Rails to Riches

As the shale revolution continues to produce growing outputs of crude, the midstream sector struggles to keep pace. Rather than wait for new pipelines to come online, many exploration and production companies continue to expand rail transportation facilities. Logistics companies, refiners, traders and others have announced new and expanded rail-loading facilities in response to the growing need for transport. The need is most acute in the Eagle Ford and Bakken shales, which continue to experience take-away constraints. The next area of concern focuses on the Niobrara and the Permian Basin.

Crude oil production in the Williston Basin, which is primarily from the Bakken formation, is just above 600,000 barrels (bbl.) per day, according to the U.S. Energy Information Administration. By some estimates, production in the Bakken may reach 700,000 bbl. per day by 2013 and as much as 1 million bbl. per day by 2015. The ongoing growth is stretching pipeline networks and forcing producers to use rail and trucks as well as pipelines to move crude. Because of the constraints in transportation, Bakken crude continues to hold a discount to prices seen in the Midcontinent and the U.S. Gulf Coast. The Bakken region has only one refinery, Tesoro Corp's 58,000 bbl. per day facility in Mandan, North Dakota. The rest of the crude has to be moved out of the region by rail, truck or pipeline. Tesoro is working to expand the capacity at that plant by 10,000 bbl. per day and expects to complete the expansion by the end of second-quarter 2012.

BNSF Railway Co. and Canadian Pacific are the two rail operators in the Bakken, which collectively could move as much as 25% of the total crude production from the region.

Greg Haas, manager of research at Hart Energy LLP., says the need for rail terminals has attracted a wide variety of logistics providers, including producers, midstream operators and refiners, which have all started developing rail terminals. "Coast to coast, there are 41 separate rail terminals that we are tracking," he says.

Justin Kringstad, executive director of the North Dakota Pipeline Authority, estimates that 222,000 bbl. per day will move out of several rail shipping points in the Bakken by the start of 2013. The largest is the EOG Resources Inc.'s rail terminal in Stanley, North Dakota, which ships about 65,000 bbl. per day on unit trains. In addition, Hess Corp. has built a rail hub in Tioga, which currently ships about 25,000 bbl. per day. That output will gradually increase to about 50,000 bbl. per day by the end of the year.

St. James terminals

In response to the growing demand for rail terminals, NuStar Logistics LP and EOG Resources Inc. have developed a 70,000 bbl. per day unit train off-loading facility at NuStar's crude oil terminal in St. James, Louisiana. Under the agreement, EOG owns the rail-unloading facility, while NuStar owns the ancillary assets around the terminal, including an 8 million bbl. storage facility. NuStar, which is adding storage tanks with a combined 362,000 bbl. of capacity, operates the terminal.

The new facility began unloading unit crude trains in mid April. The crude coming from the trains can go in one of three directions: into storage at NuStar's terminal, on barges to nearby refineries or into one of several major crude pipelines that pass through St. James, says Jim Siciliano, vice president of business development at NuStar Logistics.

NuStar Logistics LP and EOG Resources Inc. have developed a 70,000 barrel per day unit-train facility in St. James, Louisiana. Source: NuStar Logistics LP

Union Pacific Rail Corp. operates the rail lines that transport the crude to the terminal, which generally receives shipments from the Eagle Ford and the Bakken. EOG Resources is active in both the Bakken and Eagle Ford and was among the first to implement unit trains. EOG Resources first unit-train loading facility was built in Stanley, North Dakota.

EOG pays NuStar fees to operate the rail-unloading facility and storage fees if the production goes into storage. NuStar's storage facility has access to all pipelines running into St. James, which gives upstream operators and markers additional flexibility for the end use of the crude coming from the trains.

The terminal in St. James, Louisiana, is one of 84 that NuStar owns across the country. Its terminals store and distribute crude, refined products and specialty liquids. About 65% of its terminals have rail-loading or offloading capacity. Meanwhile, the company continues to develop other manifest and unit train systems, Siciliano says.

The growing output of oil from U.S. shale plays will ensure that rail transport will continue to play an important part of the country's midstream infrastructure for the foreseeable future, he says.

Rail transport has at least three advantages over the pipeline network. First, regulators generally approve new rail facilities more quickly than new pipelines. Second, rail terminals have lower startup costs than their fixed pipeline counterparts. And third, rail transport gives operators and crude marketers flexibility that the pipeline network cannot offer.

"What's driving rail is that you can get to multiple markets from one location," he says.

Pipelines, on the other hand, have a clear advantage in cost for operators. By some estimates, moving crude from the Bakken to the U.S. Gulf Coast costs around $7 per bbl. by rail, compared with the cost of pipeline transport at around $1 per bbl.

NuStar's terminal is separate from another terminal recently expanded by U.S. Development Group LLC (USD) in St. James. USD, a developer of unit-train logistics and terminal facilities, recently doubled its own St. James terminal to 130,000 bbl., or two unit trains, per day. The terminal at St. James started operations in the summer of 2010 and is part of USD's nationwide network of crude and condensate facilities under development.

USD's St. James facility includes seven miles of rail track and a fully automated 52-spot, high-speed railcar offloading rack. USD has also started construction of an additional rail track that will soon begin service.

The facility is served by Union Pacific Corp., which delivers train shipments of crude oil, condensate and related products from the Bakken, Niobrara and Eagle Ford shale plays. USD's terminal is connected via pipeline to a crude and condensate storage terminal operated by Plains Marketing LP.

The partners in the program stress that crude by rail is a safe and reliable form of transport that gives upstream producers and marketers additional flexibility and better pricing. Low-sulfur crudes on the U.S. Gulf Coast trade at a significant premium to the same grade in the Midcontinent because of pipeline constraints that restrict the free flow of product to market. The country's rail network, they say, is an important element in getting around this bottleneck, as rail terminals give refiners and blenders access to a steady supply of high-quality sweet crude.

Meanwhile, USD will build a crude-loading facility in Van Hook, North Dakota, which will take crude from tanks and trucks and put them on trains moved by Canadian Pacific Railway Ltd. The facility will have an initial capacity to handle up to 35,000 bbl. per day at eight automated truck-unloading positions. Once the terminal is fully built, capacity will expand to accommodate up to 30 unit trains per month, USD reports.

USD also started operations at a separate crude terminal from the Niobrara shale. The company will load crude from the facility in Carr, Colorado. The facility is USD's third in a nationwide network of crude oil and condensate terminals. The truck-to-rail loading facility will handle up to 35,000 bbl. per day of crude at 30 truck unloading positions. Served by Union Pacific Railroad, its outbound destinations include refiners on the U.S. Gulf Coast with the capacity to receive crude by rail. The terminal will have an initial loading capacity of 60 railcars per day, but USD plans to double that capacity.

USD has also built a rail logistics terminal near Cotulla, Texas, to load crude from the Eagle Ford held in nearby tank and gathering pipelines. Eventually, the facility will have direct truck-to-rail loading capacity to handle 40,000 bbl. per day at 10 truck unloading positions. The facility, which is serviced by the Union Pacific Railroad, joins its St. James rail terminal in Louisiana.

In addition, USD purchased an adjacent 500-acre parcel in LaSalle County near Gardendale, Texas, and has begun developing land parcels at the Eagle Ford crude terminal for pipeline companies, producers and marketers to construct infrastructure with open connectivity to the hub.

Crosstex Energy LP is also expanding the capacity of its rail facility in southern Louisiana. Its Riverside fractionation facility currently has a rail terminal which moves 4,500 bbl. per day of crude from rail cars to barges and pipelines. That terminal will expand to 14,500 bbl. per day by first-quarter 2013.

Moving east, moving west

The growing network of unit trains has sent Bakken crude to areas that did not previously receive it, such as the east and west coasts. Greg Garland, the chief executive of Phillips 66, the downstream branch of what was once ConocoPhillips Corp., said the company plans to process more shale oil, which will require more rail unloading, rail cars and storage to facilitate the movement of crude to the U.S. Gulf Coast.

Phillips 66 started running unit trains from the Bakken shale in North Dakota to its 238,000 bbl. per day Bayway refinery in Linden, New Jersey. In addition, it is taking trains to its West Coast refineries.

Elsewhere, Tesoro Corp. will be able to transport more crude to its 120,000 bbl. per day refinery in Anacortes, Washington, from the Bakken. Tesoro announced a $50 million project to take crude from the Bakken, and to cut supplies from Alaska's North Slope, by increasing rail shipments from the Bakken to 40,000 bbl. per day. It currently receives between 1,000 and 2,000 bbl. per day from the Bakken. Initially, the project was designed to move 30,000 bbl. per day, but Tesoro has ordered additional rail cars to accommodate another 10,000 bbl. per day. Tesoro has stated that the Bakken crude yields about 16% more clean products and less fuel oil than crude from Alaska's North Slope.

The lower cost of Bakken crude has also attracted the attention of East Coast refiners, which are trying to get larger amounts from the region by rail. Rail terminals in New York, New Jersey and Virginia are scheduled to expand or open, according to data compiled by Bloomberg. The terminals may take as much as additional 250,000 bbl. per day

Other terminals are also under construction or in the planning phases. Plains All American Pipeline LP, for example, announced in regulatory filings that it will complete a rail terminal in Yorktown, Virginia. The facility will have a capacity of 60,000 bbl. per day.

Concern in the Permian

The growing production from the Permian Basin is another cause for concern among upstream producers. Pioneer Natural Resources Co. chief executive Scott Sheffield warns that the growing amount of oil out of the basin is constraining take-away capacity. Midstream providers need to act quickly to expand capacity, he told attendees at Hart Energy's recently held DUG Conference.

"One of the biggest issues we have in the Permian Basin is just getting the oil out," Sheffield says. "It's tight right now. We cannot afford to have a $25 discount (to West Texas Intermediate) like you've seen in the Bakken."

Current take-away capacity in the Permian is 1.1 million bbl. per day, which is more than 90% utilized with current spare capacity hovering between 50,000 to 100,000 bbl. per day. That narrow cushion "can squeeze to zero instantly" if a local refinery goes on downtime, he says. The rig count in the Permian is approaching 500, a five-fold increase in the past three years, as high oil prices have invigorated new drilling. Production is growing by 150,000 bbl. per day per year from the region, he says.

In the absence of pipeline capacity, operators will turn to trucks and rail to move crude out of the region, he says, adding that he believes pipelines are still the best option.