U.S. crude by rail industry slows down after six years of rapid growth

Crude oil shipments by rail dropped nearly 17 percent in the United States last year as low oil prices, reduced oil output and new pipelines ended six years of rapid growth by the oil train industry.

The Association of American Railroads on Wednesday said 410,249 tank car loads of crude oil were transported across the nation in 2015, down from a peak of 493,146 tank cars a year earlier. The tally confirms declines reported by individual railroads and North Dakota officials.

Once a booming business, the loading of crude oil at more than a dozen North Dakota rail terminals now faces a financial squeeze. Many operators are surviving only because multiyear shipping contracts haven't yet expired, according to industry analysts.

"The oil that is moving by rail is being done out of obligation, not opportunity," said Craig McKenzie, chief executive of Wayzata-based Dakota Plains Holdings, which operates a New Town, N.D., loading terminal. "They are fulfilling contractual obligations rather than chasing profit-making opportunities."

Dakota Plains, whose terminal lies in the heart of North Dakota's oil fields, reported a loss in the third quarter and hasn't yet reported fourth-quarter results. But McKenzie said in an interview that the company has increased its share of the shrinking oil-loading market while expanding into the business of unloading trains hauling fracking sand to Bakken producers.

Three of 12 actively monitored North Dakota oil-loading terminals have periods without any activity, including EOG Resources' terminal in Stanley, which hasn't been seen filling a train since July, according to Genscape, a Louisville, Ky.-based energy intelligence firm. Last week, North Dakota terminals loaded 319,000 barrels per day, down 37 percent over the same week a year ago, Genscape said.

Oil trains of 100 or more tank cars still roll across Minnesota, Wisconsin and other states. North Dakota in December shipped about 41 percent of its oil to refineries via oil trains, compared with 72 percent in December 2013, which was the peak share. From 28 to 46 oil trains pass weekly through the Twin Cities, according to the most recent railroad reports.

"Oil trains are still out there, and people are still seeing them," said Peter Dahlberg, who manages the Minnesota Transportation Department's rail service improvement program.

Crude-by-rail traffic jumped fifty-fold from 9,500 U.S. carloads in 2008, the beginning of the shale oil boom, to the peak in 2014. On a typical shipment, about 70,000 barrels of oil are loaded on a so-called unit train consisting of nothing but tank cars.

Justin Kringstad, director of the North Dakota Pipeline Authority, said pipeline capacity added in 2015 via Kinder Morgan's Double H Pipeline in western North Dakota, a decline in oil field production and changed market conditions have reduced that state's reduced crude-by-rail volume.

Yet even with North Dakota's production decline to 1.15 million gallons per day, the state still lacks sufficient pipeline takeaway capacity. One anticipated project — Enbridge Energy's 225,000-barrel-per-day Sandpiper pipeline from North Dakota and across northern Minnesota — has been delayed until 2019 while Minnesota regulators review environmental issues.

Erika Coombs, energy analyst for BTU Analytics in Lakewood, Colo., said the Sandpiper delay and potential delay in another proposed Bakken pipeline though Iowa could help stabilize the crude-by-rail industry.

"If both pipelines are delayed or don't get built, those are volumes that need to continue to move by rail," Coombs said.

Pipelines and oil-hauling railroads like BNSF Railway and Canadian Pacific Railway serve different refiners. Midwest pipelines don't extend to East Coast refineries, which have been buying North Dakota crude and paying the extra cost of rail shipping when the overall price beats ship-delivered oil.

But crude by rail is profitable only when the East Coast crude oil price exceeds the North Dakota price by about $12 or $13 per barrel, leaving room to pay the rail shipping. Lately, the price spread has been narrower.

"For quite a while the spread has not been favorable to railing out to the East Coast or the West Coast," said David Arno, an analyst for Genscape.

Coombs said many rail terminals have two- or three-year contracts with shippers that are expiring. Under current conditions, some of those contracts might not be renewed, she said.

"That is a difficult spot that many of these terminals are in right now," Coombs added.

Yet parts of the crude-by-rail industry remain in a growth stage. Phillips 66 Partners and another company recently completed a $300 million feeder pipeline and rail-loading terminal near Palermo, N.D.

"Over the long term, five or 10 years from now, I still see crude-by-rail as part of the equation," said North Dakota's Kringstad. "It will not be the same type of volumes we have seen in the past."

Oil trains remain a concern of transportation safety advocates, even as new state laws, federal regulations or investments by railroads have focused on strengthening tank cars, reducing speeds, improving track, reducing explosive vapors and preparing for emergencies.

"In virtually all of the categories, the improvements are just marginal," said Fred Millar, a rail safety advocate and consultant in Washington, D.C. "Tank cars will still be releasing their contents … There are going to be continued accidents."

David Shaffer • 612-673-7090 • @ShafferStrib