Friday, July 15, 2016

Moving energy beyond borders

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Moving energy beyond borders Bruce Kelly (all photos)

Can exports revive North America’s crude-by-rail and coal?

During a moment when much of the world was fixated on Presidential politics and the death of a pop music icon, two business stories of considerable importance to energy, transportation and the economy went largely unnoticed.

BEK 8891 BNSF Empty Coal near Trinidad WAOn April 18, 2016, a ship carrying 433,000 gallons of crude from Algeria docked in New York Harbor, its load destined for a Phillips 66 refinery in Bayway, N.J. According to Reuters, “The move marks a return of Algerian crude after years of being shunned from one of the world’s biggest energy markets.” At the height of the shale boom, Algerian crude simply could not penetrate the U.S. But the tables have turned. Reuters said, “Low prices [now] make it nearly impossible for U.S. shale producers with crude that has to travel thousands of miles by rail to compete with foreign crude, which costs less to ship.”

An exception to that rule was Hess Corp., which delivered 175,000 barrels of Bakken crude—the equivalent of roughly two unit trains—to a refinery in the Netherlands. Before starting its ocean voyage in early April, the crude was hauled in Hess-owned railcars via BNSF Railway from a terminal in Tioga, N.Dak., was interchanged en route to Union Pacific, and then offloaded at the NuStar terminal in St. James, La. It was said to be the first shipment of Bakken crude to an overseas buyer since the December 2015 lifting of America’s ban on most domestic oil exports.

U.S. crude sourced primarily in the Gulf States has been shipping overseas since January 2016, moving from storage tanks to seaport primarily via pipeline. These exports took advantage of a nearly $2.00 discount on West Texas Intermediate crude vs. European Brent crude. Meanwhile, the April start-up of oil exports from the Bakken shale formation signals a potential resurgence for crude by rail (CBR), assuming market behavior continues its slow trek back into favorable territory. Rail still represents a viable means, and in some cases the only means, for transporting Bakken and other central-U.S. or Canadian crude to refineries and ship terminals on the East, West and Gulf coasts.

When asked why Phillips 66 brought Algerian crude to New Jersey instead of North American crude, spokesman Dennis Nuss told Railway Age, “Phillips 66 has a complex portfolio of logistics assets including our railcar fleet, supplemented by commercial relationships, that provide us the flexibility to adapt to changing market conditions to meet the supply needs of our refineries.” That does not mean that Phillips is ignoring domestic producers. Nuss says, “I can confirm that we have begun exporting North American crude from the U.S. since the crude export ban was lifted in late 2015.”

At Hess Corp, how frequent will those export shipments through St. James or other terminals become? Hess spokesman John Roper says, “We’re always seeking the highest value for our shareholders, and exporting Bakken crude expands the list of customers that can help us achieve that. Where the crude goes is determined by where we get the best value.” As for the percentage of those exports reaching coastal terminals via rail as opposed to pipeline, Roper says, “This is determined by which transportation method gives us the most value at the particular time.”

That’s the perennial challenge for railroads. The business is there, but it must be won. CBR for domestic consumption is currently down by roughly one third from its late-2014 peak, but there’s potential for CBR to regain lost ground, now that the whole world has become a marketplace for U.S. crude. Among the factors for railroads to consider: how and where can CBR tap into an oil export market most effectively, and with line capacity more available now due to declines in other traffic, how to price for export crude movements competitively yet profitably.

In mid-June, CSX spokesperson Melanie Cost told Railway Age, “CSX is not currently moving crude oil by rail for export. With a network that reaches the major ports on the East Coast, CSX is well-positioned to support new opportunities should the economics of domestically produced crude oil support customer demand for CSX service to export.” Norfolk Southern spokesperson Susan Terpay says, “Norfolk Southern has handled some limited volumes for crude export to the East Coast. As the market presents additional opportunities, NS is positioned to move crude products from inland production fields to the coasts. Our network provides the most direct route to the East Coast with superior throughput capacity, and has substantial storage and staging capacity to support customers’ needs in key locations.” BNSF, UP and Canadian Pacific declined to comment on their handling of energy exports.

Within the North American market, U.S. imports of crude and petroleum products from Mexico have dwindled over the past decade, from 1.6 million barrels in 2006 to virtually zero in 2016, according to the U.S. Energy Information Administration (EIA). However, U.S. exports to Mexico have risen steadily during the same period, reaching more than 27 million barrels in March 2016.

Looking northward, in addition to the current export of U.S. crude to Canadian refineries, there is opportunity for U.S. crude to move through Canadian ports to reach the Asian market. Efforts to build new coal and crude export terminals in Washington and Oregon face persistent environmental opposition, which is why low-sulfur Powder River Basin coal has been rolling toward the export dock at Roberts Bank, B.C., at a rate of roughly two trains per day.

A proposed export coal terminal along the Fraser River at Surrey Docks, B.C., was granted approval by Port Metro Vancouver in November 2015. The project’s amended plan calls for direct transload from unit trains into ocean-going ships. (The original plan was to transload coal into barges that would move downriver to a separate export facility.) If built, Surrey Docks would eventually have capacity to unload approximately one trainload of PRB coal per day, according to BNSF. Construction is being held up by new legal challenges, as well as the need for permitting on air quality and wastewater discharge.

Even if capacity increases for exporting PRB coal to Asia, the reliability of that market—China in particular—remains in question. Reports from media and government sources on China’s coal consumption continue to paint conflicting pictures, some saying that China’s coal imports have recently increased and new coal-fired powerplants continue to be built, while others say China is easing away from coal and placing more emphasis on gas-fired plants, solar and wind. However, a Reuters story in early June described a positive outlook among attendees at the annual Coaltrans Asia meeting in Indonesia. “Much of the optimism is based on the fact that the benchmark Asian coal price, the Newcastle weekly index, has risen almost 3.9% so far this year, ending last week at $52.59 a ton.” Reuters went on to predict, “Once the Newcastle price breaches $60 a ton, it’s likely to do two things: firstly, tempt more U.S. coal back to the seaborne market, and secondly, incentivise Chinese domestic output to ramp up.”

A recent increase in China’s demand for crude has been observed, which could translate to export rail traffic for North America. In April 2016, Bloomberg reported, “China is hoarding crude at the fastest pace in at least a decade, filling inventories at a time when oil futures remain about 60% below where they were just two years ago.” Bloomberg cited a surge in oil-hauling tankers headed toward China, “the most since December 2014.” How long this crude buying binge will continue, and whether or not U.S. producers can jump on board, remains to be seen.

Canada’s export of CBR into the U.S. continues, though volume is down, from 176,000 barrels per day during December 2014 to less than 90,000 bpd in August 2015. That figure rebounded slightly to 107,000 bpd in December 2015, according to Canada’s National Energy Board. Failure to start the Energy East and Keystone XL pipelines has preserved the need for railroads to transport a share of Canada’s crude southward over the border, even in these times of depressed prices. In fact, a U.S. EIA report in February 2016 declared, “Canadian oil production [is] expected to increase despite lower prices.”

The EIA explained that production facilities in Canada’s oil sands, even if operating currently at a loss, “are designed to operate over a period of 30 to 40 years and can withstand volatility in crude oil prices.” The cost of shutting down an oil sands facility, according to the EIA, “is estimated to be in the range of $500 million to $1 billion, which may exceed the operating losses a producer might experience in the short term.” As of mid-2016, the oil sands region was still recovering from a catastrophic wildfire that reportedly caused only minor damage to production and transport infrastructure.

BEK 7530 BNSF Oil Empties EastAlgoma IDA key hub for exporting western Canadian crude is Hardisty, Alberta, where a CBR terminal operated by USD Group, in partnership with Gibson Energy, can currently load two unit trains per day. Plans are now under review for expanding the terminal to more than double its train throughput. Hardisty is also connected via pipeline to Casper, Wyoming, where USD recently purchased a 100,000-barrel-per-day CBR terminal that had been in operation since 2014. In a March 2016 conference call, Gibson Energy CEO Stew Hanlon predicted, “By mid-2017, we’re going to start to see pressures downstream from Hardisty with respect to takeaway capacity,” which he believes will increase western Canada’s oil production by roughly one million bpd.

If the numbers add up favorably for moving crude and coal by rail to export, there will still be an uphill battle against opponents of such fuels, even though many recognize their current value to the economy. A survey of 1,200 residents in the Pacific Northwest conducted in 2014 found that a slight majority (64% of Idaho, 59% of Oregon, 53% of Washington) supported CBR. However, only 46% of the participants said they had actually paid much attention to CBR. It’s not known to what degree those positions have changed following the June 3 derailment of a UP oil train along the Columbia River in northwest Oregon.

Natural gas, which has been touted as the cheaper and cleaner alternative to coal, is also being targeted by some environmental groups. Comments issued by the Sierra Club in its Beyond Natural Gas campaign might horrify electrical utility operators, who thought that their conversion from coal to gas would help them meet air quality standards. The Sierra Club says, “Natural gas is a menace to our air, water, local communities, and climate. Even without accounting for methane emissions, a recent International Energy Agency (IEA) study concluded that a global shift away from coal to natural gas would do little to get us off the path to climate catastrophe.” The Sierra Club goes on to say that switching completely to natural gas would be better than adding more coal to the energy mix, but switching existing coal energy to gas “would lead to a global temperature rise of more than 3.5 degrees C.”

Sierra Club’s Climate Policy Director John Coequyt tells Railway Age, “[Our] Beyond Natural Gas campaign and the Beyond Oil campaign have transitioned into the Beyond Dirty Fuels Campaign. Our ultimate aim is a science-based long-term goal of net zero greenhouse gas emissions by 2050 as we move toward an economy powered by 100% clean, renewable energy like solar and wind.” Coequyt says that while the carbon content of coal is higher than natural gas, “substantial climate pollution can be associated with leaks of natural gas during production and transportation, and in some cases that pollution can even be larger than burning coal.” Where would that leave railroads, which not only haul a considerable share of North America’s coal and crude but have also been eyeing natural gas as a potential fuel source for locomotives? Citing goals set forth in the recent Paris climate accord, Coequyt says, “The world is moving off of fossil fuels and that’s necessarily going to include the rail industry, which needs to look now toward electrification and other zero-carbon modes of transporting the nation.”

For the near term, railroads are perfectly poised to accommodate growth in energy exports. Long-term, the idea that railroads could someday lose that business and be forced to electrify might sound improbable, until you consider the fact that a federal mandate has already forced rail companies to invest billions of dollars toward another perceived necessity: Positive Train Control. Zak Andersen, V.P. of Corporate Relations at BNSF, submits a view that is probably shared by most in the rail industry. “Opposition to certain commodities has always existed, but the permitting process has been twisted to be a tool to stop projects where the commodity is disliked. The issue is that there is always someone who will not like a certain commodity. At some point, it impedes the ability of the railroad to grow, and by extension, commerce. In a trade dependent state, trying to decide what will and won’t move, independent of market forces, just won’t work in the long run.”

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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