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.

CP Crude Oil Traffic Could Fall to Zero, Use of Tank Cars for Crude Oil Storage Seen as Unlikely

Despite initial opposition, U.S. railroads may be at least taking a look at allowing oil companies to use tank cars for storage.

However, Cowen & Company Freight Transportation Analyst Matt Elkott told Railway Age that Canadian National and Canadian Pacific don’t want that business because any revenue gained would not outweigh the potential financial liability.

Elkott said tank cars would in theory be used to store at least 25 million barrels of crude oil.

The crude oil by rail market has fallen during a global conflict between Russia and Saudi Arabia over production levels and pricing that has sent the price of barrel of crude plunging.

There is no evidence yet, Elkott said, that crude oil is being stored in tank cars and he said that for now it seems unlikely that it will happen.

Elkott said U.S. railroads have largely been silent on the prospect of storing crude oil in tank cars which might mean they are more open to it than their Canadian counterparts.

Aside from regulatory and liability concerns, railroads might oppose storage of crude oil in tank cars because it would accelerate corrosion of those cars.

In an unrelated development, the decline in crude oil prices could lead CP’s oil transport traffic to fall to zero or near zero.

The carrier hauled a record 36,000-plus carloads of crude in the first quarter of 2020, but the economic downturn triggered in part by the COVID-19 pandemic combined with falling oil futures has led CP to project a steep drop in crude oil traffic.

Oil futures fell below $0 a barrel on Monday although production has not fallen as fast as demand.

CP expects a double-digit decline in crude oil volume in the second quarter.

Crude oil extracted in Alberta and the Bakken region of North Dakota is placed in unit trains that CP interchanges with all U.S. Class 1 railroads for shipment to refineries.

Railroads Resist Storing Crude in Tank Cars

Suggestions from oil companies that they be allowed to store surplus crude oil in railroad tank cars are not getting a positive reception from the railroad industry.

Carriers are citing safety concerns when asked by shippers about long-term storage of crude oil.

The oil companies have raised the idea because the plunge in crude oil prices combined with reduced demand have left them with large supplies of crude oil and fewer places to store it.

Railroads have pointed out that federal rules limit storage of oil in rail cars, even at private facilities.

Those rules permit the storage of only a small amount of crude oil.

An oil price war between Saudi Arabia and Russia has led to sharp declines in crude oil prices.

Oil Companies Want to Store Crude in Tank Cars

Some oil companies are seeking tank cars to store a glut of crude oil that has been rendered surplus due to a downturn in demand during the COVID-19 pandemic.

The companies are running out of convenient places to store crude oil and are looking to lease tank cars for three months to a year.

Bloomberg News reported that companies will be required to follow certain Federal Railroad Administration rules and that there are some safety concerns surrounding storage of crude oil in tank cars.

Oil companies have leased tank cars for storage of crude oil before, the last time being in 2016.

The price of crude oil has been hovering around $22 a barrel in United States with some crude oil produced in Alberta, Canada, selling for less than $10 a barrel.

Rail Crude Oil Shipments Down 45%

Crude oil shipments by rail fell 45 percent in the first five months of 2016 when compared with the same period in 2015.

The U.S. Department of Energy said crude oil shipments averaged 443,000 barrels per day this year.

About half of the decline was due to fewer shipments of crude oil from the Midwest to the East Coast.

The DOE said crude oil shipments by rail have been in decline since summer 2015 due to a narrowing of price differences between domestic and imported crude oil, the opening of new crude oil pipelines, and declining production in the Midwest and Gulf Coast on-shore regions.

In a report, the department said the economics of crude-by-rail transportation depend on the relationship between the prices of domestic and international crude oils.

Domestic crude oil priced in the Midwest and western Texas are no longer heavily discounted relative to imported crude oils priced in the North Sea.

DOE said the narrower the spread between domestic and imported crude oils, the more likely that coastal refiners will choose imported crude oil rather than domestic supplies shipped by rail.

Although it suffered the largest fall, the market for Midwest crude oil to the East Coast remains the largest in the U.S., accounting for 176,000 barrels per day or 45 percent of the total crude oil moved by rail within the United States in May 2016.

Crude Oil by Rail Also Faces Tough Future

Much has been made about falling coal production in the eastern United States and its adverse effect on railroad traffic, yet the shipment of crude oil by rail is also facing a tough future.

Crude oil production in the Niobrara shale region of Colorado and Wyoming is in decline, having peaked in April 2015 and a report by RBN Energy LLC analyst Sandy Fielden predicts that pipelines are going to rob rail of a significant amount of crude oil from that region which now moves by rail.

An Energy Information Administration forecast said that falling crude oil prices and lower drilling activity has meant that crude production in the Niobrara shale region is likely to fall to 388 million barrels a day through March 2016. Peak production in April 2015 was 491 Mb/d.

Fielden told Railway Age magazine that midstream companies continue to add pipeline capacity in the region, which is causing a diversion of crude oil away from rail.

Rail shipments of crude oil peaked in December 2014, but Fielden said that rail terminals to handle crude oil continue to be built.

Fielden has published a report titled Slow Train Coming – Terminal Projects Still Being Built As Rockies Crude-By-Rail Fades that says that crude oil by rail volumes are falling across the United States and Canada.

“The decline is mostly in response to narrower spreads between U.S. domestic crude benchmark West Texas Intermediate and international equivalent Brent,” Fielden wrote. “The lower the spread between these two, the lower the incentive to move crude from inland basins to coastal refineries by rail because the latter is a more expensive transport option compared to pipelines.”

After Congress last December lifted regulations that limited U.S. crude oil exports, West Texas Intermediate crude began to trade at a slight premium to Brent crude, which averaged $0.26/Bbl in January.

Fielden said that the narrowing of prices between West Texas Intermediate and Brent resulted in crude oil by rail volumes in the United States falling by 20 percent between November 2015 and January 2016.

However, Fielden said the decline was slower than expected because shippers and refiners continue to rely on rail to move crude oil out of the Bakken region of North Dakota. This may be, in part, because shippers and refiners have investments in rail infrastructure and because some routes still do not have pipeline access.

Most of the oil being moved out of the Niobrara region by rail is bound for the Gulf Coast, where more than half of the U.S. refinery capacity is located.

Just 20 percent of Niobara region oil was shipped by rail to the East Coast in 2014, a figure that fell to 17 percent in 2015.

In the meantime, construction of new rail loading terminals continues in Wyoming and Colorado.

Fielden’s report said those facilities were planned before the price of oil fell and probably reflect a belief that crude oil by rail will still have a role to play in the longer-term development of Rockies crude takeaway capacity.

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.