April 7, 2013 8:05 pm

Oil traffic surge strains US trains

Union Pacific locomotives©Bloomberg

The train that stands on the track running past the Union Pacific railroad’s Davidson Yard in Fort Worth, Texas, is one that two years ago the company could scarcely have anticipated operating.

A big diesel engine stands at the rear, while another two stand at the front. In between, taking up a mile-and-a-half of track, stand 93 tank cars filled with about 55,000 barrels of crude oil coaxed by new drilling techniques from the ground under Oklahoma.

The shale-rail network

The shale-rail network
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Such trains, heading for US coastal refineries, are becoming increasingly common sights on Union Pacific and other big US railways exposed to the US shale oil boom.

Union Pacific was typical in recording a trebling of crude oil traffic for 2012 over 2011 and looks set for another year of strong growth. BNSF, the other big western railway, also expects rising oil traffic to continue.

However, 650 miles to the north at Union Pacific’s Harriman Dispatch Centre in Omaha, which controls the company’s 32,000-mile network, operators can see the strain the new traffic is imposing.

Screens indicating the state of the company’s network show formerly problem areas – including the main transcontinental route and the busiest coal routes – a reassuring (meaning undercapacity) blue.

But the areas around Fort Worth and the coastal refineries are all an angry red, showing they are operating at least 10 per cent over their comfortable capacity and at risk of growing congested.

Cliff Bowman, Union Pacific’s director of terminal operations for the Davidson Yard, says the yard not only now handles significant crude oil traffic but, standing in the yard’s control tower, points to the many cars loaded with pipeline parts and other oil industry supplies. Many are heading for West Texas’s fast-growing oilfields.

“It’s been a surprise to see how fast the crude oil business has taken off – it really has,” Mr Bowman says. “It changes so fast.”

The question for the US’s largest railways is how heavily they should invest to turn those routes from an overcapacity red to at-capacity yellow while simultaneously coping with slackening demand for coal, once their main commodity.

“It’s going to continue to be a challenge in terms of capital allocation,” Tony Hatch, an independent railways analyst says, adding that the decision will involve an element of gambling on future traffic flows. “The question is, where do you put your chips?”

Musket Corporation’s Fort Worth ethanol facility, served by BNSF a few miles from the Davidson Yard, illustrates part of the solution to the investment dilemma.

We actually have more crude train sets running than agriculture train sets. That’s pretty significant for us

- Matt Rose, BNSF’s chief executive

Here the ethanol distributors paid to construct the terminal – lowering costs to the rail companies – which was a model adopted for last decade’s boom in ethanol shipments by rail. Third parties also own the tank cars that use the facility.

Railways have adopted the same approach to minimising the capital they invest in the new crude oil business, letting oil producers and refinery operators purchase new railcars and bear the costs of developing the terminals where tanks begin and end their journeys.

However, Matt Rose, BNSF’s chief executive, points out that ethanol mostly ran on track that had already been brought up to a high standard to handle significant flows of agricultural products.

Crude oil is moving in areas such as North Dakota, where there was previously little traffic of any kind.

“In this case, we didn’t have capacity,” Mr Rose says of the crude oil traffic. “Today we actually have more crude train sets running than agriculture train sets. That’s pretty significant for us.”

The ethanol experience also illustrates how traffic that suddenly spikes can disappear just as swiftly. Last year’s drought in the US midwest and changing federal incentives have reduced ethanol shipments.

There have also been concerns that the laying of the pipeline parts – now visible in loaded up cars around Davidson Yard – could shift much of the new shale oil volume from trains into pipelines.

However, Jack Koraleski, Union Pacific’s chief executive, reflects the rail industry’s general optimism, pointing out that customers have invested heavily in new terminals and tank cars to move crude by rail.

Both Mr Rose and Mr Koraleski say oil shippers appreciate how rail lets them shop about between refineries for the best price for their crude. Pipelines offer less flexibility. “Their investment tells us that they’re going to plan to use rail for a long time even as pipelines get built,” Mr Koraleski says.

There remain practical challenges in dealing with the surging traffic. The lines that the Davidson Yard crude train will use – and many other crude oil routes – remain single-track, Mr Koraleski says. The company is seeking to lay a second track along many of them, to improve capacity and make maintenance easier.

The difficulty is that the traffic’s demands make it hard to find a good time to close the line to do that work.

But Mr Koraleski is optimistic, based on the railway’s experience of handling previous sudden traffic growth, that the congestion will gradually ease and the growth will be accommodated.

“Every time we hand over a piece of added capacity, it just gets a little better,” he says.

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