Originally posted by FreightTrain
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This is from Sep 2011.
US Inland Oil Boom Leading To Rail Car Shortage
HOUSTON (Dow Jones)--A looming shortage of rail cars threatens to throttle oil companies' plans to increase the amount of crude they transport out of booming oil fields in the interior of the U.S.
As oil in North Dakota and south Texas is pumped out of the ground faster than available pipelines can carry it away, refiners have turned to railroads to bring in petroleum shipments.
The number of railcars hauling crude oil has jumped suddenly in the past few years as new drilling technology has unlocked oil and gas reserves in areas previously considered economically unattractive, such as the Bakken shale in North Dakota and the Eagle Ford shale in south Texas. About 46,000 carloads of crude traveled the rails in 2010, 57% higher from the year before, according to the latest statistics from the Association of American Railroads. The scarcity of cars is expected to last another few years, when pipeline projects are expected to come online to link the newly prolific oil fields to market.
Musket Corp., Lario Logistics LLC and other companies are building rail terminals at the Bakken and Eagle Ford, both of which produce crude oil at relatively low market prices because of a supply glut in the main oil storage hub of Cushing, Okla. Suppliers then ship the oil via unit trains -- more than a hundred cars each -- to markets where oil prices are higher, such as Louisiana.
This problem comes as refiners and fuel shippers increasingly rely on the price difference between the crude delivered at Cushing and the higher global price to make a profit. Tesoro Corp. (TSO) is building a "pipeline on rails" that would run 120 rail cars of crude oil every other day from the Bakken Shale in North Dakota to its 120,000 barrel-a-day refinery in Anacortes, Wash.
But the sudden need for crude oil railcars demand has outstripped supply. Union Tank Car Co., one of the major manufacturers of rail cars, has leased out its entire hazardous material railcar fleet to be used in hauling crude and has a "sizeable" production backlog, company spokesman Bruce Winslow said.
"Our lease fleet is leased," Winslow said.
Within the next six months, rail capacity for crude oil leaving the Bakken Shale field in North Dakota will double to 300,000 barrels a day, according to Musket Corp. Bakken oil production reached 425,000 barrels a day in June, up 8% year to date, and North Dakota government projections say it could reach about a million barrels a day by December 2018.
Analysts aren't sure whether the shortage of rail cars will directly cause shale oil producers to slow the flow out of their wells, but it could make some production unprofitable. The costs for alternative transport methods such as trucks could have high enough price tags that drillers decide the added price isn't worth the effort, said Chris Ross, senior analyst for oil and gas at CRA Marakon.
"You can always find someway of getting the oil out," Ross said. "But it costs more and changes the wellhead economics."
As rail car supply dwindles, providers are hiking their rates. Rail car lease prices have nearly doubled in the past 18 months, reaching about $1,000 a month per car as part of leases that last for about five years, said Larry Padfield, vice president at U.S. Development Group, which operates a 40,000 barrel-a-day crude terminal in the Eagle Ford region.
"Absolutely, beyond a doubt, infrastructure is getting tighter," Padfield said. "They can't make cars fast enough."
As oil in North Dakota and south Texas is pumped out of the ground faster than available pipelines can carry it away, refiners have turned to railroads to bring in petroleum shipments.
The number of railcars hauling crude oil has jumped suddenly in the past few years as new drilling technology has unlocked oil and gas reserves in areas previously considered economically unattractive, such as the Bakken shale in North Dakota and the Eagle Ford shale in south Texas. About 46,000 carloads of crude traveled the rails in 2010, 57% higher from the year before, according to the latest statistics from the Association of American Railroads. The scarcity of cars is expected to last another few years, when pipeline projects are expected to come online to link the newly prolific oil fields to market.
Musket Corp., Lario Logistics LLC and other companies are building rail terminals at the Bakken and Eagle Ford, both of which produce crude oil at relatively low market prices because of a supply glut in the main oil storage hub of Cushing, Okla. Suppliers then ship the oil via unit trains -- more than a hundred cars each -- to markets where oil prices are higher, such as Louisiana.
This problem comes as refiners and fuel shippers increasingly rely on the price difference between the crude delivered at Cushing and the higher global price to make a profit. Tesoro Corp. (TSO) is building a "pipeline on rails" that would run 120 rail cars of crude oil every other day from the Bakken Shale in North Dakota to its 120,000 barrel-a-day refinery in Anacortes, Wash.
But the sudden need for crude oil railcars demand has outstripped supply. Union Tank Car Co., one of the major manufacturers of rail cars, has leased out its entire hazardous material railcar fleet to be used in hauling crude and has a "sizeable" production backlog, company spokesman Bruce Winslow said.
"Our lease fleet is leased," Winslow said.
Within the next six months, rail capacity for crude oil leaving the Bakken Shale field in North Dakota will double to 300,000 barrels a day, according to Musket Corp. Bakken oil production reached 425,000 barrels a day in June, up 8% year to date, and North Dakota government projections say it could reach about a million barrels a day by December 2018.
Analysts aren't sure whether the shortage of rail cars will directly cause shale oil producers to slow the flow out of their wells, but it could make some production unprofitable. The costs for alternative transport methods such as trucks could have high enough price tags that drillers decide the added price isn't worth the effort, said Chris Ross, senior analyst for oil and gas at CRA Marakon.
"You can always find someway of getting the oil out," Ross said. "But it costs more and changes the wellhead economics."
As rail car supply dwindles, providers are hiking their rates. Rail car lease prices have nearly doubled in the past 18 months, reaching about $1,000 a month per car as part of leases that last for about five years, said Larry Padfield, vice president at U.S. Development Group, which operates a 40,000 barrel-a-day crude terminal in the Eagle Ford region.
"Absolutely, beyond a doubt, infrastructure is getting tighter," Padfield said. "They can't make cars fast enough."
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