By Kristen Hays
HOUSTON Jan 3 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
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
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.
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.
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
"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
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.