North America - Oil Transport By Rail

[gokeefe]

10%-20% year over year. Seems optimistic in the absurd but I'm having a hard time not seeing this as a real possibility.

[Cowford]

Intermodal CAGR has averaged about 2.5% over the last 10 years; about 5% over the last five years. I always marvel at your optimism!

[gokeefe]

Intermodal CAGR has averaged about 2.5% over the last 10 years; about 5% over the last five years. I always marvel at your optimism!

Thanks!

I would say if intermodal has averaged 2.5% over a ten year period which included the Great Recession and it's aftermath then surely there's plenty of room for a spurt of robust growth.

I'm fascinated by reading all of the "cheap oil is bad for the economy" articles. I understand there certainly is an economic effect from the loss of all of the related capital expenditures but the flood of consumer spending that is coming will be extraordinary.

I would note yet again that this increase in consumer economic activity combined with only a mild recovery in oil prices has the potential to overwhelm the Class I railroads with traffic.

[Gilbert B Norman]

Here we go again:

The Oregonian

Fair Use

A multi-car oil train derailment Friday in the Columbia River Gorge near Mosier sent up a massive plume of black smoke and stoked long-standing fears about the risks of hauling crude oil through one of the Pacific Northwest's most renowned landmarks.

Eleven cars from a 96-car Union Pacific train derailed west of the small city about 12:20 p.m. At least one car caught on fire and released oil, but no one was injured, said railroad spokesman Aaron Hunt.

The train originated in New Town, North Dakota, and was moving Bakken crude to the U.S. Oil & Refinery Co. refinery in Tacoma, said company spokeswoman Marcia Nielsen.

I was hoping that the temporary lull in oil traffic was giving the industry a back to the drawing board mentality and were identifying weaknesses in the handling oil safely yet efficiently. I sincerely hope this incident was a "one off" and from it comes a learning experience.

[Rockingham Racer]

This incident is going to cause a lot of angst for the UP. The environmental/green movement is strong in those parts. UP has been trying to advance a plan to put in several miles of 2 MT right where this incident occurred, and the greenies have been opposed to that. This could put the nail in the coffin of that plan.

[John_Perkowski]

News report from KCPQ, Seattle

Key points:
- Expect the FRA to start pushing for electric vice air brakes.

- UP will now send the track inspection cars through the Columbia River Gorge route every three months.

[Gilbert B Norman]

I think the immediate material is attributed to the Associated Press than the local TV station noted.

Here is the same article from AP's site containing additional photos of the scene:

http://bigstory.ap.org/article/6a66c22b ... -oil-train" onclick="window.open(this.href);return false;

[Gilbert B Norman]

All I could think when opening up my Journal this morning was "OUCH":

http://www.wsj.com/articles/crude-slump ... 1469484016" onclick="window.open(this.href);return false;

Fair Use:

The oil-train boom is waning almost as quickly as it began.

Rail became a major way to move crude after companies began unlocking new bounties of oil from shale formations, with volumes rising from almost nothing in 2009 to more than one million barrels a day by 2014, according to the U.S. Energy Information Administration.

But those numbers began falling after oil prices started tumbling two years ago, and aren’t projected to recover anytime soon. In April, just 430,000 barrels of oil rode the rails each day, according to the latest federal figures.

Some of the decline came from a drop in U.S. oil production, but oil and rail executives say the drop-off may be permanent. “At least some portion, and it could be a pretty large portion,” of the rail business won’t return, said Union Pacific Corp. Chief Executive Lance Fritz.

More pipelines have begun reaching North Dakota and other shale regions, giving producers a cheaper way to move their oil to market.

Also, a string of fiery crude-freight-train derailments—including one in Lac Mégantic, Quebec, that killed 47 people in 2013—have prompted a host of new and expensive regulations, and fueled opposition that has helped delay major rail projects on the West Coast, where a dearth of pipelines makes rail useful. Regulators have mandated new safer tank cars, and older tank cars are being phased out—adding to future costs for transporting oil.

We don't need this; but then after Megantic and all the others that got on to Page 1, as well as after the capital has been committed, pipelines can move the stuff cheaper and safer, I can't be too surprised.

No wonder my disclaimer now reads in its entirety;

disclaimer: author holds long position UNP

[Gilbert B Norman]

Seems both my daily reads have piled on the Union Pacific for Mosier:

http://www.nytimes.com/2016/08/01/us/pa ... rains.html" onclick="window.open(this.href);return false;

Fair Use:

“Communities around this state have awoken,” said Oregon’s governor, Kate Brown, a Democrat. Washington’s governor, Jay Inslee, who is also a Democrat, said he thinks that all oil transit should be halted until more stringent track inspection rules can be put into place. “Can it be transported into the Pacific Northwest safely?” he said. “That answer now is no.”

The volume of oil being shipped by rail across most of the rest of the nation has plummeted, as low oil prices and more pipeline capacity have reduced the need for trains. The number of rail cars carrying petroleum is down about 40 percent from the peak in 2014, according to the Association of American Railroads

Sooner or later, the "Greenies" are going to confront a pipeline that went BOOM or an underground leak undetected until some kid comes home smothered in oil from playing in the backyard - or worse, a public park.

I can only hope that the industry, oil and rail, will confront the various issues that have created this public perception that crude by rail is unsafe. First Bakken needs its own UM Class away from 1267. Possibly there need be more stringent limits on train length, or maybe even handling Bakken in unit trains need be prohibited. As Mr. Rockingham notes in his immediate, the Greenies have a strong political lobby (even Mr. Trump had best not offend them) and even have their own Presidential candidate.

Lest we note, that pipelines come with heavy capital costs, and as we have learned (and may I say I predicted) that various Sheiks of Araby still have enough muscle in the marketplace, as well as much lower production costs, to set the world price of crude. Unlike 1973 and 1979, where they sought and succeeded to limit the supply of crude to raise the price, they now seek to flood the market to drive the competition, i.e. Bakken, out of business. I'm sure they are delighted to see that railroads are being questioned about handling crude safely, as Bakken is presently "underserved" by pipeline.

disclaimer: author holds long position UNP

[gokeefe]

Lest we note, that pipelines come with heavy capital costs, and as we have learned (and may I say I predicted) that various Sheiks of Araby still have enough muscle in the marketplace, as well as much lower production costs, to set the world price of crude. Unlike 1973 and 1979, where they sought and succeeded to limit the supply of crude to raise the price, they now seek to flood the market to drive the competition, i.e. Bakken, out of business. I'm sure they are delighted to see that railroads are being questioned about handling crude safely, as Bakken is presently "underserved" by pipeline.

disclaimer: author holds long position UNP

Some thoughts about the market as it stands right now since the Saudis (and OPEC) generally have attempted to regain control of the market. First and foremost this strategy has been driven largely by desperation. The re-entry of the United States into the global markets as an oil exporter has substantially destabilized the balance of power in global oil markets. Saudi Arabia's nearly four decade monopoly as the swing producer has broken and there are numerous reasons why. Normalization of relations with Iraq and consequent increases in production there being first among these.

Bakken (and shale oil generally) have also done something no one could have predicted a few years ago, their production costs have been driven down by 50% or more. This means that the "profitable" WTI price for Bakken oil is now closer to $40-$50 per barrel with some previous reports indicating that the most efficient operations were doing just fine at prices barely about $20 per barrel. All of this leads to the real question in everyone's minds, "Can the price of oil go higher?".

I would argue that the recent decision by the Kingdom to implement austerity policies that begin, for the first time ever, to rollback the massive welfare state are the strongest indication yet that oil is not, and will not be heading much higher than $60 per barrel for some time to come. This in effect amounts to capitulation by the House of Saud and has forced them down a domestic policy path that is fraught with instability, social challenges and a broad array of problems that government "jobs" were once relied upon to solve wholesale.

This means in effect that Bakken in concert with unrestricted production increases from Iraq are making the global oil supplies unbalanced with production that the world does not appear capable of consuming. Recent backlogs at the Cushing depot are among the very strongest indicators that the glut of oil coming from Middle America simply does not have a home of any kind at all. What then are the implications for oil by rail? In my opinion this scenario is strongly indicative of a long term role for rail transportation at shale oil terminals. Shale oil will remain unstable and unreliable to the extent that pipeline construction will be unjustifiable financially. The markets are not strong enough to permit producers to sign long term contracts and shale oil production and exploration will likely continue to occur in fits and starts along with the market. This is a near "perfect storm" of conditions that would support a very positive long term outlook by the railroads in the shale oil industry.

Things are quiet for the moment but I do believe that shale oil transport by rail has a future and that the current replacement cycle of tank cars will support a "surge" of oil shipments in the future. I suspect we will see long trains of tank cars once again the next time there is an "up" cycle in oil prices. The difference this time is that the top end of that cycle probably looks more like $70 per barrel and the duration perhaps 12-18 months as opposed to $120 per barrel for two or three years.

[Cowford]

Bakken (and shale oil generally) have also done something no one could have predicted a few years ago, their production costs have been driven down by 50% or more. This means that the "profitable" WTI price for Bakken oil is now closer to $40-$50 per barrel with some previous reports indicating that the most efficient operations were doing just fine at prices barely about $20 per barrel.

Are you distinguishing between exploration/drilling and simple production breakeven? The proof of the breakeven pudding is in the eating, i.e., rig counts and crude production. Bakken rig count was ~200 two years ago. It now stands at 28. And production is down 17% from peak, and falling fast as existing well output decline.

[Gilbert B Norman]

Even if transportation is not mentioned within this article, I'm certain Messrs. Cowford and O'Keefe as well as anyone else between their polar views, will find this article appearing yesterday in The Journal, to be of interest:

http://www.wsj.com/articles/two-years-i ... 1474968601" onclick="window.open(this.href);return false;

Fair Use:

When oil prices began to plunge two years ago due to a global glut of crude, experts predicted U.S. shale producers would be the losers of the resulting shakeout.

But the American companies that revolutionized the oil and gas business with hydraulic fracturing and horizontal drilling are surviving the carnage largely unbowed.

Though the collapse in prices caused a wave of bankruptcies, total U.S. oil production has only fallen by about 535,000 barrels a day so far this year compared with 2015, when it averaged 9.4 million barrels, according to the latest federal data.

As the oil markets ponder where production will resume when prices pick back up, one clear answer has emerged: America. Goldman Sachs forecasts the U.S. will be pumping an additional 600,000 to 700,000 barrels of oil a day by the end of next year—making up for every drop lost in the bust.

Of great interest is the graphic within the article depicting the break even price/bbl of the oil producing regions. While of course the various Sheiks and Vladimir The Great are on top, the US is "in the game"; Canadian sand oil is not.

[Cowford]

One thing that is truly amazing is the evolution of fracking, given the drive for production and efficiency. Rules-of-thumb regarding well statistics are hard to nail down now. Not long ago, we used to SWAG 30 carloads of fracking sand per well... and now that number is in the hundreds. Halliburton drilled a 3.5 mile lateral this summer, two miles down. It boggles the mind!

An interesting question to ponder: The industry is focusing on developing fewer, higher producing wells. That concentrates volume, which my gut tells me would translate in favor of pipelines (or further pipeline development). Unfortunately, rail share out of the Bakken has declined from 75% in 2013 to 40% at the beginning of 2016 to 30% in July. Overall production declines have opened up local refining and pipeline capacity, and if/when Dakota Access pipeline comes on-line, that'll hurt share further.

[gokeefe]

I think the long term future of the shale fields is still uncertain enough that we will not see substantial pipeline expansion.

[Gilbert B Norman]

From.Today's Wall Street Journal:

http://www.wsj.com/articles/aging-pipel ... 1478128942" onclick="window.open(this.href);return false;

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More than 60% of U.S. fuel pipelines were built before 1970, according to federal figures. Recent disruptions on Colonial Pipeline Co.’s fuel artery running up the East Coast show why some energy observers worry that this is a problem.

The pipeline, which began operating fully in 1964, was partially shut down for nearly two weeks in September. Fuel prices spiked throughout the Southeast, rising more than 20 cents a gallon in places like Atlanta

Let's imagine the 1967 movie The Graduate. Benjamin (Dustin Hoffman) is in the pool in his diving gear. Mr. Robinson (Murray Hamilton) walks over to say his one word to Benjamin:

RAILROADS.