The North American crude-by-rail (CBR) saga “is that of a victory of good old U.S. ingenuity over the lack of pipeline capacity that stranded booming shale oil production in 2012,” writes RBN Energy LLC analyst Sandy Fielden in the final installment of hisSlow Train Coming series on the rapid rise and fall of CBR.
“The lower cost to market of ‘on-ramp’ rail terminals allowed surging crude production a route to (mainly) coastal refineries, igniting a building boom over four short years that has left 82 load terminals and 44 destination terminals operating today, many of them now underutilized,” says Fielden in Slow Train Coming: Victory of American Ingenuity Over Crude Pipeline Delays And Congestion. “Along the way, monthly lease rates for rail tank cars that reached $2,750/month at the height of the boom are down to $325/month after the bust, with many lease holders paying daily rent to park their empty cars.
“The growth of CBR in 2012 and 2013 was prompted by a lack of pipeline capacity that highlights rail’s speed-to-market advantage,” notes Fielden. “A CBR loading terminal can be planned, permitted and built in six months or so, since the major shale basins are in relatively remote locations—away from population centers there are typically fewer environmental objections. Pipelines take longer to build and involve rights-of-way acquisition across hundreds of miles of land. The railroad network that CBR uses already exists . . . Lower cost of entry means that producers and shippers make lower commitments of time and money to CBR than they do to pipelines. . . . . [R]ailroads offer immediate access to a multitude of destinations. . . . As the CBR boom developed, other advantages became clear, such as the economies of scale achievable with large unit train facilities, the combination of rail and water legs to journeys. . . . In addition, many midstream Canadian terminal developers talked about the advantage of rail in reducing the diluent penalty incurred in moving heavy bitumen crude by pipeline . . .”
“The decline of CBR traffic that we have seen in the past year is expected to continue as existing take-or-pay contracts expire and shippers shift barrels to pipelines or refiners switch to alternative supplies such as cheaper imports,” Fielden concludes. “The rail terminals built during the boom will perhaps find new value whenever production expands again by shipping surplus crude direct to export docks when the economics warrant such movements. Until then, the history of CBR during the shale boom will perhaps best be remembered for the victory of American ingenuity over pipeline build-out delays and congestion, [and] that [brought] a new network to market in less than two years.”