12 BULKDISTRIBUTOR Rail Logistics March/April 2016 Backing out of the Bakken? I t has now become a modern legend, the moment in 2009 when the ‘sage of Omaha’ Warren Buffet bought the remaining shares his Berkshire Hathaway company did not already own in BNSF railway. It was a bet on an old-fashioned industry as Buffet saw that pipeline capacity was insufficient to export oil production out of America’s then booming shale plays. For the following years it was a bet that paid off handsomely. Widening spreads between the US domestic crude benchmark West Texas Intermediate (WTI) and its international equivalent Brent, and high prices generally, boosted the economic argument for crude-byrail (CBR). Now the landscape has changed drastically. Crude prices plummeting to as low as US$30 a barrel have made CBR transport an expensive option for hard pressed shale producers looking to conserve cash – especially where pipeline alternatives are available. Narrower spreads that once justified shipping inland crude to coastal destinations by rail have all but disappeared. In November, 2015 pipeline shipments exceeded rail out of North Dakota for the first time since 2011 and by 2017 available pipeline capacity out of the region should exceed producer’s needs. In the circumstances, rail shipments would appear to be living on borrowed time. However, Houston-based analyst firm RBN Energy points out that some North Dakota rail shipments are continuing in spite of the poor economics. New pipelines have been built out to provide less expensive options to get stranded crude to market, further narrowing the WTI discount. And after the US Congress repealed regulations limiting US crude exports in December 2015, WTI actually began to trade at a slight premium to Brent that averaged $0.26/Bbl in January 2016. In response, CBR volumes fell during 2015, but not as fast as one might expect, dropping only 20 percent between January and November 2015, according to latest data from the Energy Information Administration (EIA) even though the economics often made no sense. The slow decline in CBR traffic is because committed shippers and refiners continued to use rail infrastructure that they invested in and because some routes still do not have pipeline access. Back in 2012 production in the shale heartland of North Dakota’s Bakken formation quickly outstripped available pipeline capacity, much of which had to be shared with crude from Western Canada. Pipelines became congested and prices were discounted while producers tried to figure out alternative routes to market. The solution for many operators was to build a swathe of CBR loading terminals in the Bakken. As long as the WTI discount to Brent stayed wide enough, rail was an ideal option for Bakken producers, especially to the East and West Coasts where there is no pipeline capacity. When differentials narrowed after 2013, barrels shifted back to pipelines to take advantage of cheaper tariff rates. Yet significant crude volumes continued to be transported to market from North Dakota by rail because pipeline capacity could still not handle the demand. But today CBR shipments from the Bakken are declining. In November 2015, according to the North Dakota Pipeline Authority (NDPA), the percentage of crude leaving the Williston Basin by rail was exceeded by the percentage leaving by pipeline for the first time since June 2012. The slower than expected decline in CBR traffic is because committed shippers and refiners continued to use rail infrastructure that they have invested in The percentage of crude moving by rail peaked in April 2013 at 75 percent but since production was increasing rapidly during this period it was not until October 2014 that the most crude was shipped by rail – an estimated 760,000 barrels per day (Mb/d) that month – which represented 60 percent of total traffic. Rail percentages have been declining since December 2014 except for a brief uptick in September 2015 and they sunk to 41 percent in November 2015 (the latest data available). Meanwhile, pipeline traffic has been steadily increasing since December 2014 and jumped to 52 percent of takeaway crude in November 2015. Pipeline shipments out of North Dakota increased steadily during 2015 with the start-up of the Kinder Morgan Double H pipeline in February that shipped an average 42 Mb/d during January 2016, according to Genscape, another analyst outfit. And along with the decline in rail shipment percentages - overall crude production levelled off after peaking at 1.3 MMb/d in December 2014. Since the end of 2014 production has drifted down somewhat but was still only 4 percent below peak levels in November 2015. However, although CBR shipments out of North Dakota are declining and crude production has levelled off, output still exceeds current pipeline capacity available. That means some crude still has to use rail or other means to get to markets outside the region after accounting for local refining capacity. The point at which - in theory - pipeline capacity is able to take care of all Bakken production is expected in 2017. Two major pipelines are expected to be then onlin e in North Dakota; the 225 Mb/d Enbridge Sandpiper and the 450 Mb/d Energy Transfer Partners Bakken pipelines. If completed (and in the current environment nothing is certain, RBN emphasises) these two projects will catapult pipeline capacity above North Dakota production for the first time since mid-2011. Up until that point additional transport capacity is still required, and that means rail. And that slack is taken up by the very significant rail loading capacity that has been built in North Dakota since 2010 – representing an estimated 1.5 MMb/d of load capacity at the start of 2016 – of which only about 350 Mb/d would actually be needed if all the pipelines out of North Dakota were running full – which they are not. But although volumes are still moving by rail, some of the CBR load terminals in North Dakota are definitely suffering from the downturn. Detailed information is not publically available, but Genscape monitors a number of terminals on a real time basis and the firm’s data show that the EOG Stanley terminal has virtually ceased loading crude since June 2015 and that Global Energy Partners has seen significant reductions in loading at its Stampede terminal since mid-2015. These terminal slowdowns indicate that where contract volume commitments either don’t exist or are not being fulfilled, CBR is winding down. For now, North Dakota retains its ‘first in nation’ status for CBR traffic but the combination of increased pipeline capacity and poor economics with the inevitable expiration of remaining term commitments will likely result in volumes continuing to decline. GPR in grain wagon deal G PR Leasing Africa (GPR) has concluded a five-year lease of 100 grain hopper wagons to Corredor De Desenvolvimento Do Norte (CDN) in Mozambique. CDN operates a part of the Nacala Corridor, which consists of the Port of Nacala in Mozambique, the Northern Railway network of Mozambique, and the railway system of Malawi (CEAR). The lease is supported by CDN’s transport agreement with Bakhresa Malawi Limited, a Malawian company, which owns a grain terminal in Nacala and a milling and packing facility in Malawi and part of the Bakhresa Milling Group which has operations across eastern and southern Africa. The wagons will be manufactured by and purchased from Galison Manufacturing from Welkom in South Africa. Galison has been manufacturing new, and repairing existing, rail freight wagons and other rolling stock for the past two decades. “We are essentially supplying an African solution that will benefit three African countries,” said GPR’s Jacques de Klerk. Willem Goosen, GPR’s commercial executive added that the deal is the firm’s first innovative wagon lease in Africa and additional deals will follow. The agreement with CDN was signed in midOctober 2015 and the first wagons were delivered in March 2016. “All 100 wagons are expected to be delivered before the end of Q4, 2016,” he said. “We are also exploring further opportunities in the locomotive and wagon markets with CDN.” Andre Soares, director of operations for CDN, said that the benefits of the new wagons are myriad. “The new wagons are lighter so we will gain payload (about 4-5 tons per wagon), enjoy fuel efficiencies and lower our operating costs while driving up revenue. The leasing agreement means the wagons are not on our balance sheet and we haven’t had to spend any capital. This in turn improves our cash-flow and allows us to optimise our funds and concentrate on our core activities.” Wells-named W ells Fargo has renamed its rail wagon finance operation First Union Rail as Wells Fargo Rail’. The company’s acquisition last year of GE’s rail wagon and locomotive leasing business has made Wells Fargo Rail the largest and most diverse such leasing company in North America with more than 175,000 railcars and 1,800 locomotives. Wells Fargo Rail offers a variety of customised finance and operating lease structures.