like a storm, and like everything else, the infrastructure for handling and maintaining tank cars is trying to keep up. We think this situation is creating yet another new issue, or shall we say opportunity, for the energy and rail industries.  You see, tank cars, like any asset that’s in short supply, must be utilized as efficiently, effectively and safely as possible. Today’s cars provide unprecedented power and reliability but utilizing them as much as possible has been the norm. Tank cars have been running harder and longer than ever, shuttling long distances between places like North Dakota and the East, West and Gulf Coasts. In the Bakken alone, new crude oil production has been responsible for the construction of 22 new crude oil loading terminals and will be the destination for a big chunk of the new tank cars on the way.  In the last year, there has been an increase in tank car rail traffic of about 35 percent, and there has not been a repair facility of any significant size added to the infrastructure since the shale explosion started. And on top of that, most existing maintenance shops are not certified to do extensive repair. This implies that not only do we need to catch up to take care of all these new cars, we also need to have a more efficient repair system in place—the industry simply can’t afford not to. Many large rail car maintenance players are responding to the opportunity, including our friends at Strobel Starostka Transfer, LLC (SST) who are bringing a new solution to the table.  But it’s not traditional.   We’ll get into more details on that in a minute. 

In our last blog in this series, “I Can See (Them) for Miles and Miles and Miles – The Tank Cars are Coming,” we talked about the fact that there are nearly 1.5 million revenue-generating rail cars in North America; and 315,000 or 21 percent of those are tank cars carrying some kind of petroleum or petrochemical product. By 2016, when the current back orders are filled (and assuming that all the orders are filled and some are not cancelled), the North American tank car fleet will be up to 375,000 cars. At the time of that blog the back log of new car orders was roughly 53,000. Today it’s over 60,000. Old railroader rules of thumb tell us that roughly 7,500 will be out of service being maintained and/or fixed (affectionately called a “Bad Order”) at any given time. That’s a huge increase over recent years, with little to no increase or improvement in the maintenance infrastructure. Bad orders are a very costly proposition and there is really nothing efficient about them.  In fact, bad orders throw a monkey wrench into the entire economics of unit train shipments that have been such a boon to the development of crude-by-rail.

“Bad orders” are Bad

While safety is always top priority, the name of the game is also speed to market, efficiency, cost control and getting product moved. Things do disrupt that once in a while. Every time there is a questionable car (if it appears it does not meet Association of American Railroads (AAR) and/or Department of Transportation (DOT) safety standards in any way), it takes a minimum of 30 minutes just to assess the situation. Then, if a car is determined to need service, that process can put a car out of commission for  40-60 days.  Operators are very motivated to minimize this because time is money. But if the car has a problem, it can’t be avoided.  And the frequency of bad orders is increasing.  . You see, typically a standard 30,000 gallon manifest tank car travels about 14,000 miles per year. Today they are running more miles than ever making their maintenance cycle even more important.

Bad orders are a bad thing; they literally stop product movement. This costs money. The cost includes the expense of the maintenance and the opportunity cost created by an idle car. The numbers can be a moving target.  But we can rely on the rule of thumb that at any given time—2-3% of all tank cars are in some kind of maintenance mode. We also know that one car out of commission for a month typically prevents 1,600 Bbls of product being moved. That has many ramifications, but the most obvious and basic is when product delivery stops so does the cash flow.

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