A LOT is going on in 2015

Posted by Fred Frailey
on Sunday, January 4, 2015

Okay, my vacation is over, and with it my semi-annual writer’s block. Happy new year to everyone. In the spirit of the season, here are four things to watch for in 2015. Call them predictions, if you insist.

The NEC will get a huge $$$ injection. Bill Shuster chairs the U.S. House Committee on Transportation & Infrastructure. The Republican from Altoona, Pa., is about as nonpartisan as you can get. Last summer he got through his committee with no fuss at all a four-year Amtrak reauthorization bill. It would have passed the House easily, I suspect, but never came up for a vote because, well, the U.S. Senate wasn’t in a mood last year to vote on anything it didn’t have to, so why bother? This year will be different, and I have every reason to think Shuster will reintroduce substantially the same legislation.

And guess what? Tucked inside that bill is a congressionally mandated, $14 billion dollar loan for improvements to the Northeast Corridor. It would come from Railroad Rehabilitation and Improvement Financing (RRIF), a $35 billion off-budget program administered by the Federal Railroad Administration. FRA would have no choice but to make the loan, according to the bill’s language.

There’s a lot of crap in the reauthorization. The way I read it, Amtrak could comingle at will NEC and national network funds. It mandates that food and beverage service be profitable within five years or cease to be eligible for federal subsidy. It appears to bless Amtrak’s nontransparent cost allocations, which I suspect leads to cross-subsidization of the NEC by the national network. That said, those of us who use the NEC know it is falling apart. My own preference would be for the NEC to be separated from Amtrak and managed privately under long-term lease, open to any and all users on a trackage-fee basis. But this is better than nothing.

Crude by rail will stall out. You can thank the collapse of oil prices for that. But other forces are at work. There is no future for railroads hauling oil from North Dakota to the Gulf Coast, which has by far the largest concentration of refineries. By 2017, at the latest, pipeline capacity will exist to move as much oil to Texas and Louisiana as refiners want, and much cheaper than BNSF and Canadian Pacific railways and their connections can. Plus, that same quality of light sweet crude is available in abundance (overabundance, really) in the nearby Permian Basin and Eagle Ford oil fields in Texas.

So if crude by rail has a future, it’s by securing and holding markets on the east and west coasts, neither of which have pipeline connections to the oil fields in the U.S. interior. BNSF, CP, CSX Transportation, and Norfolk Southern have done a good job on the east coast, sending about five trainloads of oil east every day last October and November. Their market share among east coast refineries is easily 80 percent.

It’s a different story on the west coast, where environmental groups have erected a “green curtain” with the help of sympathetic politicians. For example, the most efficient way to move oil from North Dakota to California is to go by rail to the Pacific coast, then by barge to California refiners; the cost is lower than all-rail and the refineries already have shoreline oil docks. But a big, four-train-a-day rail-barge terminal at the Port of Vancouver, Wash., may never be permitted. The city of Vancouver opposes it, while promoting (says The New York Times) a $1.3 billion commercial and residential development along the path of the BNSF rail line.

The challenge to railroads is to hold those east coast markets (giving producers rate relief, perhaps) while adding California refineries to those in Washington State already served by rail. This won’t be easy, and there are many possible outcomes. But it’s either this or see this new railroad market whither.

LNG locomotives will go on the back shelf. In 2013 I called the impact of using liquefied natural gas as a locomotive fuel “bigger than the shift from steam to diesel.” I guess I was a bit premature (even hyperbolic). It may still, but not in 2015. At present crude oil prices, which are less than half what they were last summer, the potential savings have simply dissolved. Prices for both natural gas and oil are so volatile that the economics of using one fuel versus the other constantly change. Perhaps Florida East Coast Railway has the right answer. It will pair its 24 new General Electric ES44C4 road locomotives with 12 LNG fuel tenders and alternate between diesel and LNG for fuel, whichever is cheaper moment to moment. (FEC still needs Federal Railroad Administration approval to use LNG.) It’s not so easy for Class I railroads, some of whose routes go from coast to coast.

Does this sort of remind you of the electrification studies of the 1970s and 1980s? Every time oil prices shot toward Orion, certain railroads (I’m thinking Conrail and Union Pacific) would dust off their studies of converting key routes to electric locomotives. The up-front costs were huge, oil prices always came back down a ways, and the studies got put away. Déjà vu all over again.

The urge to merge remains. The sultans of North American railroads by and large have no taste for further consolidation, it seemed late in 2014. But it takes only one of them (think: CP’s Hunter Harrison) and only one filthy rich investor (think: William Ackman of Pershing Square Capital Management) to derail everyone’s complacency. Harrison and Ackman, CP’s biggest investor, failed to interest CSX is a transaction last October. I predict they will be back, in some manner, in 2015 and push the issue much harder. And if they do, all hell could break loose on the North American railroad landscape, as everyone one else adopts offensive or defensive postures.—Fred W. Frailey

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