For North Dakota's railroads, the bonanza grows and grows

Posted by Fred Frailey
on Wednesday, January 25, 2012

An Associated Press story makes clear what I’ve been suspecting: With the Keystone XL pipeline perhaps five years or more from completion, about the only way North Dakota oil drillers will get their product to market is by train. The XL is the Canada-to-Gulf of Mexico pipeline that was to bring oil from Alberta’s tar sands to U.S. refiners, and along the way scoop up 100,000 barrels per day of North Dakota’s surging output. President Obama put the kibosh on that idea this month, forcing TransCanada Corp. to restart the approval process for the pipeline.

In the meantime, oil production in the Bakken Shale area of northwest North Dakota is ramping up rapidly. Last November, output passed the 500,000-barrel-a-day level. By 2013, state officials expect to drillers to pump 750,000 barrels per day from the stubbornly hard rock formations and to surpass 1 million by 2015. “Pipelines are by far the safest and most economically efficient way to transport oil, but we are left with a limited number of options if pipelines are off the table,” Tony Clark, chairman of the North Dakota Public Service Commission, told the AP. “Once the oil is flowing, it has to go somewhere.”

Actually, if not by pipeline, producers have but one option: a train. A modern railroad tank car holds 700 or more barrels of crude oil. So a 100-car train can take 70,000 or so barrels of oil wherever the customer wants it to go. Presently, railroads estimate they are loading about 25 percent of North Dakota’s crude oil, the rest going by existing pipelines. But pipeline capacity cannot ramp up quickly. Therefore, for the next couple of years, as production increases at roughly the rate of 10,000 barrels or more per month, you either get the oil out of the state by rail or shut down your pump jacks, and that second option is really not in the cards.

Just do the math. One-fourth of 500,000 barrels a day, the current production, comes to almost two unit trains a day, which is about what BNSF Railway and Canadian Pacific Railway are carrying. By the end of this year, make that three or four trains per day, and in 2013, five or six or seven. At the moment, BNSF has six loading facilities for crude oil in North Dakota, CP two (but CP is also active in Saskatchewan). By 2013, BNSF’s loading capacity will expand to nine facilities in the state, and CP’s to three. So what I thought was overbuilding of these loading docks and associated trackage turns out not to be the case at all.

This is great incremental business, from just one state, and BNSF in particular has the infrastructure in place to move it. The question is, will expanded pipeline capacity break this chain of events? By the time the XL is built, presuming that it is, it will have room for just one-tenth of North Dakota’s oil output. Other pipelines will be proposed and built into the state, but the pipeline network is aimed primarily at Oklahoma and Texas, whereas prices are higher on the east and west coasts and places in between.

Hess Corp., one of the biggest producers in North Dakota, has begun to run unit oil trains from its loadout in Tioga, N.D., to an idle Sunoco refinery near Camden, N.J. via BNSF and Norfolk Southern. The facility has oil storage and pipeline access, presumably to Hess's U.S. refinery in Woodbridge, N.J. It’s business like this that railroads need to nurture, through pricing that is as competitive to pipelines as possible and with service that is as dependable as a ticking clock. Are BNSF, CP, and other railroads in the nation’s burgeoning oil fields up to this challenge? The answer is yes, if they choose to be. — Fred W. Frailey 

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