A few years back, crude-by-rail (CBR) “emerged as the go-to fix that enabled pipeline-constrained shale regions to move fast-increasing volumes of oil to market,” writes RBN Energy LLC analyst Housley Carr in Slow Train Coming: What's Next for CBR. “But changes in the market—lower oil prices, slowing/declining production, new pipeline capacity—have been challenging and undermining CBR.”
“Only about 20% of U.S. nameplate capacity is being used, and further declines in CBR volumes are expected, prompting serious questions about CBR's future role,” says Carr, who in RBN Energy’s latest Drill Down Report, examines CBR’s pros and cons, its evolution, and its current status and prospects.
The four graphs in the lower illustration show the dramatic changes in market destinations for Bakken CBR since 2010. “In the early years, volumes moved from Petroleum Administration for Defense District (PADD) 2 (Bakken) to the crude hub at Cushing (red bars, also in PADD 2), but never exceeded 60 Mb/d (thousand barrels per day),” notes Carr. “Those volumes have dropped almost to zero in 2016. As CBR ramped up in 2014, significant barrels were moved to the Gulf Coast (PADD 3), peaking at 240 Mb/d in 2013. Since then, those volumes too have declined to near zero. In contrast, CBR to the East Coast (PADD 1) ramped up to 370 Mb/d in 2014 and remains above 340 Mb/d in 2016 year-to-date. Similarly, volumes moving to the West Coast (PADD 5) moved up to 145 Mb/d in 2014 and remain above 125 Mb/d in 2016 YTD.”
There are a number of drivers responsible for these changes in CBR flows, says Carr: “Despite CBR’s clear success in providing needed takeaway capacity, questions about CBR’s safety came to the fore. The July 2013 [Lac-Mégantic] disaster in eastern Quebec and a spate of other crude train mishaps resulted in heightened public concern and tightened rail line and tank car regulations. Next, pipelines planned to relieve delivery constraints out of the Bakken and other fast-growing shale plays started coming online, giving producers a generally lower-cost alternative for moving oil to market. Regional price differentials shrunk as a result, chipping away at the economic rationale for moving CBR. Then came the crude oil price collapse in late 2014, eliminating the remaining economic incentive for CBR transportation based on spot prices. Now, many of the tank cars ordered to meet the demand of CBR sit idle; take-or-pay contracts giving producers and others the right to use loading and unloading terminals are rolling off; and more pipeline capacity is in the works.
“For all these reasons, the near-term outlook for CBR remains cloudy, particularly if oil prices stay low and continue to hold down production volumes. But all is not gloom and doom. Volumes on some CBR shipping corridors are holding up, and a few terminals continue to be built. Also, it seems likely that the inherent advantages of CBR—destination flexibility, optionality and speed-to-market—will always play a role in continually evolving crude oil markets.”
