The next Powder River Basin

Oil expert and historian Daniel Yergin contends that the center of gravity of the petroleum world has undergone an amazing shift in recent years, away from the Middle East and toward (are you ready for this?) the Western Hemisphere. From offshore oil deposits it scarcely imagined having just a few years ago, Brazil expects to produce 6 million barrels of oil a day by 2020, more than half the output of Saudi Arabia. Canada’s Alberta oil sands disgorge 1.5 million barrels of oil a day, equal to Libya’s pre-civil war exports, and output could double by 2020, making that nation a bigger producer than Iran, says Yergin. And here in the U.S., recent breakthroughs in technology are spawning a vast boom in oil production, by permitting drillers to extract petroleum and natural gas once thought unrecoverable.

The new technology is called “fracking,” and what this means to U.S. and Canadian railroads, we’re just starting to find out. Evidence points to a surge in rail transport of oil and drilling supplies unlike any since World War II. You see it most clearly in western North Dakota, where BNSF Railway and Canadian Pacific struggle keep up with demands for service from oil producers. But other Class I carriers, as well as a host of short lines, are getting into the act. I liken it all to the development of Powder River Basin coal in Wyoming and Montana 40 years ago, but on a national rather than regional scale. In other words, out of the blue comes a wealth of new business, not just drilling materials but also opportunities to carry crude oil to refineries and export terminals.

A quick primer: Scattered across the U.S. are hard, almost impermeable rock formations. Until recently, there was no way to get oil and gas to flow from this dense rock in meaningful amounts. But new horizontal drilling, combined with hydraulic fracturing, in which water and sand are forced through the tiny rock crevices to open them up, extracts the petroleum. Eight years ago, from a formation in western North Dakota and eastern Montana called the Bakken, producers coaxed out just 10,000 barrels of oil a day. Today, thanks to fracking, output is 440,000 barrels in North Dakota alone and should top 1 million barrels by 2016. This year, authorities expect 2,100 new wells to be drilled in the Bakken formation.

According to BNSF, each well requires four to six rail carloads of drilling pipe, 15 to 30 cars of super-hard sand, a car of calcium chloride, a car of barite and half a car of cement. So figure at least 25 cars per well, virtually all of these supplies getting to North Dakota by rail (the sand mostly from Illinois and Wisconsin but also from as far away as Brady, Texas, and even China). That works out to 52,500 rail carloadings this year, or more than 200 inbound carloads each weekday of business that didn’t exist a few years ago. To handle the volume, BNSF has two dozen unloading facilities in the Bakken region. And the Bakken is just one of numerous shale plays, others including the Marcellus in northern Pennsylvania, Eagle Ford in south Texas, Barnett in north Texas, the Niobrara in Colorado and Wyoming and the Haynesville-Bossier in Louisiana and east Texas. I count shale plays underway in more than half the 50 states.

Still that’s not all. Oil pipelines in North Dakota are overwhelmed by the surge in output, and moreover, the pipeline network runs primarily north and south, centering on Cushing, Okla., where benchmark prices for U.S. crude oil are commonly set. However, shale oil production has contributed to a glut of supply in the Cushing market, creating a gap, currently $16 per barrel, in the price of oil there versus on international markets. True, it costs $5 to $10 a barrel more to transport oil by rail rather than by pipeline. But the price differential for crude oil is an incentive for refiners dependent upon imported oil to buy the easy-to-process light sweet crude from North Dakota that will yield gasoline commanding the same price as products that come from Middle East crude. No matter where the refinery, rail gets it there directly.

So we’re beginning to see the unthinkable: unit trains of crude oil. Rail shipments of petroleum products are running 1,300 cars per week ahead of last year’s pace, and most of the increase is believed to be crude oil. BNSF is hauling oil from North Dakota to Stroud, Okla., near Cushing on Watco-owned Stillwater Central Railroad, and to refineries in Houston, St. James, La., New Mexico, California and the Pacific Northwest. Denis Smith, BNSF’s vice president for industrial products marketing, says oil loadings are currently divided about 50-50 between scheduled manifest freight trains and unit trains, but are being driven by the railroad toward unit trains as facilities to load huge volumes of oil are constructed. Right now BNSF can load crude from six locations in North Dakota. “When all is said and done,” says Smith, “we’ll have up to a dozen crude oil terminals.”

Canadian Pacific is the second-biggest rail player in the Bakken shale region. It said earlier in 2111 it would spend $100 million during 2010-2012 to expand capacity in North Dakota and would increase its train crew base by almost 20 percent. Prior to 2010, CP hauled only about 500 carloads of crude oil annually. This year, it’s on track to handle 13,000 cars, plus inbound supplies of sand, pipe, and chemicals for drillers. CP spokesman Ed Greenberg says two to three unit trains of crude oil leave North Dakota weekly, most destined for Gulf Coast refiners.

Nobody expects railroads to wrestle the bulk of crude oil from the arms of pipelines. But the shale plays, many from untraditional oil-drilling locales not well served by pipelines, open the door to railroads, and the rails are rushing to fill the void. BNSF’s Smith says that between them, his railroad and Canadian Pacific haul away 20 to 25 percent of the 440,000 barrels of oil produced every day in the Bakken play. As production rises to more than twice current levels by 2016, he expects railroads to hold on to that proportion. True, pipeline capacity will expand, but so will that of railroads. Freight car builders are plugged through 2012 with orders for oil-carrying tank cars and sand-carrying covered hoppers. BNSF alone is building capacity for hauling from the Bakken region 730,000 barrels of crude per day, which amounts to about nine unit trains.

Pardon the pun, but is BNSF engaged in pipe dreams? Replies Smith: “Pipeline tariffs are cheaper. But to build you have to make a big investment, and you’re committed to that market. Maybe you won’t like that market the next 20 years. We don’t look for a 20-year commitment. We give you the flexibility to take oil anywhere you can get the best price.”

Think about that. I question whether 20 or even 10 years ago, railroads would have been capable of taking something like the Bakken shale development and making it into a whole new business category. It means thinking differently. It requires sizable capital investments. It entails educating new customers who probably resist thinking differently themselves and who no doubt look upon railroads as things of the past rather than as partners who can take their products in new directions.

I’ll be back to this subject next week, because I haven’t even touched upon some railroads that are huge beneficiaries of fracking, the short lines. Plus, my thoughts about the future of this railroad traffic phenomenon. — Fred W. Frailey

Top photo: An oil-loading yard take shape beside the Yellowstone Valley Railroad near Sidney, Mont. (Andy Cummings photo)

Bottom photo: Six Canadian Pacific diesels drag a long freight loaded with farm commodity and oilfield cars onto the 25-mph Newtown Branch, at Drake, N.D. (Fred W. Frailey photo)