Railroads confident they'll keep winning a slice of crude oil-moving business

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Posted: Friday, August 16, 2013 12:00 am

Domestic oil production is on the rise, creating an opportunity, as well as some controversy, for railroads.

Last month's fiery derailment in Quebec of a trainload of crude, which killed 47 people, renewed safety concerns about moving oil by rail. Rail industry officials say rail continues to be a safe method and offers advantages that will keep railroads in the crude-hauling business long term.

The resurgence of U.S. oil — production peaked at 9.6 million barrels a day in 1970, then fell to 5 million in 2008, growing back to nearly 6.5 million in 2012 and 7.3 million in May of this year — has created a demand for more ways to haul crude to refineries, where it's transformed into products consumers use, such as gasoline, diesel fuel and kerosene.

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Omaha-based Union Pacific saw its first-quarter chemicals business rise 14 percent, with $873 million in revenue, and of that crude oil volume was up 107 percent. In the second quarter, the chemicals business was up 12 percent, with $890 million in revenue and crude oil volume up 39 percent.

BNSF Railway, owned by Warren Buffett's Berkshire Hathaway, reported in the second quarter a 12 percent bump in industrial products volumes, resulting in $1.4 billion in revenue for that unit. The railroad credited increased shipments of petroleum products, driven mainly by an increase in crude.

“It's really an exciting time for us to be able to partake in this crude-by-rail market. It's given us the opportunity to leverage the access we have,” said Beth Whited, vice president and general manager for U.P.'s chemicals group, which also includes products such as plastics, liquid chemicals, fertilizer and soda ash.

Still, the Quebec derailment gave some analysts pause. The Manhattan Institute for Policy, a conservative think tank, renewed its call to speed up pipeline construction.

“Pipelines,” it said, “are the safest way of transporting oil and natural gas, and we need more of them, without delay.”

The institute in June said its research showed that pipelines are a safer way than rail to move oil. When taking into account the volume of oil being shipped — each U.P. tank car, for example, can hold up to 725 barrels' worth — rail shipments were more than three times as likely as pipelines to result in a spill or fire between 2005 and 2009, it said.

The rail industry defends its safety record with crude and says the question is not one of rail vs. pipe. It says that as long as domestic oil production grows, there will be a need to move some of it by rail.

Holly Arthur, a spokeswoman for the Association of American Railroads, said both pipelines and railroads are safe and “there will be a role for both in moving crude oil.”

Because domestic oil production has surged so much, “there's room for both,” agreed Prentiss Searles, marketing issues manager at the American Petroleum Institute, an oil and natural gas trade group.

U.P.'s chairman and CEO, Jack Koraleski, said the Quebec disaster prompted the railroad to reinforce its safety procedures and best practices for moving crude. But the accident hasn't altered his belief that railroads remain the safest way to haul crude, he said.

BNSF spokesman Andy Williams agreed, noting the railroad is “continuously assessing and improving its own operations to prevent incidents in the first place.”

Both men said they were waiting for the Quebec investigation to finish.

“Once that happens,” Koraleski said, “we and all railroads will go over the results and determine the root cause to see if we should be doing something different.”

An independent transportation analyst based in New York, Tony Hatch, said he expected the Quebec accident would have “some impact” on the crude-by-rail business, particularly in the minds of people who watch railroads hauling the stuff and worry about the prospect of an accident where they live or work.

“It's a big psychological blow,” he said.

Despite that, Hatch called hauling crude by rail a “long-term prospect” because it offers flexibility: Existing rails go more places than pipelines. And although he expects the proposed Keystone XL pipeline through Nebraska will be built, he doesn't think it'll be big enough to carry all the oil coming from Canada and the Bakken region that includes North Dakota.

Whited said pipelines come into operation “lumpy” — with long delays while they're being planned and built — and said U.P. will continue to participate in the market even as pipelines do.

“We think crude by rail is kind of here to stay because of the stranded nature of barrels,” she said, referring to the oil that now waits to be moved, by any method.

Whited also said more pipeline projects benefit U.P. because the railroad hauls a lot of pipes.

“They're great markets for us as drilling has increased in the U.S.,” she said.

Historically, most crude oil has moved by pipeline, but data from the Association of American Railroads shows moving crude by rail is on a dramatic upswing. In 2008, U.S. Class I railroads originated just 9,500 carloads of crude. Last year they originated 234,000.

“You have to be able to move the Bakken formation in North Dakota and Permian Basin in Texas,” Searles said, pointing out regions of the U.S. where much of the recent oil production has taken place. Newer methods, such as fracking and horizontal drilling, have allowed companies to reach remote oil reserves.

Meanwhile, U.P.'s chemical-business results are being led by growth in crude oil shipments.

It's a shift from when U.P.'s chemicals business slumped as producers moved operations overseas. In 2009, U.P. was moving only about 5,200 carloads of crude each year. Then the shale drilling boom began. By 2011, volume was up to 37,000 carloads.

Last year, U.P.'s crude shipments, mostly from the Bakken, Permian and Eagle Ford shale formations to the Gulf of Mexico area, grew more than threefold compared with 2011.

Neither U.P. nor BNSF break out revenue contributions by individual commodities within business groups, but crude oil made up about 16 percent of U.P.'s chemicals volume last quarter. For BNSF, petroleum products last year represented about 4 percent of all volume and so far this year are about 5 percent.

Both railroads say crude has helped to make up for sluggish coal and agricultural — particularly grain — shipments.

The growth in crude shipments is the result of oil companies finding rail more accessible, efficient and cheaper, Whited said. She said the oil industry finds rail attractive because the infrastructure is already in place to move products anywhere and because building a rail terminal to haul crude is cheaper and faster than building a pipeline.

Still, there are about 60 crude oil pipeline projects in the U.S. in various stages of planning, including the Keystone XL, Searles said. The projects involve some 114,217 miles of new pipe, although several only increase the capacity of existing pipelines.

Searles said the American Petroleum Institute doesn't have a preference for how crude is moved. Both pipeline and rail have a “99.99-plus percent success rate,” he said. What's significant, he said, is that both are aiding a U.S. oil output that's now forecast to surpass Saudi Arabia's by 2020.

“There's a tremendous growth opportunity there. And the idea that we could be energy independent based on the production in the U.S. and Canada and Mexico, I think, is quite a unique opportunity for us,” he said.

“Rail is helping to make that happen.”

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