HOUSTON BNSF Railway Co's North Dakota Bakken crude shipments are rebounding due to lower U.S. crude prices after shrinking in recent months when prices rose, Chief Executive Matt Rose said on Thursday.
He expects the largest U.S. railroad's crude shipments to approach 700,000 barrels per day by year-end, after falling below 600,000 bpd. The railroad, owned by Warren Buffett's Berkshire Hathaway (BRKa.N), last spring had expected higher growth this year, but the pullback slowed it down.
Longer term, Rose expects growth to continue despite price volatility in oil markets, which he said is easier to tolerate than the far more volatile market for grains - historically the biggest commodity BNSF has handled in its northern U.S. network.
Canadian and U.S. crude production is rising and refiners and logistics companies are putting up more offloading infrastructure to move it by rail - particularly on the East and West coasts, where pipeline companies are not expected to build their own projects.
"We think by the end of this year we'll be closer to 700,000 barrels per day, so we'll kind of hit back to where we were for that short period of time in the spring this year," Rose told the Reuters Global Commodities Summit.
Several refiners that process railed Bakken crude, including PBF Energy (PBF.N) and Phillips 66 (PSX.N), said during recent earnings conference calls that they scaled back on Bakken shipments in the third quarter in favor of imports because higher U.S. oil prices eroded the cost benefit of replacing imports with railed-in crude.
Double-digit discounts of U.S. crude to Brent had narrowed to nearly nothing, making it uneconomical to take on the added transportation costs of railed crude.
The Association of American Railroads also said on Thursday that third-quarter crude shipments via rail dropped 14 percent from the second quarter.
However, Brent's premium to U.S. crude futures has since widened, prompting shippers to ramp up Bakken shipments again. On Thursday Brent closed at a $9.26 per barrel premium to U.S. crude, down from $10.44 on Wednesday.
"As it worked against us this summer, it's working back now, that the marginal barrel is flowing back to rail, away from imports," Rose said.
Rose said he was unconcerned about the volatility because he sees growth in railed crude as more offloading projects come online and U.S. oil production keeps growing. BNSF plans to double its capital spending on its crude business to $400 million next year from $200 million this year.
He said railed crude may wane along the U.S. Gulf Coast and in the Midwest as pipeline projects come online, he said, but no such big projects await the East and West coasts. Those markets increasingly rely on rail to tap cheaper U.S. and Canadian crude.
As producers in Canada are just starting to build loading infrastructure to put their output on the rails, Rose said his industry is in the "first inning of the heavy crude by rail business."
Rose said there is less volatility in crude markets than in the market for grains.
"When you talk about volatility, that is volatile. When I compare the crude business, even though there is a degree of volatility with the spreads, I really think the crude business is going to be less volatile than our grain business," he said.
CANADIAN CRASH AFTERMATH
Rose said BNSF and other railroads are "very much involved" in scrutiny of crude-by-rail and tank railcar integrity in the aftermath of the deadly crash and explosion of a Bakken oil-laden train in a small Quebec town last July.
The Lac-Megantic crash of a runaway Montreal, Maine and Atlantic Railway train killed 47 people and obliterated half of the town's main business strip.
U.S. and Canadian regulators, AAR and railroads are examining ways to increase safety in light of the accident. The U.S. Department of Transportation's Pipeline and Hazardous Materials Safety Administration (PHMSA) has stepped up inspections and may impose stricter regulations on tank cars that carry crude and other hazardous materials.
Two years ago AAR adopted standards requiring that all such railcars ordered after October 2011 have thicker shells and reinforced valves to better prevent punctures or leaks in derailments.
However, at least 69 percent of railcars in use were built before that standard was imposed, according to the National Transportation Safety Board. The rail industry has said it could cost $1 billion to retrofit all cars to meet the 2011 standard.
Rose said BNSF supports phasing out any hauling of hazardous materials by those older cars over seven years. That's not an industry position, and PHMSA is still seeking public comment as it reviews imposing more safety rules.
"We think a seven-year phaseout is reasonable," Rose said. "It allows people enough time to be able to build out the new cars, and the industry has the capacity to replace those cars."
(For other news from the Reuters Global Commodities Summit, click here)
(Reporting by Kristen Hays in Houston and Ernest Scheyder in New York; Editing by Terry Wade and Phil Berlowitz)