News Column

Oil, Gas Drilling Leads to Rail Resurgence

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Last year, the amount of crude oil and petroleum products delivered by rail increased 46 percent compared to 2011, or almost 171,000 carloads, according to the Association of American Railroads. Crude oil accounted for an estimated 38 percent of the combined deliveries in the oil and petroleum products category during 2012, up from 3 percent in 2009. AAR reports that crude was responsible for that growth.

U.S. crude oil production increased by a record 780,000 barrels per day in 2012. One rail tanker car holds 700 barrels of oil, and most unit trains are composed of at least 100 cars.

Coal, the largest commodity transported by rail, showed the largest decline in loadings last year, though it still represented the highest carloads at just more than 6 million. Last year, it dropped by 726,000 carloads, or nearly 11 percent.

Railcar loadings for other nonenergy commodities grew slightly in 2012, the AAR reports. Railcar loads of motor vehicles and crushed stone rose the most; grain and metallic ores showed the biggest drops. Excluding coal, U.S. railcar loads totaled 8.7 million in 2012, up 3 percent from the previous year, according to AAR.

Source: U.S. Energy Information Association

What's next?

The Board of Weld County Commissioners at 10 a.m. on Wednesday will hear a proposal for the Plains Tampa Loading Facility, proposed by Plains All American Pipeline, to build a facility to accept up to 68,000 barrels of oil per day and ship it out via trains. The facility would be located along Interstate 76 between Keenesburg and Roggen. Many Keenesburg residents already are against the proposal, fearing it will harm their ways of life -- bringing pollution, noise, truck traffic and extra trains into their agricultural settings. The board meets at the Weld County Administration Building, 1150 O St., Greeley.

Though they've long been a delivery system of choice for many commodities, America's railroads are increasingly becoming an integral part of the oil and gas industry, solving a transportation glut that threatens to slow down production and depress prices.

In the next year or so, Weld County residents could be stopped at the tracks by a lot more crude trains hauling the black gold to out-of-state markets. Rail may become the most prevalent mode of hauling away production from northern Colorado and the Wattenberg field for a few more years before more pipelines are built to keep with a steady increase in production that is only expected to keep rising.

"This is anything but normal operations for the industry today," said Greg Haas, manager of research for Houston-based Hart Energy integrated oil and gas markets. "The production end of the business is certainly overwhelming local refineries nearby where they're producing. That's why you have to reach further afield and more to the Gulf Coast or other coasts."

THE WATTENBERG GLUT

The boom that's dominated headlines is real, and producers are now hitting it big in what they once thought were old, tired plays. With increased technology and experimentation, they're coming out with more production than they have ever imagined. In the Rocky Mountain West, horizontal drilling coupled with hydraulic fracturing have created a boom worthy of billions of investments by global oil giants such as Anadarko Petroleum and Noble Energy -- both with so many assets overseas, the U.S. production would seem a pittance.

But both of them see something in northern Colorado, enough to increase their drilling efforts this year from last -- in Noble's case, doubling its drilling. An estimated 37 million barrels of oil came from Weld County last year. That works out to 101,369 barrels a day and is considered an incredibly conservative estimate.

Throughout this time, the only options to dispose of that production were at the SunCore Refinery in Commerce City, which refines oil into gas for local markets, or the White Cliffs pipeline, which routes the crude more than 500 miles to the trading hub of Cushing, Okla., where it's put out to the national markets.

Together, the refinery and pipeline can take about 120,000 barrels a day and are quickly being overwhelmed. Colorado's total oil production in 2012 is estimated at 47 million barrels, about 9,000 more per day than current resources can handle.

Producers conceivably could stop or slow down their drilling for oil, but there's still demand, and prices still warrant the additional drilling. And all of that drilling has created jobs, tax revenue and retail sales throughout Weld, propping up an economy during a recession.

WHY RAIL?

Rail has always offered some variability in moving crude to different markets, and it has long been the preferred method to bring components such as fracking sand or pipe into the fields. But last year, business picked up in crude takeaways.

"There may have been historically some crude, but not a lot," said Mark Davis, spokesman for Union Pacific Railroad, which traverses Weld County along the U.S. 85 corridor. "Most of the crude in the country moves by pipeline. We have seen numbers rise in the last year. Our group that handles crude saw an increase of 160 percent in shipments from 2011 to 2012."

BNSF Railway reports its crude transportation has grown from 2008 by 7,000 percent to 100 million barrels last year. Railroad officials expect more this year.

Most of the oil being transported via rail through Colorado today is coming from the Bakken, an oil play in North Dakota that is considered one of the country's largest resources, where rail essentially saved the day. Last fall, BNSF, as an example, expanded its facilities up north to have the capacity to take away 1 million barrels a day from North Dakota and Montana. The mile-long rail lines of black tanker cars traveling south along U.S. 85 are becoming more prevalent. Fields in Texas also are expanding.

Northern Colorado's resources in the Wattenberg field, with the Niobrara boom, have developed a bit slower, but they're speeding up. The 40-year-old and much-tapped Wattenberg field has surprised everyone in the past three years, proving itself to be what some in the industry call a "mini" Bakken.

With expectations of increased production now, companies are lining up their resources in Colorado. Pipeline companies are talking about expansions; one has plans on converting a natural gas pipeline to crude.

But pipelines, either converting them or building them, take time.

"Rail is more expensive than pipelines, but it's faster. It can reach the market a little quicker than pipelines," Haas said. "If White Cliffs expands to 150,000 like they've planned, it would be met by another wall. It's all piling into Cushing. Everyone needs to figure out something a little more varied than that."

Oil is priced in two different markets in the U.S., the West Texas Intermediate and Brent exchanges. Brent prices are what producers want, as they're about $30 per barrel on average higher -- based on international oil prices -- than WTI prices. Typically, shipping to the places that demand Brent prices costs more than it's worth. But with the recent gluts at the Cushing trading hub, it can depress prices.

"Yes, you want better prices, but if you are completely limited on pipeline capacity, you just want to get the crude to market," said Adam Bedard, an oil and gas analyst with PA Consulting in Denver. "First, you want a price, and second, you want the best price."

"The highest value markets continue to be the coastlines of both the U.S. and Canada. So by hook or crook, by rail, by car, by pipeline, if they can reach those higher-valued markets, they will," Haas said.

The option of moving that black gold via rail to markets that fetch a higher price is spawning a host of new rail centers to make it happen. In Weld County, rail transloading facilities are popping up. A facility in Carr in northern Weld County has been around for years, and just last year was acquired by Plains All American Pipeline. It has the capacity to load from 15,000 to 35,000 barrels of oil per day onto 160 cars.

Musket Corp. last year opened its own transloading facility in the Great Western Industrial Park in Windsor, with the ability to store 48,000 barrels of oil and the capacity to take out up to 16,000 barrels per day on trains.

Plains All American also has planned a much larger terminal along Interstate 76 between Roggen and Keenesburg, capable of taking in 68,000 barrels per day. It already has commitments from Noble and Anadarko to pipe in their crude from northern Colorado in 12-inch lines to the facility. Plains officials hope to have the facility running by August.

But, the Plains Tampa Loading Facility, as the southeast Weld facility is called, already faces some opposition from area residents worried about truck traffic through Keenesburg and additional wait times because of an already heavy schedule of trains in the area. The proposal will go before the Board of Weld County Commissioners on Wednesday.

Down the road, the Hudson Terminal Railroad also takes in oil to ship out, though on a much smaller scale, said John Birmingham, president of the company, which has 13 miles of tracks.

"We have customers asking us for it," Birmingham said of the business of railing crude. "One of the things is that the pipelines can't be built as fast as rail cars can be set up to haul crude if production increases."

Birmingham is set up for smaller loads, not the "unit trains," which carry on average 100 cars, stretching a mile or more down the tracks.

"There are a lot of refiners that can't handle unit trains," Birmingham said. "There's a niche market for the smaller loads of five to 10 cars."

A transloading facility also may come to Eaton, but its itinerary is not yet set in stone. The town of Eaton is set to sell 43 acres at the old sugar factory to Omaha Track Material , which builds railroads, but also transloading facilities. Plans are preliminary, but they include mostly offloading agricultural products.

"Offloading crude is a possibility, but it's not our favorite thing to do," said Gary Carsten, Eaton's town manager. "Everything's on the table at this point."

Decisions in Eaton should be made in the next two or three months.

Oil and gas officials have made serious plans to keep the rail coming. In earnings calls, they're assuaging investors with broad plans to get product to those better-priced markets.

Bedard sees the addition of rail discussions as another sign of Niobrara success.

"It signals to me that big companies like Noble and Anadarko are seeing good results out of the Niobrara," Bedard said. "They see that their growth is going to outpace pipeline capacity, then they're stuck... and they need to get the oil out."

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Distributed by MCT Information Services

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