Short lines and pure dumb luck: The next Powder River Basin (Part II)

Posted by Fred Frailey
on Tuesday, November 15, 2011

GC&SS sand trainBen Franklin said, “He that GC&SS trackcan have patience can have what he will.” More recently in Trains, Iowa Interstate chairman Henry Posner said that relying on pure dumb luck can be a workable business strategy, if you can wait it out. Two ways of saying the same thing and both true.

Case in point: Short line conglomerate Watco thought it was acquiring mostly a farm-products railroad when it leased a Montana branch line from BNSF Railway a few years ago. What that little railroad became is a conveyor belt for oil drillers in western North Dakota and eastern Montana; trains of supplies roll in, while trains of crude oil will soon roll out.

And another: Railroad entrepreneur Richard McClure carried a mere 680 cars the first year he owned the Gulf Colorado & San Saba Railroad in central Texas. In 2012, the former Santa Fe Railway branch line may handle 15,000 loads, and the year after that 25,000. Likewise, the Dakota Missouri Valley & Western ambles over 522 miles of track in the Dakotas and Montana, most of it leased since 1990 from Canadian Pacific. It, too, is being financially transformed, thanks to operating through the heart of the Bakken shale oil-drilling bonanza in North Dakota.

Attention has been focused on how the big boys of railroading are positioning themselves to benefit from the technology breakthroughs that are loosening oceans of oil and natural gas from hitherto intractable rock formations. Let’s look today at the little guys.

To me, the most remarkable story is that of McClure and his San Saba. He really had to scratch for a living in that hardscrabble Texas country northwest of Austin, running a 68-mile ramshackle he bought in 1992 (even today, the right-of-way is none too fancy). Most of those 680 cars that first year contained sand. But that red sand, found in massive quantities around Brady and called Brady Brown, is ideal for hydraulic fracturing. Fracking, as it is called, involves forcing water and fracking sand into tiny crevices of huge formations of hard rock. The sand holds open the new channels within the rock, allowing trapped oil and natural gas to escape. This breakthrough, coupled with the development of horizontal drilling, which permits efficient recovery of oil and gas from modest layers of rock, has revolutionized the oil business in North America.

So too has it revolutionized McClure’s railroad. Though more than 1,400 miles by rail from North Dakota’s Bakken shale formation, Brady Brown is so cheap to produce, lying just beneath the surface, that some of it ends up there, via GC&SS and BNSF. Soon entire unit trains of sand may be headed to the Dakotas from Brady. Of course, most sand from the seven (soon to be 10) sand shippers along the GC&SS ends up closer to home, particularly the nearby Eagle Ford shale play and the Barnett formation in north Texas. Says McClure: “We knew in 1992 we could increase the rail business. But we never dreamed of being where we are now.”

Watco’s Yellowstone Valley Railroad in Montana (a few miles poke into North Dakota) connects BNSF’s former Great Northern and Northern Pacific routes, at Snowden on the north and Glendive on the south. Still, BNSF had no inkling of what soon lay ahead when it leased the 172-mile railroad to Kansas-based Watco in 2005. Traditionally, this line produced about 10,000 carloads of business annually, most of it related to agriculture but some involving natural gas production.

Almost overnight, starting about two years ago, energy companies began building unloading terminals alongside the Yellowstone Valley for sand and other drilling supplies. Ground was broken in Dore, N.D., for a loadout for crude oil. BNSF needed the line to move traffic between its two east-west routes in volumes it never imagined. So BNSF declared portions of the Yellowstone Valley part of its strategic network and invoked a clause in the lease that permits its renegotiation.

BNSF didn’t exactly reclaim the Yellowstone Valley, but something close to it. According to BNSF, it will provide all unit train service, and Yellowstone all other service, between Snowden and Crane, Mont., through the Bakken exploration field. BNSF will serve all customers between Crane and Glendive, and Yellowstone all customers north of Snowden. BNSF will also maintain all track between Snowden and Glendive and dispatch the trains. I sure hope that Watco got something of value from this rearrangement of responsibilities. And the Yellowstone experts to handle between 15,000 and 20,000 carloads this year, quite a step up from what is did not very long ago. Says one of that railroad’s executives: “It’s nice to be in the right place at the right time.”

How long will all this last, you must wonder? It’s no secret that fracking consumes a lot of water, not all of which is recoverable. In western North Dakota, oil drilling is disruptive of day-to-day life in the little farm communities, some of them now speckled with “man camps;” that is, trailer towns for housing oilfield workers. (Hint: If you want to stay overnight in Minot, N.D., book a room months in advance.) And the trucks hauling sand, rigs, and crude oil are hell on the roads, as well as the ears. Environmentalists hate fracking, too. So both Mother Nature, through water shortages, or regulations, could shorten this story.

But to answer the question, fracking and horizontal drilling are so new that nobody knows how much oil is really hidden in those rock formations, not just the Bakken but all the others scattered from Utah east to New York, from Texas north to the Dakotas. Ed Ellis is chief executive of the Iowa Pacific group of short lines that include the Texas-New Mexico Railroad, sitting astride the Permian shale formation. That railroad’s business has more than tripled since 2002. Ellis puts it this way: “The customers say our boom will last 10 years. Union Pacific says three to five, BNSF five to 10. While we would be thrilled for the customers to be correct, UP’s conservative approach is in line with the historical boom-and-bust cycle of the Permian Basin. I would never bet against the boom-and-bust cycle.”

Down on the San Saba, Dick McClure is hearing none of that. “True, nothing lasts forever,” he emailed me. “But technology never rests. Advancements of the last four years dramatically impacted drilling activity, lowered the cost of, and increased the production of, oil. The domestic market will keep demand strong, in my opinion. The international market for fracking sand is in its infancy. The opportunity for international markets is massive. What will China, Asia, Africa, and South America need?” In other words, he argues that even when U.S. rock-formation oilfields play out, the overseas market for Brady Brown will keep the Gulf Colorado & San Saba fat and happy many additional years. I’ll drink to that hope. — Fred W. Frailey

Photos: A trio of immaculate Gulf Colorado & San Saba GP-15s haul a train of sand near Brady, Texas, on Nov. 2, 2011. But the track ahead is not so well tended. (Bob Eisthen photos)

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