North America - Oil Transport By Rail

There is an article, front page no less, regarding Federal leases of land in Southeast Wyoming for exploration of shale oil in the region:

https://www.nytimes.com/2018/10/27/clim ... l-gas.html" onclick="window.open(this.href);return false;

Fair Use:

The parade of trailer trucks rolling through Jay Butler’s dusty ranch is a precursor to a new fracking boom on the vast federal lands of Wyoming and across the West.

Reversing a trend in the final years of the Obama presidency, the Trump administration is auctioning off millions of acres of drilling rights to oil and gas developers, a central component of the White House’s plan to work hand in glove with the industry to promote more domestic energy production.

Seeing growth and profit opportunities at a time of rising oil prices and a pro-business administration, big energy companies like Chesapeake Energy, Chevron, and Anschutz Exploration are seizing on the federal lands free-for-all, as they collectively buy up tens of thousands of acres of new leases and apply for thousands of permits to drill.

While I realize the political agenda is in conflict with many a reader of this material, the area has already been "built out" with adequate trackage to serve the Powder River coal source. In short, if environmental interests want to "rid the earth of coal", the track capacity is already there and that could hold pipeline interests at bay.

We shall see.

First half of the Super Bowl has been "dull bowl", so I'm catching up on my newspsper reading.

I'm not sure "what to make of" this Wall Street Journal article:

https://www.wsj.com/articles/oil-trains ... mail_share" onclick="window.open(this.href);return false;

Fair Use:

..The use of trains to carry crude is surging after dropping in recent years amid concerns about safety, as drillers in parts of North America produce more oil than area pipelines can accommodate.

An average of 718,000 barrels of crude a day traversed America’s railways as of October, the latest data available, an 88% increase from a year earlier, according to the U.S. Energy Information Administration. That compares with a peak average of about 1.1 million barrels in October 2014.

Much of the recent oil train growth is due to record shipments from Canada, where pipeline expansion projects, including Keystone XL and Trans Mountain, have stalled amid environmental opposition and legal delays. Crude-by-rail shipments also have ticked up from North Dakota’s Bakken region and the Permian Basin of West Texas and New Mexico, according to energy-monitoring firm Genscape Inc..

The "tone" conveys to me that the shippers will think of rail as their last resort. The article has this theme "pipeline is cheaper", but I wish it contained more analysis regarding capital costs.

Sure, it's great to learn that "business is picking up", but how about some talk that shippers are prepared to cast their lots with the railroads.

Pretty sure I caught the same article. 88% increase over last year and climbing towards record territory.

It doesn't seem to be a question of casting lots so much as "fast and flexible". I've also noticed that in general oil to rail terminals appear to be relatively simple facilities. Nothing complicated or expensive about them.

Even the new tank car mandates haven't killed this service.

My reaction to this article appearing inToday's Wall Street Journal is "mixed". Great to learn the business is bouncing back.

https://www.wsj.com/articles/canadas-oi ... lewebshare

Fair Use:

.Overall, Canadian crude oil exports to the U.S. by rail hit 8.6 million barrels in June, a 41% jump from a year earlier, according to the most recently available data from Canada’s National Energy Board.

But the "flip side":

Canadian oil prices would have to fall below current levels to justify the rail shipments. Moving a barrel from terminals in Alberta to the U.S. Gulf Coast costs between $9 and $12 a barrel by pipeline and between $15 and $20 by rail.

That cost exceeds the current premium of U.S. crude to Canadian, putting shippers’ profits at risk. As things stand, a shipper could lose between $2 and $7 for every barrel sent to the Gulf by rail..

I still await a report that a shipper has chosen to use rail as its primary means to handle crude from Canada to the Gulf, rather than a "stopgap" until a pipeline, such as Keystone, is up and running.

Interesting that the increased traffic never does off completely and is now bouncing back.

Perhaps what's most notable of all Mr. Norman is that rail now seems to have a permanent position as the "flex" option, which previously was done by tanker trucks.

While it would be nice to think that the disruption to Saudi oil production will instantly return US shale to peak '14 production levels, as well as rail shipments, this Wall Street Journal column holds such will not be the case.
Very simply, Saudi Aramco will be working at flank speed to resume production, and such will be "full tilt" before any "ramp up" of dormant shale production could begin:

https://www.wsj.com/articles/sorry-ener ... ge=1&pos=1

Fair Use:

..America’s bountiful shale deposits have displaced worries about the far larger oil reserves and production of the Middle East. This weekend was a reminder of just how crucial the region remains.

Saudi Arabia’s forced shutdown of over half of its crude production, some 5% of world supply, should be short but shocking. Energy traders had become complacent about geopolitical risk in part because massive shale plays, particularly the Permian Basin in West Texas and New Mexico, have driven growth in world oil production.

The region pumps some 4.4 million barrels of oil a day, according to the U.S. Energy Information Administration. Growth over the past 10 years has helped make the U.S. a significant exporter of petroleum products. Since the 2014 collapse in oil prices at the tail end of an earlier boom in shale output, which was later surpassed in volume, Saudi Arabia and other members of the Organization of the Petroleum Exporting Countries, along with nonmember Russia, have struggled to support prices and to adapt to the shale era..

The big winners will be the traders, who can double their upside profits (how convent the attack occurred on a weekend) if they properly time the facilities return with Short positions.

A loser will be me; for on Friday I'm starting an auto trip to Greenwich CT and return. If the prediction of a $.25ga price spike comes to bear, then the trip will cost me some $15 more than planned (one less flight into HPN on Saturday - the one I would have taken).

WSJ ran another article today indicating that the outlook is not as rosy as Saudi ARAMCO has been indicating.

I would expect a gradual impact over the course of the next 6 months. Rail may not be out of it yet on this round Mr. Norman.

From Hyatt Regency Greenwich CT--

I just threw some threads on and got down to the lobby where they hadn't yet ran out of "comp" Times and Journals. (don't think they are that full; they sure were Sat. nite) Here is the article regarding Aramco to which Mr. O'keefe is likely addressing:

https://www.wsj.com/articles/aramcos-re ... lewebshare

Fair Use:

The Saudi Arabian Oil Co. is in emergency talks with equipment makers and service providers, offering to pay premium rates for parts and repair work as it attempts a speedy recovery from missile attacks on its largest oil-processing facilities, Saudi officials and oil contractors said.

It may take many months—rather than the maximum 10 weeks company executives have promised—to restore operations to full working order, they said.

Following a devastating attack on its largest oil-processing facility more than a week ago, the company also known as Aramco is asking contractors to name their price for patch-ups and restorations. In recent days, company executives have bombarded contractors, including Baker Hughes , with phone calls, faxes and emails seeking emergency assistance, according to Saudi officials and oil-services suppliers in the kingdom.

One Saudi official said costs could run in the hundreds of millions of dollars.

Saudi Arabia and the world’s most profitable company are struggling to recover from the attacks, which came within weeks of the Saudi government reviving plans for its on-again, off-again initial public offering of Aramco shares. Now, the IPO, the company’s financial health and the country’s economy may be in danger, say Saudi officials and advisers.

If they're talking end of year for restoration, then production could well be stepped up. Since there is more pipeline capacity in place within the Permian Basin then there is within the Bakken, the BNSF and SOO will benefit more than the UP will from the Permian.

My impression is that the Bakken also has more facilities available from the previous build out.

Just when it looked like the business was coming back. and that with new equipment and train handling procedures to enhance safety, "Vlad and Moh" start having this playground fight:

https://www.wsj.com/articles/u-s-shale- ... lewebshare

Apparently, Vlad touched Moh's beard and Moh touched Vlad's bald head, and the boys "got into it". But as noted in this Fair Use caption, some North American producers can survive @ $40bbl:

.“Bankruptcies will be more substantial and have a bigger impact on supply than they did back then,” said Shawn Reynolds, a portfolio manager at asset firm VanEck. “There’s a dozen or two dozen companies that can survive at $40.”

But with Russia's "perpetually shaky" economy, and Saudi Arabia's still tied to petroleum, it's evident, that the boy's egos come before the welfare of their people. Of course, neither need worry about those little "inconveniences" known as polls.

As far as North American producers - and the railroads "getting back in the game", well "that's their problem".

Of course the flip side: gas is down $.20ga around these parts.

disclaimer: author long XOM RDSA UNP

Should be interesting to see how this plays out. I think the jury is still out on who this is going to hurt the most.

The Russians probably won't admit it but this is going to hurt a lot.

It does hurt the Russian economy, but Moody's (not really Russian media) is saying that they can live on $20 a barrel for a couple years. Unpleasant, but not unbearable.
The prices have been slowly picking up since the record low price last week, but it's slow and it isn't guaranteed that the price is stable.
But what's bothering me is that the fuel prices at the pump for us customers isn't much lower (if not higher sometimes!) than when the barrel fetched a 3 digit price, I'm afraid of what the prices will be when oil prices catch up and start growing again.

Ranger762 wrote: ↑Fri Mar 27, 2020 2:44 am It does hurt the Russian economy, but Moody's (not really Russian media) is saying that they can live on $20 a barrel for a couple years. Unpleasant, but not unbearable.

The "lift price" (price of production) is not the point at all. Russia functions much like Saudi Arabia. They pay a huge portion of their government budget with oil royalties and/or revenues. If the price of oil is only marginally above the lift price for the Russians then they have a 30% +/- hole in their government spending for the year. That's a pretty serious problem for a country that spends a lot of time hand wringing over pensions to elders, massive increases to defense spending and rebuilding crumbling Communist era infrastructure.

The Saudis aren't really that much better off especially when you consider they have capital intensive goals for economic diversification. Sure they can eat through their sovereign wealth fund but I doubt very much that's what they really want to do right now. They need the cash and it damages their strategic position when they start burning through their reserves.

So that leaves North America ... Yes I think there will be bankruptcies. However, that only means assets sold at fire sale prices to companies willing to take them on. These are tangible assets. The oil is still there regardless of the paper that governs it above ground. That is not the case in many bankruptcies when the capital value of the company as a going concern evaporates upon shutdown.

No matter how hard they try OPEC knows that there is nothing they can do about this. The oil is in the ground, the cat is out of the bag and perhaps worst of all for them the North American railroads continue to be able to deliver flexible takeaway capacity which comes online and offline with market conditions.

It's a total nightmare for a cartel which is trying to control a market.

Be it assured, this is a first for me in my investing life (at age eight, I knew what a stock was) where an expiring futures contract for a major commodity was priced negative. In other words, the contract holder is saying to "the market" "I'll pay you to take this property off my hands" (sounds like call 1-800-GOT JUNK).

An article in The Journal today suggests that buyers of such a contract will take delivery of the oil and "store it wherever". The article suggested crude carrier vessels that would be "set adrift" ( honestly, that must mean with a crew and steaming - moving in "lubberese" - in circles at a "make way" speed).

Could this be an opportunity for the owners of stored DOT-111 cars? It appears that to move existing levels of crude, many of such are stored.

To me, "opportunity knocks"; no need to have them moving as in the case of vessels.

disclaimer: author Long: XOM, RDSA

I was thinking the same about stored tank cars except for one thing. Locals freak out over when they realize there are full cars in storage nearby. This may require loading tanks and shipping off to a remote locations for many months.