I wrote an article recently outlining pipeline companies pursuing pipeline by rail models due to flexibility and relatively low barrier to entry. Since then, I have received several questions regarding what these opportunities mean for the Railroads’ revenues.
BNSF Railway has the most modern, highest speed, and accessible railroad in the Bakken region. Although others come close, such as the Canadian Pacific Railway and CP’s partner lines, BNSF seems to have the greatest advantage. Not only does crude oil need to get out of developing oil regions, but input commodities, such as sand and steel, need to find its way in to drill out the oilfield. For this article, I will focus on outbound crude oil.
BNSF’s vice president of marketing was recently quoted as saying he expects rail to capture at least 25% of the oil produced in the Bakken for the long term. Today, including oil production in Eastern Montana, the Bakken, Three Forks, and other formations produce approximately 500,000 bbl/day of crude oil and projections are it could reach up to 1.2 million barrels per day in the near future. If that is the case, let us assume BNSF hauls approximately 125,000 bbl/day today. With publicly available information, we can calculate how much revenue this means to the railroads.
Each tanker rail car holds between 600 and 700 barrels of oil. For this analysis, let us assume 680 barrels per car. 125,000 barrels per day divided by 680 per car, equates to 184 cars per day being shipped by rail. Because most of the oil wants to go to the gulf coast to take advantage of price differentials, let us assume the destination is Houston, TX and that all of the volume moves in unit trains. The published unit train rate from Williston to Houston is $4005 per car. This equates to $736K revenue per day and $268 Million revenue per year. If production doubles, as some predict it will, revenues could reach $1.4 Million per day and $537 Million per year out of North Dakota/Eastern Montana.
Although Canadian Pacific’s lines are primitive in comparison to BNSF’s, Canadian Pacific and Union Pacific have teamed up to offer somewhat comparable crude transportation options out of North Dakota’s growing oilfields. Canadian Pacific’s feeder line in New Town, ND is well positioned in the center of the Bakken – just north of Lake Sakakawea. However, this line is a very long branch line with limited infrastructure. To alleviate infrastructure constraints, Canadian Pacific runs shorter unit trains, around 80 cars, and hands the trains off to the Union Pacific in Minneapolis for furtherance to the Gulf Coast and other premium crude markets. If CP and UP continue to aggressively develop destination markets and upgrade infrastructure in North Dakota, they may be better positioned to take some of the market share from BNSF.
Several assumptions were made for this analysis and this does not include the thousands upon thousands of carloads of inbound commodities needed for oil drilling and completion. I will focus on the inbound stream for my next article.
As the trend for power plants continues to move away from coal and into natural gas, maybe the crude hauling business will act as more of a replacement for the future decline of coal than a pure growth commodity.