UPDATE 1-U.S. petroleum rail shipments up nearly 50 pct in 2012

Thu Jan 3, 2013 3:47pm EST

By Kristen Hays

HOUSTON Jan 3 (Reuters) - Shipments of petroleum on U.S. railroads rose more than 46 percent in 2012 as shale oil producers put record amounts of crude on trains to overcome pipeline capacity constraints.

Petroleum products were the fastest growing cargo category for major U.S. railroads last year and analysts expect oil producers to further expand their use of trains in 2013 as pipeline constraints are far from overcome.

Aided by hydraulic fracturing techniques U.S. oil producers have unlocked huge volumes of crude from shale formations but have struggled to get the oil to market due to limited infrastructure.

U.S. crude output jumped nearly 1 million barrels per day last year to a near 20-year high, but much of the new production comes from places like North Dakota where there is little pipeline capacity.

Although rail shipments are very costly, the infrastructure to load crude oil onto trains can be built quickly and cheaply, unlike pipelines which can take years to develop.

Total petroleum shipments exceeded 540,000 carloads in 2012, up from 370,000 carloads in 2011, according to the Association of American Railroads.

Another report released by the AAR last month forecast crude-by-rail shipments for 2012 would come in at more than three times the number of carloads moved in 2011.

Major U.S. freight railroads carried 66,000 carloads of crude in 2011, up from only 11,000 carloads in 2009. By the third quarter of last year, daily shipments of crude oil were exceeding 500,000 barrels per day, roughly equivalent to the output of OPEC's smallest member, Ecuador.

If growth patterns hold, crude by rail could "easily" blow past 600,000 barrels per day by early 2013, AAR said.

Dismissed by some observers as a transient phenomenon when rail movements of crude oil first emerged as a significant development in North American oil markets a few years ago, recent market activity suggests big players are betting the phenomenon will continue.

Oil marketer and shipper Plains All-American Pipeline LP paid $500 million last month to buy four operating rail terminals for crude oil shipment.

COAL STING

Growing rail shipments of oil have also eased some of the pain for railroads from rising U.S. natural gas output, another facet of the shale revolution, which is cutting into electric utilities' demand for coal.

Coal shipments on major U.S. railroads fell nearly 11 percent in 2012 to 6.03 million carloads.

Hydraulic fracturing techniques also require large amounts of sand and other material that is being moved by trains, which further offsets some of the losses in the coal cater gory.

BNSF Railway, owned by Warren Buffett's Berkshire Hathaway , is the biggest mover of crude by rail, largely thanks to its foothold in the Bakken shale oil play in North Dakota and Montana.

John Miller, BNSF's vice president of sales for industrial products, told Reuters in an interview that the company has gone from moving about 5 percent of Bakken output two years ago to nearly half today.

"It's been incredible growth, and that's spurred strengthening of the infrastructure we have," Miller said.

By the end of the third quarter last year, about 430,000 barrels per day of crude moved out of North Dakota's Bakken shale play by rail, up from nearly nothing in mid-2010, according to the North Dakota Pipeline Authority.

Miller said BNSF touches all the shale plays across the western United States, but rail in the Bakken play is much further along than others in development rail efficiencies.

"You'll see development in the other shales as well, but they don't seem to have the speed or the depth that the Bakken does - at least not yet," he said.

COASTAL SHIFT

Rail shipments to the Gulf Coast may shrink once pipelines move more crude into the region from the glutted U.S. crude futures hub in Cushing, Oklahoma, or the booming Eagle Ford shale and Permian Basin in Texas.

Enterprise Products partners LP and Enbridge Inc's jointly owned Seaway pipeline is slated to start moving 400,000 bpd of crude from Cushing to the U.S. Gulf Coast next week, unveiling the first of two expansions on the line that was reversed last year.

The second expansion involves building a new parallel pipeline that will up shipments to 850,000 bpd by early 2014.

However, these developments are unlikely to spell the end of rail movements.

"A pipe goes from A to B. Rail is more flexible. If prices are higher somewhere else, send the train there," said Rusty Braziel, president of consultancy RBN Energy LLC in Houston.

Refiners on the East and West coasts increasingly are tapping rail because inland crude's discount to other global crudes makes crude-by-rail profitable despite transportation costs that can reach the mid-teens.

Last September Tesoro Corp began moving up to 40,000 bpd to a new offloading facility at its 120,000 bpd refinery in Anacortes, Washington.

Tesoro is also processing up to 5,000 bpd of Bakken crude at its 166,000 bpd refinery in Martinez, California.

Rival Phillips 66 is buying 2,000 railcars, with deliveries starting early this year, to increase shipments to its coastal refineries in New Jersey and Washington.

BP Plc is also seeking permits to build an offloading facility by spring of 2014 to bring up to 60,000 bpd of oil to its 225,000 bpd Cherry Point refinery in Blaine, Washington.

And PBF Energy aims to lease thousands of railcars to move cheaper inland U.S. and Canadian crude to its Delaware and New Jersey refineries.

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Comments (1)
duncer wrote:
Killing pipeline construction was a crony capitalist payoff to Warren Buffet who owns the railroads used to very dangerously ship that oil. Pipelines have much lower accident rate than rail systems.

Jan 07, 2013 2:37pm EST  --  Report as abuse
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