The crude-by-rail (CBR) industry has grown rapidly over the past five years, driven by the desire of oil producers to deliver crude from the Bakken shale play in North Dakota to coastal refining markets and storage terminals. The initial unit train shipments that began in December 2009 connected the Bakken play to the major West Texas Intermediate (WTI) storage and trading hub of Cushing, Oklahoma. This rail “takeaway capacity” acted as a relief valve for Bakken production, which was surging past the ability of existing and planned pipelines to handle it. Later, with rail’s destination flexibility, oil traders used the transport mode to deliver to other trading hubs, and also directly to refineries where the higher price-per-barrel Brent benchmark could be achieved. For example, by 2012 the major trading hub of St. James, Louisiana, became the largest single receipt location for CBR unit trains, while by early 2014, the majority of CBR volume has shifted to the East Coast.
Acceleration in the future
CBR volume likely will continue its rapid growth due to two key mega-themes. Firstly, with CBR fully established as a permanent part of North American oil logistics, the Bakken play is expected to become the primary light sweet crude supply to East and West Coast refineries that would otherwise pay a higher price for waterborne Brent deliveries. This price advantage, combined with continued Bakken production growth and the lack of pipelines to those locations, likely will result in over 1 million bpd of Bakken CBR volume in the next five years. Secondly, production of heavy/sour crude from western Canada’s oil sands region will continue to grow as producers improve extraction techniques and more projects develop. With additional pipeline construction unlikely over the next several years to alleviate the “at capacity” network, Canadian CBR is at an inflection point: CBR is the only way available to move the growing production.
Potential risks, road blocks
Even with a number of hurdles foreseen, CBR’s future path will remain as dynamic as its past. Pipelines will remain the prime competitor for many of the north-south CBR routes due to the normally lower logistics costs. The pending U.S. rail car regulatory ruling expected before year-end will likely upgrade the crude tank car specifications and may create a bottleneck. Additional rule changes may slow the production, testing and rail shipping of crude. Several crude receiving facilities in the Pacific Northwest and California have already been delayed due to environmental concerns. Additionally, the development of Gulf Coast facilities to receive Canadian heavy crude may slow CBR volumes. The largest wildcard to slow growth could be the unknown regulatory impact of another major CBR accident.
Full speed ahead
CBR was born just five years ago, and has rapidly matured because it provided optionality and flexibility for oil producers, marketers and refiners to quickly move crude out of the Bakken. We expect to see sustained high volume from Bakken shipments to the U.S. East Coast and the Pacific Northwest. The significant growth over the next three years will be from western Canada, mainly to the U.S. Gulf Coast and Pacific Northwest. There are plenty of known risks to growth, but CBR has proven to defy the experts’ predictions. It has become an efficient long-term solution for the industry to move oil out of new domestic production areas and to displace waterborne crude imports.
For more information, visit www.plgconsulting.com/cbr-forecast or contact Taylor Robinson at (312) 957-7757 or trobinson@plgconsulting.com.
