(John Kemp is a Reuters market analyst. The views expressed are his own)
By John Kemp
LONDON, Oct 5 (Reuters) - The booming business of transporting Bakken crude has thrown a lifeline to U.S. railroads, at a time when shipments of coal, their main commodity by volume, have fallen sharply.
Coal accounted for just over 43 percent of rail car loadings by weight, and 25 percent of gross revenues, last year according to the Association of American Railroads (AAR).
In comparison, the oil business was tiny. Combined shipments of petroleum and coke accounted for just 2 percent of tonnage and 3 percent of gross revenues on the major Class I railroads in 2011.
But the coal business has been hit hard by the collapse in natural gas prices, which has encouraged power generators to maximise output from gas-fired plants at the expense of coal.
In July, coal-fired power stations accounted for 37 percent of electricity production, down from 42 percent in the same month in 2011, and 43 percent in 2010, according to the Energy Information Administration (EIA), the independent statistical and analysis arm of the U.S. Department of Energy. Coal consumption at power plants was down 8 percent.
The result has been a sharp drop in coal production and railcar loadings. Coal production fell 9 percent in the second quarter compared with a year earlier, according to EIA data, and appears to have fallen even further between July and September.
By the third week of September, railcar coal loadings were 17 percent below prior-year levels. Class I railroads loaded 116,000 freight cars with coal in the week ending September 29, compared with 141,000 in the same week last year.
Because coal is such an important contributor to freight volumes and railroad revenues, the switch to gas has been a major drag on performance, especially for railroads like Burlington Northern Santa Fe (BNSF) which have a major share of the coal haulage market.
BNSF loaded 41,000 coal cars in the week ending September 29, down from nearly 50,000 last year, according to the company's own weekly carload report.
OIL TO THE RESCUE
The impact has been softened by a surge in petroleum shipments. For the industry as a whole, loadings of petroleum and products in the most recent week are up 59 percent year on year, from 7,371 in 2011 to 11,749 in 2012.
BNSF, which was bought by Warren Buffett's Berkshire Hathaway in 2010, has been the main beneficiary. It owns all the tracks in North Dakota and Montana, at the heart of the Williston Basin, and most of the routes connecting south to the major refining centres in Illinois and along the Gulf Coast, putting it in a commanding position to capitalise on the oil boom.
BNSF's petroleum loadings doubled to 8,156 in the most recent week, from 4,131 last year. BNSF accounts for 70 percent of all oil loadings, and essentially all of the growth in oil by rail over the last 12 months.
The company announced last month that it has increased its capacity to enable the railroad to haul 1 million barrels per day out of the Williston Basin.
"BNSF currently has 1,000 miles of rail line in the Williston Basin area and serves eight originating terminals with two more scheduled to be completed by the end of 2012. BNSF connects to 16 of the top 19 oil producing counties in Central and Western North Dakota, and five of the six oil producing counties in Eastern Montana" the company said last month.
"BNSF has been hauling Bakken crude out of the Williston Basin area for over five years. In that time, we have seen the volume increase nearly 7,000 percent, from 1.3 million barrels in 2008 to 88.9 million in 2012."
The company has been able to achieve the capacity increases through investment and track upgrades, improved signalling, and hiring more than 560 new employees to fill new and existing positions in the two states.
"BNSF has also formed a dedicated Unit Energy Desk that works with customers to help coordinate and plan unit train movements to and from the Williston Basin," according to a statement put out by its press department.
Improved planning and coordination lies at the heart of the heart of the expansion of oil-by-rail.
Most observers expected the lack of specialist tank cars for carrying petroleum to be the main constraint on expanding oil shipments out of the Bakken.
Back in September 2011 I wrote: "The rail system does not have sufficient capacity to relieve the pressure on Cushing. The total amount of crude moved that way remains modest" [ID: nL5E7KR35W].
Goldman Sachs also predicted delays in building new tank cars would lead to a prolonged bottleneck.
But the rail system has managed to find ways of expanding capacity, in part by using the existing fleet more efficiently.
***************************************************** Maps and illustrations: U.S. power generation: U.S. coal production: Class 1 Railroads: Bakken Oil Express LLC: Bakken Express Oil Loops: BNSF's Nationwide System: BNSF's Williston Network (1): BNSF's Williston Network (2): BSNF's Gulf Coast Network: BNSF's Bakken video: *****************************************************
Efficiency improvements have been delivered by finding ways to load and unload tank cars more quickly, move crude shipments in dedicated "unit trains" formed of more than 100 tank cars, and cutting delays en route as well as at switchyards and terminals.
Most trains consist of a mix of box cars, gondolas, hoppers, tanks and other cars carrying a range of products on a complicated timetable with multiple stops. By assembling unit trains that consist of nothing but crude tanks taken from one destination and delivering it to another, loading, unloading and routing can be speeded up.
Each unit train can carry up to 85,000 barrels, according to BNSF. The railway now transports more than 25 percent of all oil produced in the Bakken, as well as hauling much of the sand and specialised steel oil-country tubular goods (OCTG) used in oil production.
GIANT LOADING TERMINALS
Bakken Oil Express has already built four giant rail loading loops at a facility near Dickinson at the centre of the Bakken.
The terminal collects oil delivered by road or pipeline and loads it onto specialist unit trains for carriage south. It can load a unit train in 12 hours, and can load up to 100,000 barrels of oil per day. Additional rail loops will lift throughput to more than 200,000 barrels per day.
Bakken Express is just one of about a dozen terminals that have cost more than $1 billion to build.
The incentive to use tank cars as efficiently as possible is overwhelming. As demand to shift Bakken oil by rail has surged, the cost of leasing tank cars increased ten-fold over the last three years, from a low of $300-350 per tank car per month to as much as $3000-3500 per car per month currently for short-term (12 month) leases.
BNSF and shippers have also cut delays at the other end of the line, such as in Texas, where crude is unloaded to the giant tank farms and refineries at Houston, Galveston and Beaumont. The number of hours freight cars and intermodal units spend waiting and unloading ("dwell time") at the company's terminals in Houston has been cut by a third over the last year, from 33 hours to 23.
The sheer cost of leasing tank cars also ensures it is not economic to use them to store crude for any length of time, maximising the availability of cars.
BNSF and the other railroads are also developing oil-by-rail businesses in other shale plays. Hauling oil seems destined to be an increasingly important component of the rail business for at least the next five years.
Even as new pipelines are constructed to take away Bakken oil, the railroads are likely to retain a significant share of the transport market.
Unlike fixed pipelines, railroads offer oil shippers valuable flexibility to deliver their crude to regional markets offering the best prices, for example moving crude to East Coast refineries rather than the over-supplied midcontinent area.
(Editing by William Hardy)
Keywords: COLUMN KEMP/OIL BY RAIL