Fred Frailey Blog

What's bigger than coal in rail's future?

  • Comments 41

Within eight years, the biggest producer of oil in the world will be … yes, the United States of America. Bigger than Saudi Arabia and any of the other sheikdoms. So says the International Energy Agency, a Paris-based organization that The Wall Street Journal describes as a highly regarded source of information on global energy policies.

Moreover, the IEA also predicts that by 2030 natural gas will be an even bigger source of energy in the U.S. than oil. All this flows from the revolutionary advances in oilfields that combine fracturing of energy-bearing shale formation with directional drilling.

So are you thinking what I'm thinking? To the railroads, the consequences of these developments are life-altering. First of all, today's biggest source of business, coal, will never in our lives be what it is now in terms of car loadings. Cheap natural gas trumps coal on price and environmental cleanliness. Substitution of gas for coal is inevitable and will occur with increasing frequency no matter which political party reigns in Washington. It's a given.

That's the bad news, so to speak. The good news is that a world of opportunity beckons the railroads, if they will only pay attention and act in their own long-term (as opposed to short-term) interests. The oil that is coming from these newly exploited shale formations (and from the Canadian tar sands in Alberta) has to move. But it is being mined in parts of the country (such as North Dakota and south Texas) where the oil industry has not had a big footprint in times past. Pipelines to many of these locales simply do not exist today, nor will they for several more years at the least. Herein lies the opportunity for railroads.

Yes, you can move oil more cheaply through a pipeline than you can aboard a train. So what? You can also move grain more cheaply by barge than you can by train. But look at the reality of the grain market today:

Waterways carry an important but small amount of the grain. Railroads, on the other hand, move by far the largest share to market. They can do this and seemingly defy the laws of economics because they exploited their advantages. Waterways go some places. Railroads go practically everywhere. Waterways are slow, railroads much faster. Waterways don't adapt well to change. Railroads constantly reinvent themselves; just look at the variety of unit grain train services that shippers can choose.

OK, so today the pipelines are caught off guard. Their ability to take oil from North Dakota, for example, is limited. Every incremental barrel brought to the surface in that state today must leave by train. And are North Dakota's railroads willing and able? Oh my gosh, yes! BNSF Railway by itself now has the loading capacity to move more barrels per day (1 million) from North Dakota than the state's drillers can produce. Even when the Keystone XL pipeline is built through North Dakota from Canada, the XL will be able to move only 100,000 barrels a day of the oil produced there.

Up to this point, most thinking about transporting America's growing gusher of oil has been conventional, in-the-box. Not long ago at a reception, I encountered Harold Hamm, founder and chief executive officer of Continental Resources, the biggest oil producer in North Dakota. I asked him what role railroads would play in oil transportation in the future.

"Marginal, very little," he replied dismissively. As soon as pipelines are built to the shale oil fields, that's it for railroads.

And he's right, unless railroads begin thinking outside of the box and seize the day. On the East Coast, in New Jersey and Pennsylvania, oil refining has been a losing bet. Refiners pay the world (Brent) price for their crude oil rather than the far cheaper U.S. (Cushing) price. Why?

Because pipelines that serve places like Texas and Louisiana send the oil to Cushing, Okla., and not to the East Coast.

But the availability of railroads to bring cheap North Dakota oil to the New Jersey and Pennsylvania refineries has changed everything. Instead of closing, these refiners are back in business again. It costs less to pay a railroad to bring this oil to the East Coast than it does to buy it on world markets at the Brent price.

The challenge now to railroads is to perpetuate what the Harold Hamms see as a temporary phenomenon. BNSF Railway needs to think of ways to make itself indispensable to the oil industry for all time. In other words, it and the other big railroads need to persuade the oil producers to become their partners. You do this by devising low-cost transportation solutions to achieve long-term results. The short-term opportunity is to charge every penny possible to desperate oil customers. Do this, and they will flee to pipelines at the earliest possible moment. The long-term opportunity is to provide service to end users of oil that the pipelines are ill prepared to reach.

Can they do this? Of course. It's why waterways don't rule the world despite their cost advantage. You don't move rivers, but you can change the destination of a unit grain train with a single email.

More important, will railroads think and act long term? I think so. I just hope they don't waste precious time coming to this conclusion. —Fred W. Frailey

|
  • After 30+ years of involvement in the oil & gas industry, I can tell you that the CEO of Continental Resources' dismissive statement about rails importance reflects institutional knowledge in the O&G industry.  The railroads have their work cut out for them to hold on to the business to the point that new pipeline projects loose some of their attractivness.  (In another Trains forum thread) one thing pointed out in rails favor was that they do not require the long term commitments that pipelines demand before they will build.

  • Oh, darn.  I'm sure if the towboats were built with even more horsepower than the 10,000 that waterway operators seem to favor, they could make it over the several U.S. mountain ranges that obstruct the mighty tows on the Mississippi.Of course, if the grain wants to move east or west, it will go by train.

    Also, I'm not sure that coal still is the biggest commodity railroads handle.  BNSF informed analysts back in 2005 that intermodal had passed coal by revenue.  Intermodal has grown tremendously since then.   Other Class Is are experiencing the same thing.  Coal may still be the leader in tonnage, but it's the bottom line that really counts.

    Pipeline capacity will be built when the volume to be moved justifies the high capital cost of pipeline construction.  As Fred points out so well, railroads go pretty much everywhere.  Pipelines require tremendous volume in large part because they do not go everywhere.

  • After a 20 year career in the energy/utility sector I am skeptical of the forecasts of domestic oil & gas. Whereas they may not reach these lofty expectations it certainly will grow and be a major player on the railroads going forward. Natural gas was cheap due to over-exploration and already the price is inching back up. Utilities will be pulling their hair out attempting to forecast the coal vs. gas balance. (Glad I'm not in that cauldron anymore.)

    But what I have been pondering recently was touched on by Professor Frailey: Much of this "new oil" is coming to the Northeast from the Bakken. Mr. Harrison has stated his will to change CP's routing of said oil through a more direct route than via Canada. What is the capacity between Chicago and the Northeast? Will this be the tipping point that revives lesser used but still extant routes such as the former PRR mainline in the Midwest and Erie mainline through NY State?

  • Fred,

    You stated barge was always cheaper that rail. I diaagree. You might remember that the legendary leader of Southern Railway, Bill Brosnan fought a court battle all the way to the supreme court in the sixties to be able to out price the barges to move grain in his then new Big John 100 ton hopper cars. Also, more recently, CSX was able to out price the barges to move coal to a TVA steam plant in Gallatin, Tennessee. That town's mayor stopped that movement politically, the stated reason being that the trains would stop vehicle traffic there.

    George

  • I'm no expert about oil refining but recently, during Sandy, I learned a little more about it than I ever wanted to know.  I learned that  when a storm knocks out power along the shore suddenly the refineries can't refine and you have gas rationing along with lines several hours long.  If only railroad oriented refineries had been in place along the western boarder of our region in addition to along the coast we would have been hit a lot less hard.  

  • fred; we have been told that right now there is a lack of tank car capacity ? For the RRs to run with this oportunity is fairly simple.  There seems to be a shortage of tank cars now and a very large number of tank cars on order.  If the RRs can make the running of the oil trains a priority then they can cut several days or more off a round trip? To do this would require higher HP / Trailing ton, crews available to prevent crew change delays.  These crews would include the origination and destination terminals, also lenghten sidings for running meets, spring switches in dark territory, have dispatching rules much like intermodal, car and loco maintenance persons available, etc

  • Pundit, the AAR says coal accounts for 25% of railroad revenue today, more than intermodal. May not apply to BNSF but it does to railroads as a group.

    Fred Frailey

  • On an industry basis, coal still may be the big dog.  After all, NS and CSX have a large export coal business and the rates -- and therefore revenue -- on that are considerably higher than are the rates for domestic utility coal.  BNSF and UP are primarily handling utility coal, which thanks to the litigiousness of some utilities, primarily the big co-ops, cuts their revenue.

  • Fred, BNSF is beginning to route stack trains that formerly operated on the former GN "High Line" to the former NP route to the south.  Thus, freeing up capacity and crews to operate oil related traffic.  The reduction in coal traffic has made crews available for this stack traffic.  Take a look at therecent increases in capacity along the Glasgow Sub as well as the terminals that have been built to accomodate oil and gas traffic.BNSF is going all out to capture as much of this traffic as possible. The bad news is support activity is at a premium, we sometimes have to schedule trains around van availability!  For the first time the railroad is offering a referral bonus to folks finding personnel willing to work out of Minot.

  • Fred,

    You didn't mention the strong opposition to more pipelines on environmental grounds. That will prevent some from being built and hold up others for years, if not decades.

    Aaron isaacs

  • Any thoughts as to why current oil transport is by individual tank cars, rather than "TankTrain" cars like the UP's train from central California to Dolores?

  • Brilliant Analysis Mr. Fraily. Hopefully the railroad industry will do what it has always seemed to do... Adapt to changing markets.

  • Mention was made of some pipelines projects being prevented on environmental grounds,  While there may be some marginal projects that perhaps should not be built anyway, important projects will get built.  Proposed pipelines can be rerouted around environmentally sensitive areas.  As an example, we can use the Keystone project leg thru Nebraska.  While environmental groups take credit for keeping it out of the Sandhills, the real reason it was rerouted was to keep it off the Ogallala aquifer, which is the source of high volume irrigation water.  The Republican Governor and Legislature required the reroute for good reason.  I beleive because of the change, the State Dept was able to revisit the international application and put it on hold.  Once the route meets environmental statute, it will be approved.

  • Fred:

    Please take a look at the RBN Energy Blog.  There is a daily entry about the world of oil, gas, refining, pipelines, etc.  There is considerable discussion of railroads and their importance in moving the oil.  Their take is the oil will continue to move by rail, simply due to the ever changing demands of the oil supplies and pricing associated.  Much of the commentary is over my head, but the blogs are well written and very informative.

    I have a customer in the Chicago area (trucking) that is involved in the movement of Bakken oil.  In this truly intermodal operation, the oil is transferred from rail to holding tank, to truck, to barge.  The oil is finding ways to make it to market.  

    Your premise is correct...will the railroads use the early successes to forge long term relationships or not?

    Ed

  • The late John G. Kneiling - a columnist ("Professional Iconoclast") and feature article author in TRAINS in the last half of the 1960's, 1970's, and the first part of the 1980's - wrote several times that a properly designed "integral train' could stop pipeline expansion cold - its 'all-in' operating + capital costs would be conclusively less than the pipeline's.  

    Unfortunately, we've yet to see John's theories, principles, and advanced low-tare, high productivity designs actually built and placed into operation in the manner he advocated, but we're slowly getting closer to that kind of operation all the time - many of the suggestions that "blue streak 1" mentioned above are of that kind.  

    Once somebody designs and builds such a train - with technological advances that weren't in place yet when John wrote, such as AC traction motors (though he did advocate a form of Distributed Power Units and Electronically-Controlled Pneumatic brakes), then we'll see what kind of a race the iron horse can mount against the pipeline technology.  We're not yet near the ultimate and optimum economics of bulk train operation, so the present state-of-the-art should not be viewed as the best or typical of what the rails can really do - hence the dismissive comment by the CEO of Continental Resources as mentined above.  We should look forward to someone qualiifed and interested in launching a serious R&D, design, construction, and marketing venture opportunity along these lines.

    - Paul North.        

What's bigger than coal in rail's future?