Freight Cost

The story of crude-by-rail (CBR) in North America is that of a victory of good old U.S. ingenuity over the lack of pipeline capacity that stranded booming shale oil production in 2012. The lower cost to market of “on-ramp” rail terminals allowed surging crude production a route to (mainly) coastal refineries - igniting a building boom over 4 short years that has left 82 load terminals and 44 destination terminals operating today  - many of them now underutilized. Along the way monthly lease rates for rail tank cars that reached $2,750/month at the height of the boom are down to $325/month after the bust – with many lease holders paying daily rent to park their empty cars. Today we conclude our series reviewing the state of CBR today.

U.S. production of propane from gas processing has more than doubled since 2010 and now exceeds 1.1 MMb/d.  Together with another 300 Mb/d from refineries, that is far more propane than the U.S can use.  Consequently, U.S. exports of propane have been booming, reaching more than 700 Mb/d in July.  But that has not been enough exports to keep propane inventories from filling to the brim, now up to more than 90 million barrels, about 10 million barrels over the five year high.  About the only thing that has been holding back even more exports is shipping costs.   The cost of ships that move most of the propane to overseas markets, called Very Large Gas Carriers, or VLGCs (gas meaning LPG, not natural gas), have been high since U.S. exports started ramping up and then blasted to the moon this summer in response to huge export volumes and logistical tangles in global markets.  But that’s all about to come to an end.  There is a flotilla of new LPG vessels that were ordered many months ago that are scheduled to hit the market in 2015 and 2016.   In today’s blog we review how U.S. LPG exports are likely to respond to the coming massive increase in VLGC shipping capacity.

Yesterday (August 3, 2015) Brent crude closed under $50/Bbl for the first time since January 2015. At that price expensive crude-by-rail (CBR) freight costs to the East Coast leave Bakken producers with netbacks not much over $30/Bbl. Yet CBR shipments to the East Coast were still over 400 Mb/d in May 2015 according to the Energy Information Administration (EIA). By 2017 there should be adequate capacity to get all Bakken crude to market by pipeline. But direct pipeline competition against rail to the East Coast is not expected until at least 2020. Today we look at the future of East Coast CBR.