Crude-by-rail shipments soaring, but pace could slow

Rail shipments of oil and petroleum products jumped 48 percent in the first half of 2013, but the pace of crude-by-rail growth is slowing, according to an analysis from the U.S. Energy Information Administration.

There are two reasons for this: A shortage of rail cars and rising prices for U.S. oil.

The agency estimates that 700,000 barrels of crude a day moves by rail in the United States now, and that the demand could accommodate 60,000 more tank cars than are available.

Rail shipments of crude have surged since 2010 as energy companies sought transportation for oil produced in remote new shale plays with little pipeline access .

Rail shipments of crude have surged since 2010 as energy companies sought transportation for oil produced in remote new shale plays with  little pipeline access .

A train that derailed in Canada on Saturday while carrying 72 carloads of oil was moving crude from North Dakota’s Bakken shale region to a refinery in eastern Canada. The disaster caused large explosions that destroyed a portion of a small town in Quebec and killed at least 15 people, according to the Associated Press.

Though pipeline companies have expanded service in the Bakken shale, many energy companies are choosing to use rail due to lack of  pipeline linking the Bakken with  lucrative East Coast  refineries.

But as more U.S. oil has moved  east, it has  competed more directly with foreign oil typically shipped to those facilities, which has been higher-priced. The price spread allowed U.S. producers to compete even by selling their oil at higher prices than a year ago,  pushing the price for domestic crude to within a few dollars of international prices.

West Texas Intermediate oil, the benchmark for U.S. crude, is trading just over $105  a barrel. The price of Brent crude, used as a measure of international oil prices, is about $108.

But that slim difference in price offers less  incentive for buyers to choose the U.S. oil.

“More Bakken crude oil moving to market by rail has helped narrow the difference between the spot prices for Bakken crude oil and international benchmark Brent crude oil in recent months to its smallest gap—less than $5 per barrel—in more than one-and-half years,” the Energy Information Administration said.  “The narrower spread reduces the incentive to ship oil to coastal refineries.”

Still, U.S. energy companies expect to continue shipping crude east from the Bakken region by rail, despite growing pipeline capacity to move that crude south to Gulf Coast refineries.

That’s because Gulf Coast refineries already have access to huge amounts of similar quality crude being produced in other shale plays, including the Eagle Ford and Permian Basin in Texas.

East Coast refineries still are buying  crude from  the Bakken, and it will keep coming by rail.

“This trend is not temporary,” said Flint Hills Resources, a refining company owned by Koch Industries, in a filing with the Federal Energy Regulatory Commission.

Rail options are  taking some  business from pipelines, leaving some pipeline systems that  serve  Bakken region underused, Flint Hills Resources said. One of those systems is owned by Calgary, Alberta-based Enbridge.

“In particular, rail transportation is becoming more competitive and will continue to take barrels away from the Enbridge North Dakota system,” Flint Hills Resources said.

The  Energy Information Administration used data from the Association of American Railroads to calculate that 1.37 million barrels per day of oil and petroleum products were shipped on railways in the first half of 2013. That’s up from about 927,000 barrels per day in the same period of 2012.

Though those figures also include petroleum products, the agency  estimated that about 700,000 of the daily petroleum-related barrels moved this year were crude oil. Daily U.S. oil production is about 7.2 million barrels per day, the agency said.