Posted on 05/28/2013 5:21:31 AM PDT by thackney
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.”
Rail offers flexibility, he said, and “it’s significantly faster than moving by pipeline.” Rail cars move at 50 to 60 mph while pipelines move crude at 10 to 20 mph.
Valero hopes to have approval soon from local officials to ship North American crude by rail to its Benicia plant in northern California and complete the project by year’s end. The company also is considering a plan to ship by rail Canadian crude to its Wilmington plant in Southern California in 2014 or 2015.
In addition, Valero is considering a plan to send light Canadian crude to its Quebec plant by rail, and it is discussing building a rail terminal at its St. Charles refinery in Louisiana to receive heavy Canadian crude. Valero now sends North American crude to Louisiana by rail, where the oil goes into a pipeline bound for its Memphis plant. “That’s less expensive than buying a load of foreign crude,” Day said.
Tesoro, soon to be California’s biggest refiner when it closes its June 1 purchase of BP’s Southern California refinery, also has launched rail projects to move cheaper crude. As part of a joint venture with a Utah-based partner, Tesoro plans to build a facility to deliver 120,000 barrels of oil a day by rail to the Port of Vancouver USA in Washington at a cost of $75 million to $100 million.
The project will include a marine loading area where crude would be transported by ship to the company’s West Coast plants. The first phase of Tesoro’s project is to begin operations in 2014. It may be expanded to handle 280,000 barrels of oil a day. In September, Tesoro completed a project to send Bakken Shale crude to its plant in Anacortes, Wash., by rail. In November, Tesoro sold the facility to Tesoro Logistics, a master limited partnership, for $180 million.
NuStar Asphalt, a joint venture of NuStar Energy and private investment firm Lindsay Goldberg, has been moving heavy crude from western Canada to its two East Coast asphalt plants since the fourth quarter of 2011.
“If there were pipelines, you would use them,” said Greg Kaneb, vice president of the joint venture. “But for our facilities on the East Coast, there is nothing at present, so it just makes sense to move lower-cost crude by rail.”
The joint venture just received its last rail cars in April and uses about 1,200 rail cars to move 18,000 barrels a day of a heavy, tarlike Canadian crude called bitumen to the plants.
NuStar Asphalt’s Rod Pullen, vice president of operations, said he believes that NuStar is now the biggest mover of heavy Canadian crude oil, but he expects Valero to surpass its totals in the future.
NuStar has leased special rail cars to transport the heavy Canadian oil. When bitumen is loaded onto rail cars, it’s at a temperature of 150 to 180 degrees, but cools down during the trip. When the rail cars arrive at refineries, they’re hooked up to a steam-producing mechanism that heats the heavy oil enough to be unloaded.
NuStar Asphalt decided to lease the rail cars rather than purchase them.
Pullen said the company doesn’t have a large workforce to manage the cars, and “we aren’t sure how long this crude-by-rail is going to last.”
Jonathan Garrett, an energy analyst at consulting firm Wood Mackenzie’s Houston office, said he believes crude by rail “will continue into the foreseeable future” based on rail’s access to broad markets. Still, there are challenges, Garrett said.
“There’s an 18-month backlog of new rail cars on order, with about three-fourths of them slated to move crude. “Even the market for used rail cars,” he said, “is pretty hot.”
Why? Because Buffett is a major player in Burlington Northern (BNSF).
Rail can’t compete with a pipeline for volume, safety, and reliability.
The EPA, the White House, and major rail stock holders, like Buffet, need to be DEFEATED!!
If Obama will not let you build a pipeline you are forced to ship by rail.
By the way doesn’t Buffet own the rails? Isn’t he a friend of Obama’s. Wonder what the kickback is for not laying a pipeline?
I wonder how much more Warren Buffett makes with all of this oil going by rail vs. pipeline?
Moving oil by rail? !
I’ll bet old John D. Rockefeller is turning over in his grave.
Warren Buffett invests heavily into railroads buying Burlington Northern and taking positions in other railroads. He also invests heavily in the election of Barack Obama.
The Obama administration brings construction of new pipelines to a halt using regulatory agencies. It sits on the Keystone pipeline decision.
There isn’t enough pipeline capacity in America to transport the growing production of petroleum products. Railroads pick up the slack.
Coincidence or is this the invisible hand of the marketplace at work?
True. The cost effectiveness of rail is directly tied to the lack of pipelines.
That’s not to say that rail is inefficient because its not, its just that there are better ways to move crude. Rail is more of a good alternative than the ideal.
Crony capitalism at its grandest.
Speaking of Obama investors who are investing in oil I see that GE is now investing in fracking.
Yes, old Democrat Buffet needs to make a few more billion out of his railroads, so his little hired hand in the White House keeps the Keystone XL pipeline tied up in EPA knots. Funny how those Democrat contributors can do that, while any GOP contributors get to fight the IRS in court at a huge cost to their companies.
What a corrupt system.
Only when the train is actually moving.
I typically see trains sitting around most of the time. They wait for traffic, crew shift changes, Maintenance of Way, interchange between railroads, etc. In addition they have to slow down for curves and going through yards and switches.
I'd be very surprised if the average speed of a full rail car from well head to refinery was over 20 mph.
I don't know. Should I wait for the major news outlets to run a story on Buffett, his railroads, and his sucking up to Big Government politicians?
Buffet’s tank car trains. Keystone XL Pipeline to be denied, again. Pertinent, major facts are missing from the article.
He's probably smiling. John D invented the tank car--to move his oil.
What about capacity, and having to load and unload each car individually?
True....but you can’t beat the flexibility. More oil, run more trains, easier, faster and cheaper than building another pipeline. Less oil, or no more oil....fewer trains...equipment and capital go elsewhere. Empty pipeline sits there unused.
In other words, pipelines are more economical.
Between the increased coal/crude cars on the tracks people in small town America maybe stuck at rail crossings many more hours of their life.
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