RBN Energy: CBR economics aren’t what they used to be

The crude by rail (CBR) boom that less than two years ago preoccupied the industry and generated intense regulatory scrutiny is, for all intents and purposes, over, according to a new analysis by RBN Energy.

“With crude prices below $30/Bbl and the price spread between U.S. domestic crude benchmark West Texas Intermediate (WTI) and international equivalent Brent trading in a very narrow range, the economics of CBR rarely make sense any more,” writes RBN Director Energy Analytics Sandy Fielden in Slow Train Coming: Crude By Rail Decline Picks Up Pace. “Rail shipments are down across all regions and railroads are reporting sharply lower revenues from CBR shipments.” Following are a few excerpts.

• Historically, CBR transport dominated the early oil industry in North America, underpinning John D Rockefeller’s monopoly,” writes Fielden. “But its use declined after World War II once pipelines were built to ship larger volumes of crude over longer distances. Pipelines have been almost always preferred since then because, once built, their freight costs are generally lower than using rail or trucks. More recently, however, surging crude production from shale overwhelmed existing pipeline take-away infrastructure, leading to significant constraints and price discounting—particularly in the Midwest—while producers waited for the buildout of new pipeline capacity that is typically a relatively slow process, taking up to three years. As a result, at the end of 2010, producers (led by innovators EOG Resources and BNSF Railway) turned to the rails to deliver crude past congested pipelines to coastal markets where netbacks (crude sales price less transport costs from the wellhead) were considerably higher. The resulting surge saw total U.S. CBR shipments (not including Canadian imports) increase from 33 million Bbl per day in January 2010 to a peak of 928 million Bbl per day in October 2014, as measured by the U.S. Energy Information Administration.

• The growth in CBR traffic was helped by three factors. First, the railroads cooperated with the industry to develop efficient ‘pipeline on wheels’ unit trains that typically involved upwards of 100 tank cars dedicated to moving crude directly between load and destination points, returning empty tank cars immediately in a round-trip pattern with priority over other traffic. Second the investment required to get crude onto the rails was small compared to pipelines, involving building a load terminal and storage and oftentimes an unload terminal with waterborne barge access that could distribute to multiple refineries. Third, rail terminals could be built out in 5-8 months—much more rapidly than pipelines —providing a quick solution for stranded crude. The lower investment reduced the need to secure long-term shipper commitment upfront, leaving producers comfortable committing to rail volumes for 1-2 years.

• Now the use of CBR is winding down, squeezed by lower differentials between inland crude prices linked to U.S. domestic benchmark WTI and coastal crudes priced to compete with international benchmark Brent. Simply put, during the period between the fall of 2010 and the end of 2015, various constraints on the free movement of domestic crude . . . resulted in WTI trading at a wide discount to Brent that reached a peak of $28/Bbl in November 2011 and averaged $18/Bbl in 2012. The gradual build-out of pipeline capacity linking stranded crude in North Dakota and other basins such as the West Texas Permian and Niobrara shale in the Rockies reduced inland congestion, allowing domestic production to reach coastal refineries for the most part by the end of 2014, bringing the WTI discount to Brent down to about $3/Bbl. Then at the end of 2015 crude oil prices crashed below $40/bbl at the same time Congress unexpectedly passed legislation to end restrictions on U.S. crude exports, opening up the potential for U.S. crude to compete openly in international markets. But although the WTI discount to Brent narrowed fairly consistently between April 2013 and November 2015, CBR movements continued to increase, not peaking until October 2014 at 928 million Bbl/day before falling 16% to 782 million Bbl/day in November 2015.

• There are various reasons for this “lag” in CBR movements when compared to narrower price differentials. Part of the issue is that until alternatives such as pipelines are built out, CBR remains the only route to market for stranded crude, even if spot market economics may not make sense. . . .Nevertheless, although the slowdown in CBR has been less dramatic than the immediate economics suggest should be the case, [and] although there will continue to be some niche markets where CBR plays an important role, the overall use of CBR will continue to decline. {For example], Union Pacific, a major CBR shipper in the western U.S. reported a 42% drop in crude shipments in fourth-quarter 2015 vs. the same period a year ago. And one business with fortunes that are closely tied to CBR has been particularly hard hit in the past year:rail tank car leasing. At the height of the CBR boom, shippers paid upwards of $2,500/month to lease scarce rail tank cars. Now lease rates have dropped to $300/month in some cases . . . amid a glut of tank cars. Some shippers who purchased more tank cars than they need now are paying $30/day to park them on unused sidings.

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