Trains filling pipeline shortfall for new crude

Fuel Fix:

The surge in North American oil production has prompted energy companies to invest heavily in a 19th-century technology: rail.

Companies including Valero Energy Corp., Tesoro Corp. and NuStar Energy already have purchased or leased rail cars to move crude to their refineries.

There aren’t enough pipelines to move crude out of major producing regions, including western Canada and the Bakken Shale of North Dakota, so refiners are turning to rail.

Transporting crude by rail costs more than shipping it through a pipeline, but refiners can buy North American crude oil at reduced prices, offsetting the higher cost of rail.

That means mile-long trains now chug up to refineries to deliver crude. There has been a 50-fold increase in carloads of crude moving by rail since 2009, a recent report from Raymond James & Associates notes.

Crude by rail “is here to stay” and is set to grow as a complement to pipelines, analysts at Raymond James & Associates said in a recent report to clients.

(Rail isn’t much used to move crude from the South Texas’ Eagle Ford Shale, however, because it is near Gulf Coast refineries, analysts said.)

Recent moves by San Antonio-based Valero, the world’s largest independent refiner, illustrate the rush to rail.

Less than a month ago, Valero said it would own 9,000 rail cars by the end of 2014. That plan already has been revised, as the company will own 12,320 rail cars by the second quarter of 2015, spokesman Bill Day said.

The company hasn’t announced its total expenditures to buy rail cars. But Day said Valero will spend about $750 million on the 5,300 cars it has on order now. That’s about $140,000 per rail car. 

“We’re talking about moving some of the lowest-priced crude on the planet to our refineries,” Day said. “The reason is that there isn’t the infrastructure to move it in great quantities. So it’s trading at a discount, and it’s not near markets where it’s processed.”
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There is much more.

Rail does move faster than pipelines.  The trains  travel at about 60 miles per hour as opposed to pipelines that have a top speed of about 20 miles per hour.  On the downside, trains tend to have more spills.  Right now they are the best alternative for moving inexpensive oil from areas not served by pipelines.

While trains are not used in Eagle Ford for crude deliveries, they are heavily used for getting the fracking sand to the well sites and are also used for moving equipment for the rigs.  As manufacturing plants using natural gas come on line, the trains will also be used for moving products made from the gas.