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 And after the US Congress repealed regulations limiting US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.