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— by Jeff Stagl, Managing Editor
The lyrics to the theme song from vintage television series "The Beverly Hillbillies" included "black gold, Texas tea," which described the Lone Star State's lucrative crude-oil production. For several North American railroads, the lyrics could be updated to "black gold, North Dakota tea" or "black gold, Saskatchewan tea" to describe the traffic-generating and moneymaking potential of crude-oil production in the Bakken Formation.
More commonly called the Bakken Shale, the 200,000-square-mile formation covering parts of Montana, North Dakota and Saskatchewan contains large oil reserves, which only a few years ago became more economical to tap because of horizontal drilling and other modern extraction techniques. Today's historically high foreign oil prices also help make crude produced from a shale more competitive to produce and sell domestically.
As more oil companies establish wells in the Bakken, railroads stand to transport more inbound carloads of frac sand, drilling pipe and other materials used to build wells or horizontally drill. And as more crude oil is extracted, the roads figure to transport lots of it to refineries and other end users thousands of miles away in the Gulf Coast, California, Oklahoma or points in Canada. Rail transport is significantly cheaper than truck and more flexible than pipelines to move crude long distances, and an economical way to deliver inbound materials, so it's starting to become oil producers' mode of choice.
By 2011's end, about 1,800 new wells — each requiring 23 carloads of rail-delivered materials during construction — are projected to join the thousands already operating in the Bakken. At 2010's end, daily production had exceeded 300,000 barrels, outstripping available transportation capacity and hastening the need for more rail infrastructure.
Oil companies are expediting plans to build or expand terminals that can load or transload 95- to 118-car unit trains, which can transport 60,000 to 68,000 barrels per trip.
Daily oil production might reach 700,000 barrels by 2013 and 1 million barrels by 2015. BNSF Railway Co. and Canadian Pacific could collectively capture 20 percent to 25 percent of outbound traffic because of their extensive Bakken-area networks and market reach, says BNSF Vice President of Industrial Products Marketing Denis Smith.
"The Bakken is a big play for us. It's an opportunity to do something similar to what we did in grain, in coal and in intermodal," he says. "It's new, and it needs to be moved in unit trains."
BNSF already is moving several unit trains per week from the Bakken to Stroud, Okla.; Bakersfield, Calif.; St. James, La. (via a Union Pacific Railroad interchange in Kansas City, Mo.); and points in New Mexico and Texas. BNSF also is moving a number of inbound trains carrying frac sand, clays and pipe.
To prepare for traffic growth, the Class I is constructing sidings and turnouts, and performing some work in yards, says Smith. BNSF won't need to acquire more tank cars because most of them are owned by oil companies.
CP is prepping for additional Bakken traffic, too. In March, the Class I announced plans to invest $100 million in North Dakota infrastructure the next two years.
This year, crews will extend yard track in Max and Flaxton; install a new runaround track in New Town; and replace more than 17 miles of rail between Drake and Max, including upgrades to 41 grade crossings. In addition, CP plans to hire 70 workers to expand its North Dakota train crew base by 18 percent and create a superintendent of operations territory that will focus on traffic between Enderlin and Portal.
The Class I currently is moving some unit trains from the Bakken, primarily to the Gulf Coast. The Class I serves a major Western Petroleum Co.-owned terminal near New Town.
"We have the flexibility to move crude to other markets," says CP Vice President of Marketing Steve Whitney. "Some [crude] could go north. Saskatchewan is an opportunity, and there will be others as the market develops."
Moving crude by rail is a relatively new concept for oil companies, which usually use pipelines, he says. However, pipelines take a long time to build, and require long-term commitments and volume targets, says Whitney.
"Rail can be complementary to pipeline," he says. "We can sign up business on shorter and less onerous terms."
As CP sales and marketing executives work to convince oil producers about rail's advantages — including flexibility and scalability — they're also targeting business from terminal operators, oil buyers and others, says Whitney.
"It's not a short-term horizon for driving profitability," he says. "We're thinking about it in terms of decades."
CN also is anticipating long-term growth opportunities, including Bakken crude that might flow into Canada. Although many Canadian refineries currently lack the rail infrastructure necessary to accommodate unit trains, that could change soon as oil companies find it cheaper to process Bakken crude north of the U.S. border and seek access to more markets, says Randy Meyer, sales director for CN's petroleum and chemicals business.
"They haven't used rail before. They have a pipeline mind-set," he says. "But rail is newer, better and faster. We're starting to get that breakthrough."
CN sales and marketing execs now are engaging discussions with large oil companies — such as EOG Resources Inc., which operates a large production facility in Stanley, N.D. — in addition to the mid-size and small companies they have been approaching, says Meyer.
Since October 2010, CN has provided truck-to-rail services in Willmar, Saskatchewan, for Bakken crude destined for points in eastern or western Canada, or in the U.S. Midwest and Gulf Coast. Some Bakken crude is being used as a diluent for bitumen in Alberta's Athabasca oilsands. So far, CN has moved more than 600 single cars of crude, as well as some large blocks of cars.
In addition, the Class I has provided a rail-to-truck frac sand service at Lampman, Saskatchewan, since 2009 through on-site transloader Sand Source Services. Currently, the railroad moves about 1,000 to 1,500 cars of frac sand annually and "we can get that to 2,400," Meyer believes.
CN also plans to gain unit-train capabilities in Willmar in about one year, he says. For now, CN employs mobile transload or rapid deployment train-loading units in Willmar that are "portable and scalable," says Meyer.
UP also can provide oil companies "instant capacity" to transport Bakken crude, says Business Manager-Chemicals Trevin Hogg. Although it can take one to five years to obtain permits, clear regulatory hurdles and establish infrastructure for a pipeline, UP can start up a crude move "in a couple of months," he says.
"The challenge is finding rail-sufficient terminals," says Hogg.
UP currently moves several unit trains per week from facilities in New Town and Columbus, N.D., he says, adding that crude can be trucked from North Dakota's southern regions to the north for long-haul transportation. The Class I, which also can deliver inbound frac sand and drilling pipe, expects to more than triple its Bakken traffic compared with 2010 volume.
"We can provide transportation to various markets and alternate markets," says Hogg. "[The Bakken] is more of an opportunity for us because UP has direct access to key trading hubs like the Gulf Coast, California and St. James."
Meanwhile, Kansas City Southern managers expect a Texas market to develop into a major Bakken crude destination point by next year. Last month, the Class I announced it entered into a joint development agreement with Savage Cos. to build, own and operate a multi-user rail terminal in Port Arthur.
To be operated by Savage and served by KCS, the Port Arthur Crude Terminal (PACT) will handle unit trains from the Bakken and other crude-oil supplies for distribution to refineries and pipeline companies in Texas. To open in second-quarter 2012, the terminal also will feature crude-oil storage tanks.
"Currently, there is no viable option for crude oil to move from the Bakken to the Port Arthur area," said KCS Executive Vice President of Sales and Marketing Patrick Ottensmeyer in an e-mail.
The primary destination point for the crude service will be Port Arthur, but KCS is exploring other destinations, such as Corpus Christi, Texas, and points in Mexico, he said. KCS and Savage plan to jointly call on producers, refiners and mid-stream oil companies to secure business for the PACT and for KCS line-haul service over the Kansas City gateway, said Ottensmeyer.
In addition to knocking on potential customers' doors, Watco Cos. L.L.C. sales execs have been contacted by numerous oil producers and others who are interested in learning how moving crude by rail works and how long it would take to get a facility up and running, says Watco Senior VP of Business Development Allan Roach.
For the past few years, two Watco short lines — the Stillwater Central and Yellowstone Valley railroads — have helped move crude from the Bakken in conjunction with BNSF.
The 275-mile Stillwater Central works with the Class I to transport crude from Stanley, N.D., to Stroud, Okla., which is near Cushing, Okla., a crude-oil epicenter that features a pipeline network tied to many major U.S. markets. During the past two years, the 171-mile Yellowstone Valley has been moving crude in manifest trains with BNSF.
Watco execs have analyzed the potential for destination facilities in Houston, St. James and Patoka, Ill., and have held discussions with BNSF, UP and KCS officials about unit-train movements, says Roach.
"Quickness to market seems to be the primary driver as demand for Bakken and other shale oils continues to grow," he says. "Since Watco first got involved with discussions about unit-train movements of crude in 2008, the size of the shale field has doubled, depending on which report you read. When we started, we thought there were one to two unit train terminals possible, but that number may be closer to six to eight."
Between unit-train and manifest traffic, Watco last year moved 20 million barrels of crude.
"I think we will double that by 2012," says Roach. "We are moving one unit train per day now and will move two starting in the fourth quarter."
An agreement Watco reached with Kinder Morgan Energy Partners L.P. in March will help spur traffic growth. The parties agreed to jointly build and operate several rail transload facilities in key markets — including Dore and Stanley, N.D., Stroud and Houston — to provide loading and unloading services for crude-carrying unit trains, as well as trains moving frac sand, pipe and drilling supplies. The Dore facility is slated to open in September, followed by the Stroud facility in October and other two facilities in first-quarter 2012.
The Kinder Morgan joint venture has helped Watco gain additional expertise and resources to manage multiple projects simultaneously, including an increase in the number of design and build companies used for facilities and infrastructure work, says Roach.
Offering complete turn-key services — including rail logistics, locomotive repairs, and rail-car sourcing, repairs, switching and tracing — will help convince first-time rail users to conduct business with Watco, he says.
"Oil producers have not had a lot of exposure to rail," says Roach. "We take the time to explain each step of the process, and develop timelines and cost estimates in terms they can understand."
As railroads continue to work with oil companies to exploit what's considered a once-in-a-lifetime opportunity in the petroleum arena, both parties are learning each other's needs and desires, and trying to best match capabilities and resources.
"With rail, the oil companies are finding they can carve their own destiny," says UP's Hogg.
When it comes to tapping the Bakken's potential, railroads are coming to that realization, too.