Trains Keep on Running
So far, the evidence indicates that the trains will keep running, at least in the medium-term. Rail traffic data from the Association of American railroads show U.S. oil shipments in the week to May 4 were up more than 50 percent on the same time last year.
Energy industry intelligence service Genscape, which monitors almost 90 percent of all rail loadings from North Dakota's Bakken shale fields, said crude-by-rail shipments from the state increased to near 550,000 barrels per day in the week ended May 3, a 20 percent increase from the previous week.
Part of the reason is that firms have signed up to long-term "take or pay" agreements to get quick access to the rail network, which mean they must continue to pay the transport costs whether they decide to ship the oil or not.
The lighter quality of many U.S. shale crudes also provide further incentives for refiners on the East and West coasts, as basic plants can produce more gasoline and diesel than from imported crudes like Brent.
"Even if the spreads get to some narrow low single-digit numbers, there are still value propositions for crude-by-rail," said Eric L. Butler, Executive Vice President of Marketing and Sales for Union Pacific on the firm's first quarter earnings call in April.
While existing projects may keep running, new proposals for expanding the crude-by-rail infrastructure could now be put on hold, analysts said.
"There's no panic, but the crude-by-rail build out that we've seen is probably in a later stage of its development than many investors realize," said Bradley Olsen, director of midstream research at Tudor, Pickering, Holt & Co. in Houston.
"You could shut the majority of crude-by-rail projects down tomorrow and they still would have been good investments. They were designed to make their money back in a very short time frame."
The projects most at risk could be those that will still rely on water-borne barges to ship crude the final few miles into a refinery, adding additional costs of around $2-$3 a barrel.
Hunter Harrison, CEO of Canadian Pacific, Canada's second largest rail company, said on the firm's quarterly earnings call at the end of the April that the firm was now proceeding "cautiously" with crude-by-rail infrastructure projects.
"We're not going to go out and spend capital and build infrastructure that's going to last 40 or 45 years, when we're not so sure about the markets for five or six," Harrison said.