Railroads May Benefit From Biden Pipeline Opposition

North American railroads might benefit from plans by the Biden administration to halt or curtail construction of crude oil pipelines.

Canadian National CEO Jean-Jacques Ruest said Biden’s actions, included cancelling a permit for the Keystone XL pipeline that was being built from Canada into the United States will have a positive effect on railroads.

The Keystone pipeline is designed to carry oil sands crude from Canada to refineries in the United States. 

Ruest said it would have been a few years before the Keystone pipe had been completed.

“So I think the positive impact on us might be a few years down the line,” Ruest said.

Canadian Pacific CEO Keith Creel said the actions being taken by the Biden administration in reviewing pipelines bodes well for railroads.

However both CEOs said that conventional crude oil by rail shipments will eventually shift to pipelines once capacity matches demand. 

Some crude oil cannot flow though pipelines and thus moves by rail.

In recent years the volume of crude moving by rail has diminished due to a collapse in energy prices.

Canadian authorities reported that between April and November last year Canadian crude-by-rail exports to the U.S. fell 70 percent.

Some existing pipelines and some in the building or planning stages carry Bakken crude oil from North Dakota.

If some of those projects are shut down that could net railroad more crude by rail business.

Pipeline Closure May Help Rails

A federal judge has ordered a pipeline carrying North Dakota crude oil to be shut down for a year while the line undergoes an environmental review.

The pipeline closure is seen as a potential boon to moving crude oil by rail.

The pipeline is the largest serving the Bakken shale basin and links a terminal in Patoka, Illinois, about 75 miles east of St. Louis.

The pipeline has a capacity of 557,000 barrels a day or the equivalent of seven to eight crude oil trains.

Industry observers said that although some oil could be diverted to rail shipment, other pipelines are capable of picking up the oil sent via the closed pipeline, which is owned by Energy Transfer.

Approximately 36 percent of the North American tank car fleet is in storage. Some believe that a barrier to moving more crude by rail could be lack of operating crews due to recent furloughs by railroads.

Refinery Closing to Cut CSX Crude Oil Traffic

CSX is expected to seen a drop in crude oil traffic following the closure of refinery near Philadelphia that sustained a massive fire last week.

The Philadelphia Energy Solutions refinery along the Schuykill River will be shut down by its owner. It is the largest refinery on the East Coast.

Some of the crude oil processed at the refinery originated in the Bakken oil field region of North Dakota on BNSF and was interchanged to CSX in Chicago.

The refinery was built in the 19^th century and had a capacity of two 120-car unit trains per day, which would represent 40 percent of the refinery’s capacity of 335,000 barrels per day.

The rail unloading facility at the refinery was rebuilt in 2013 with financial help from the state.

In a statement, Philadelphia Energy Solutions said the damage caused by the fire “has made it impossible for us to continue operations.”

Trains magazine reported that some energy analysts said the refinery had slim slim profit margins and its closing is not surprising.

CSX Hit With $2.2M in Fines for Oil Spill, Fire

CSX is expected to pay $2.2 million in penalties to settle an action stemming from a 2015 derailment and subsequent oil spill.

The railroad would pay $1.2 million to the federal government and $1 million to the State of West Virginia to settle water pollution violations.

In a state-negotiated agreement, CSX will pay $500,000 to a state-administered fund to upgrade a water treatment facility in Fayette County, West Virginia.

The federal agencies involved in the case were the Environmental Protection Agency and the Department of Justice.

The derailment occurred on Feb. 16, 2015, at Mount Carbon, West Virginia, when 27 cars of a CSX train with 109 rail cars carrying crude oil derailed. The train carried 29,000 gallons of Bakken crude and about half of the cars ignited.

Some of the oil flowed into the Kanawha River and Armstrong Creek.

The explosions and fires destroyed an adjacent home and garage. A local state of emergency was declared, nearby water intakes were shut down and area residents were evacuated.

The settlement is subject to a 30-day public comment period and final court approval. CSX officials declined to comment on the settlement.

Bakken Crude Producers Cutting Their Production

An analyst who studies the crude oil industry reports that producers in the Bakken oil field are reducing their production and that trend is expected to continue through 2016.

Falling oil prices have triggered the production cuts. Much of the oil pumped in the Bakken region of North Dakota and Montana is transported by rail.

The report by RBN Energy LLC analyst Sandy Fielden did not provide any information about shipping of Bakken crude by rail.

“For the past, year many shale oil producers have defied the expectations of many and kept output at or near to record levels in the face of falling oil prices and much tougher economics,”  Fielden wrote. “Improvements in productivity, cost cutting and a concentration on ‘sweet spot’ wells that generate high initial production rates have all helped cash-strapped producers survive. But with oil prices so far in 2016 stuck in the $35/Bbl and lower range and with the worldwide crude storage glut still weighing on the market, producers are finally pulling back.”

In December there were 1,183 inactive wells in North Dakota and the number of new permits to drill wells has reached a seven-year low.

Fielden said the operators of the inactive wells have essentially abandoned them, usually because they are losing money.

The report described these wells as being older and having very low production rates

Fielden said the expectation that oil prices might remain low for a long time has shaken the market for crude oil from shale in the United States with many smaller operators having gone bankrupt.

He acknowledged that the extent of the production decline remains difficult to forecast because of the potential effect of drilled but uncompleted wells.

Increasing Pipeline Capacity Could Mean Bakken Crude Oil Trains Will be Gone After 2017

Tank car trains carrying crude oil through Northeast Ohio may seem ubiquitous today, but they might be gone by 2017 if an analysis conducted by a Houston-based consulting firm comes true.

RBN Energy LLC made the prediction on its blog and it was picked up by Railway Age.

Increasing pipeline capacity combined with falling crude oil prices has depressed the level of Bakken crude oil being shipped by rail.

The falling prices have reduced the price differences between international and domestic sources of crude oil.

“Since 2012 a combination of rail and pipeline has given Bakken producers ample crude takeaway capacity but pipelines alone have not had sufficient capacity on their own,” said RBN’s Rusty Braziel in an interview with Railway Age. “However, with production slowing down, pipeline capacity is catching up and by 2017 there should be enough pipelines to carry all North Dakota’s crude to market.”

But Sandy Fielden, the author of the blog post, said the situation is more complicated than that.

“ . . . just because pipeline capacity is available doesn’t necessarily mean producers will prefer to use that capacity instead of rail,” Fielden wrote. “In the long run – assuming that they do not have other overriding obligations – shippers will look to their crude netbacks at the wellhead to decide where and how to send their crude to market. That means they should favor market locations where the combination of crude sales price less transport is the highest – regardless of transport mode.”

Fielden, who is RBN’s director of energy analytics, wrote that wide price differences between North Dakota Baaken crude oil and crude from overseas made rail the ideal option for producers sending it to the East or West Coast because there was no pipeline capacity in those regions.

“As soon as price differentials—especially between domestic benchmark West Texas Intermediate and international benchmark Brent—narrowed, then barrels shifted back to pipelines to take advantage of their cheaper tariff rates,” Fielden wrote. “Yet significant crude volumes continued to be transported to market from North Dakota by rail because pipeline capacity could not handle the demand.”

But more pipelines have been built or are being planned in North Dakota that would provide space for all the barrels currently traveling to market from North Dakota by rail.

Fielden’s analysis found that new pipeline projects due to go into service during 2016 and 2017 will expand Bakken takeaway pipeline capacity by 680,000 barrels per day.

Another 100,000 barrels per day of pipeline capacity would come online in 2019 if the TransCanada Keystone XL pipeline is completed, with 220,000 barrels per day more in 2020 if the TransCanada Energy East project is built.

“Huge Increase’ In Crude Oil Going East by Rail

If it seems as though there are a lot more crude oil trains passing through the Great Lakes region in the past year, well there are.

The U.S. Energy Information Administration said there has been a “huge increase” in rail deliveries of crude oil to East Coast refineries.

“Monthly rail receipts of crude oil accounted for more than half (52 percent) of the crude oil supply to East Coast refineries in February,” the EIA said. “As U.S. and Canadian production of crude oil has increased, crude supply by rail to East Coast PADD 1 (Petroleum Administration for Defense District 1) refineries has grown, displacing waterborne imports of crude oil from countries other than Canada, such as Nigeria.

“While refinery utilization in PADD 1 in early 2015 has been below typical levels, this still marks the first time in EIA’s dataset that crude deliveries by rail have accounted for such a high percentage of East Coast refinery supply.”

The EIA said that growth since 2010 in inland domestic and Canadian crude oil production created an opportunity for U.S. and Canadian railroads to move crude oil to U.S. refining centers on the Gulf, East, and West coasts as well as to refineries in Canada.

Much of the crude oil moved by rail is extracted from Bakken Shale in North Dakota and eastern Montana.

Bakken crude supplied by rail to U.S. East Coast refineries, along with U.S. crude production supplied by marine vessels from the Gulf Coast, has reduced demand for foreign crude oil at the East Coast refineries.

In January 2014, domestic crude oil accounted for half of all East Coast refinery crude oil receipts, and CBR net receipts to the East Coast surpassed non-Canadian crude oil imports.

“The growth in CBRl shipments to East Coast refineries has been made possible by expansions in the capacity to load and unload crude oil from trains,” the EIA said. “Some facilities handle individual railcars or a small number of railcars [in] manifest trains; others are built for unit trains that consist of 80 to 120 railcars carrying crude oil.”

As a result, rail terminals now are better equipped to load and unload unit trains.

Five years ago, U.S. rail loading capacity for crude oil was almost entirely for manifest freights, but now more than 30 loading terminals throughout the U.S. can accommodate unit trains.

On the East Coast, 10 terminals can unload crude oil unit trains. CBR unloading facilities are located on refinery property and at non-refinery sites with access to additional modes of transportation, including marine and short-distance pipelines, that allow the crude oil to be shipped on to refineries.

EIA expects that as more unit train unloading terminals are added that some volumes that previously transferred to vessels in Albany, N.Y., before moving on to refineries in New York Harbor, the Philadelphia area and Canada will be moved directly by rail closer to their ultimate destinations.

Crude by Rail Shipping Falling More than Expected

Railroad industry observers say that an expected drop in crude oil shipments by rail in 2015 has been falling off much farther than expected.

“The consensus view was that very high double-digit growth would moderate to low double digits, and as we have seen in recent weeks we’ve broken that floor and in some cases gone negative,” said Matt Troy, an analyst with Nomura Securities International Inc. in New York in an interview with Bloomberg News.

The Standard & Poor’s 500 Railroads Index is on course for the biggest weekly decline since September 2012, and lessors’ rates for oil cars have fallen by about a third in the past six months, Cowen & Co. said.

The falloff was expected after energy companies reduced drilling for oil in the wake of oil prices falling 50 percent since July 2014.

Railroad executives and industry analysts also thought the demand for hauling crude and such materials as frac sand and pipes would slow after a four-year surge.

In January, CSX and Canadian Pacific predicted that even in the face of oil falling below $50 a barrel that oil projects in progress would boost production and keep trains hauling even more crude oil than in 2014.

However, carloads of U.S. petroleum products have fallen 2.8 percent in the past four weeks after growing 13 percent in 2014.

CSX no longer expects to reach the high end of its forecast for crude oil carloads this year but still expects that oil shipments will increase said spokeswoman Melanie Cost.

Figures provided by the Association of American Railroads show that CSX’s petroleum products carloads rose 3.6 percent following a 60 percent gain last year.

Kansas City Southern has modified its 2015 revenue growth forecast because of lower-than-expected crude-by-rail shipments and a 20 percent decline in coal revenue in the first quarter as utilities switch to cheaper natural gas.

Canadian Pacific spokesman Martin Cej said that CP has not changed its forecast of 140,000 crude carloads in 2015.

The railroad posted a 9.1 percent increase in petroleum product carloads in the past four weeks, but that’s down from 16 percent last year and a third of the railroad’s forecast for a 27 percent gain in crude only carloads this year.

BNSF saw a 4.5 percent drop in petroleum products in the last four weeks after a gain of 12.4 percent last year. BNSF is the largest hauler of Bakken oil production from North Dakota.

Union Pacific, which serves Texas oil fields, saw its carloads drop 25 percent in the four-week period. Demand for frac sand, which is used to prop open the cracks in shale stone to release trapped oil, also has diminished.

“This is the first time that anybody has slowed down on fracking,” said Taylor Robinson, president of Chicago-based PLG Consulting.  “Nobody knew how fast they could shut down and it looks like they’re pretty fast. “Frac sand is going to fall off very quickly,” Robinson says. “Oil production within a couple of months is going to fall off very quickly.”

Union Pacific’s carloadings of stone, sand and gravel fell 6.3 percent in the past four weeks after jumping 22 percent last year. BNSF saw those commodities fall 3 percent after increasing 18 percent last year.

CSX, EPA Reach Agreement on W.Va. Cleanup

CSX has reached an agreement with the U.S. Environmental Protection Agency over the cleanup and restoration of land affected by a Feb. 16 derailment of a crude oil train in West Virginia.

The agreement will supersede an EPA order. CSX had agreed to submit within 21 days a comprehensive, long-term plan for cleaning up and restoring the areas affected by the derailment.

In agreeing to commit “significant resources” to cleaning up the derailment, CSX will participate in air and water monitoring and testing; recovering oil from Armstrong Creek, the Kanawha River and their tributaries and shorelines; and educating residents about potential effects from the incident, EPA officials said in a news release.

“The agreement between CSX and EPA provides a framework within which CSX can work, with oversight from EPA and West Virginia, to ensure that oil contamination from the derailment in Mount Carbon continues to be safely contained and that long lasting impacts are mitigated to protect human health and the environment,” said EPA Regional Administrator Shawn Garvin.

The 109-car crude oil train had originated in North Dakota and was bound for a port in Virginia. Twenty-seven of its cars derailed, resulting in explosions and fires that prompted an evacuation of nearby residents.

Pa. Governor Seeks Stricter Crude Oil Standards

Pennsylvania Gov. Tom Wolf has asked President Barack Obama to impose stricter crude-by-rail safety and enforcement standards.

“The potential for disaster is too great to ignore,” Wolf wrote in a letter to the president. “In my first weeks in office, I have made it a top priority to address this issue. My administration has begun to take steps to increase safety and response capability regarding trains traveling through Pennsylvania.”

Wolf cited a spate of recent derailment of trains carrying crude oil in making the case for greater federal safety standards across the board.

He is seeking a reevaluation of rail speed limits in high-density areas, stricter standards for tank cars and train braking systems, and increased federal assistance in hiring and training more rail safety inspectors.

He also wants Bakken oil treated to remove dangerous volatiles prior to shipping.

Wolf said he plans to meet with executives of Norfolk Southern and CSX to discuss ways to decrease the risk of derailments and accidents.

Rail safety standards have also not kept pace with current shipment levels, Wolf said in asking for a greater sense of urgency in creating and implementing new federal safety standards.