Ignore a spate of accidents, tighter regulations and competitive elements, the use of rail to move crude is here for the long term, speakers told the RailTrends 2013 conference in New York late in November.
They offered their bullish outlook against a backdrop of increasing rail shipments in the current quarter after a flattening off in the previous three months as several railroads and refiners noted in the quarterly reports that there has been a rebound in crude pricing that underpins the crude-by-rail, or CBR, sector.
Refiners said a third-quarter change in dynamic made the option more economic for some refiners, especially those on the West and East coasts, to modify crude slates.
Anthony Galio, a rail analyst with Wells Fargo, said that “crude differentials will influence the degree to which CBR volume growth exceeds production growth.”
Industry data showed that in the third quarter market conditions that weighed on smaller railed volumes narrowed the price spread between West Texas Intermediate and Brent to $1.59 per barrel, compared with a $20 spread seen earlier this year.
Shipments based on economics
PBF Energy Chief Executive Officer Tom Nimbley said the third-quarter economics for Bakken crude did not justify delivering greater quantities to the East Coast, as a result of which his company adjusted its slate to bring in additional volumes of water-borne crudes.
PBF, with two East Coast refineries, has strongly endorsed CBR by enhancing and upgrading rail offloading facilities at its 190,000 barrels per day Delaware City, Del., refinery, with expectations that it will receive 125,000 bpd by rail by May 2014.
CSX, which ships crude to the East Coast, said it is able to deliver crude from Chicago to Philadelphia in two days, throwing a lifeline to East Coast refineries which teetered on the brink of closing for economic reasons a few years ago.
Tesoro Chief Executive Officer Greg Goff said his company delivered about 50,000 bpd of Bakken crude to its Anacortes, Wash., refinery in the third quarter, while rail bumped up delivery of Bakken crude to its Martinez, Calif., refinery by 350,000 barrels per month.
Tesoro’s joint venture with Savage to build a 280,000 bpd rail offloading facility at the Port of Vancouver, Wash., is in the permitting phase and scheduled to be operational no later than early 2015.
Price differentials support CBR
Most refiners and railroads say current quarter pricing differentials have regained the norm of recent years, supporting CBR from the Bakken to price-disadvantaged refineries on both coasts.
Credit Suisse analyst Jan Stuart said that in recent weeks imports of crude from West Africa have been spurned by East Coast refiners because of ample supplies from the Bakken.
But the CBR advocates are still faced with cost uncertainties from anticipated new tank car safety regulations, swings in crude prices and on-going competition from pipelines.
However, Stuart Nance, vice president of Bill Barrett, a petroleum production company, said the CBR “phenomena will continue as we go on with the renaissance of crude production,” notably as the Bakken edges over the 1 million bpd mark and production of light sweet crude from the Eagle Ford in South Texas surpassed Bakken volumes and the Permian Basin of New Mexico and Texas continues to grow.
The Energy Information Administration is forecasting that domestic output will add increments of 1 million bpd a year to reach 8.5 million bpd in 2014, almost half the projected U.S. demand of 18.72 million bpd.
The Rockies are expected to contribute 2.5 million bpd over the next five years.
Despite a series of accidents that have forced the U.S. to ponder changes to the design of crude tank cars, Norfolk Southern Chief Executive Officer Charles Moorman said he is confident the government will take sensible steps that do not negatively impact the CBR business, although the answers will not be known for about two years.
Toby Kostad, a rail industry analyst, estimated the upgrades to existing tank cars would add about $2 per barrel to transport costs, which Valero placed at $17 currently from the Bakken to the East Coast, where refineries once paid premium prices for imported feedstocks.
However, he said the upgrade costs will be borne by those who lease the rail cars, which PBF said is now about $3,000 per car per month.
$10 difference required
Graham Brisben, chief executive officer of PLG Consulting, told the RailTrends conference that WTI will need to be at least $10 per barrel less than Brent to keep CBR competitive.
Nimbley told analysts during his third-quarter conference call that there is a “very fast reaction” time by rail to moving Bakken crude to eastern refineries.
Brisben said that is supported by rail’s ability to respond faster than pipelines to crude pricing changes, with PBF Executive Chairman Tom O’Malley estimating it takes only a week to move a unit train in response to positive price changes.
PBF has rail service arrangements with Norfolk Southern and BNSF to deliver Bakken crude to its Delaware and New Jersey refineries, allowing it to carry 125,000 bpd by rail.
