Western Railroad Discussion > BNSF sees "lower crude growth"

Industry experts are watching the drop in crude oil prices. Although some areas like Eagle Ford have "break even prices" in the $50 range, others are in excess of $80. Add in $7 to $12 rail shipping cost, and the incentive to drill new wells vanishes.

One wild card is many OPEC nations like Azerbijian, Russia, and Iran have break even costs well over $100 a barrel. Meaning they are already gushing blood with current price levels. Whether they can allow prices to drop below $70 is unknown

BNSF and NS have a lot of skin in this game, since several of their destinations (Delaware City, Philadelphia, Eagle Point, Yorktown, etc) are set up to take rail or ocean shipping. So, the refineries COULD decide to take cheaper foreign oil for a while.


Bloomberg News

>>BNSF Railway Co. Chairman Matt Rose said expansion of crude-oil shipments is threatened with the commodity’s decline in price, even as a strengthening U.S. economy boosts rail freight.

The growth of shale-oil production will slow with crude in the $70 dollar-per-barrel range and will be eliminated in the $60 range, Rose said yesterday at the RailTrends conference in New York. If prices drop into the $50 range, output would decline. <<

more


http://www.bloomberg.com/news/2014-11-21/buffett-s-bnsf-sees-lower-crude-growth-on-oil-price-drop.html

Lower prices may not last but.... One of the hazards of capital investments. It is always easy to say expand capacity but a ROI always face some uncertainty.

Bob

Increase the supply while demand holds steady or drops, and the price falls. Nothing earth shattering about that. I don't know why this is all coming as such a great surprise.

Funny, though, that just as BNSF completes the major track infrastructure expansions in the North Dakota oil fields, the collapse of prices may make some of it redundant.

At least the Empire Builder and the BNSF's freight time keeping might actually improve.

Art House
Gettysburg, Pa.

The Hiline/Northern Transcon will continue to benefit from this increase in capacity. The Powder River Basin infrastructure is a different story.

aehouse Wrote:
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> Increase the supply while demand holds steady or
> drops, and the price falls. Nothing earth
> shattering about that. I don't know why this is
> all coming as such a great surprise.
>
> Funny, though, that just as BNSF completes the
> major track infrastructure expansions in the North
> Dakota oil fields, the collapse of prices may make
> some of it redundant.
>
> At least the Empire Builder and the BNSF's freight
> time keeping might actually improve.
>
> Art House
> Gettysburg, Pa.

The grain shippers will be happy, as well.

Many oil observers believe the current lower prices will be temporary, and expect to see some of the more highly leveraged small oil companies gobbled up. As India and China resume imports of oil, the surplus capacity will be sucked out of the marketplace.

The Iranians are getting clobbered. The country has minimal refining capacity, and must ship oil out of the country. And, buy it back as gasoline at world prices. Then sell it on the domestic market for about 70 cents per US gallon. Losing a few dollars on each gallon. Couldn't happen to more deserving folks.

i'd read something last week, delta airlines was having to purchase foreign oil because it's upset with delivery delays at it PHL refinery.

Lackawanna484 Wrote:
-------------------------------------------------------
> aehouse Wrote:
> --------------------------------------------------
> -----
> > Increase the supply while demand holds steady
> or
> > drops, and the price falls. Nothing earth
> > shattering about that. I don't know why this
> is
> > all coming as such a great surprise.
> >
> > Funny, though, that just as BNSF completes the
> > major track infrastructure expansions in the
> North
> > Dakota oil fields, the collapse of prices may
> make
> > some of it redundant.
> >
> > At least the Empire Builder and the BNSF's
> freight
> > time keeping might actually improve.
> >
> > Art House
> > Gettysburg, Pa.
>
> The grain shippers will be happy, as well.
>
> Many oil observers believe the current lower
> prices will be temporary, and expect to see some
> of the more highly leveraged small oil companies
> gobbled up. As India and China resume imports of
> oil, the surplus capacity will be sucked out of
> the marketplace.
>
> The Iranians are getting clobbered. The country
> has minimal refining capacity, and must ship oil
> out of the country. And, buy it back as gasoline
> at world prices. Then sell it on the domestic
> market for about 70 cents per US gallon. Losing a
> few dollars on each gallon. Couldn't happen to
> more deserving folks.


Yeah but now the Chinese have too much diesel capacity and are exporting it. As the world turns....

1 Wrote:
-------------------------------------------------------
> i'd read something last week, delta airlines was
> having to purchase foreign oil because it's upset
> with delivery delays at it PHL refinery.


Delta's Monroe plant is a good example of a plant set up to take oil by rail/barge or by barge/ship. Depending on whether it is West African (Nigeria and Angola, mostly) or [Persian] Gulf crude, the per barrel shipping ocean cost is a few dollars. The rail cost is about $9 to $12. So, the sum of the production cost plus the shipping cost tells you where they'll go. (Assuming the grades of crude are similar)

Delta always said it would sell the fuels it didn't need locally, and use the proceeds to buy in other markets where they need fuels. That's one definition of a good hedge.

Whether they're upset with rail is above my pay grade...



Edited 1 time(s). Last edit at 11/21/14 15:57 by Lackawanna484.

Oil has been a really good piece of business, the Lac Magantic disaster and other fires notwithstanding.

There seems to be a prejudiced way of thinking toward railways in this nation of ours. People are screaming for the jobs a pipeline creates, when it is obvious that once it's in the ground, it requires far less jobs than the railroads create by moving the oil.

At any rate, the prospect of falling oil prices may be one more nail in the coffin for a burst of new pipeline construction, since railroads don't require the long term contractual commitment that pipelines do.

As for those other countries, like Iran, it shows what corruption and a fundamental mistrust of capitalism gets you. I'm all for proper regulation, don't get me wrong, but these people can screw up a sure thing with their actions and beliefs.

My bets are this "cheap" oil is only very temporary (funny how $80 a barrel is considered "cheap" now - my how we get used to stuff that only a brief time ago seemed outrageous).

As for reduced oil shipments on the BNSF, in my opinion, that would be a good thing. That will give time for the BNSF to catch up on infrastructure and try to get their over all service back up to where it used to be. After all, the oil will still be there, and probably sooner than later, prices will go back up and the oil trains will be running again; particularly the oil to the east and west coasts where there are no pipelines to haul the oil. Its a good thing that BNSF is owned by Berkshire Hathaway so they should be able to continue investing in infrastructure even as the traffic appears to be (temporarily) declining. I can't imagine many "Wall Street" publically traded companies being able to do that as the pressure would be on to keep profits up, even as revenues might decline some due to reduced traffic.

I wonder how the current situation in the decrease in crude oil prices will affect the oil that's shipped to the West Coast? Historically, does anyone out there know where the west coast refineries originally got their oil from before the oil shale boom? I think the PNW refineries got their oil from Alaska for the most part?

Just to reiterate that Matt Rose offered both the example of lowered growth (more cars of oil than presently, but at a lower rate of growth than recently), and a reduction in carriage (fewer cars loaded than presently) depending on the price of oil.

With shale wells, lengthening the intervals between fracking (new explosives down the hole) would allow the well to continue producing oil but less oil, and at a much lower cost of production.

The ongoing cost of some Bakken wells is probably somewhere around $40-$50, so they'll be producing for a while, regardless of world prices.

I do not know if Yorktown, VA and Northern NJ, are still getting oil by water but they were originally set up for that since rail deliver of crude was unknow at that time. But all the oil train destinations in the Delaware Valley area have the ability to receive crude by water; they are set up that way and still do. There are now 4 Afra's or Suez's at Big Stone anchorage which get lightered and then come upriver. Monroe at Trainor PA cannot get crude directly by rail, it gets it's rail delivered oil to Eddystone then it is barged 4.5 statue miles to Trainor, recently most likely by an ATB named GALVESTON. Have not checked for a few days.

It is just good biz not to rely on one supply source. You play them against each other to get the best deals. Right now Westville, NJ gets 1-2 unit trains of crude a week, Sun Logistics in Philly at least two per day, Eddystone one per day, and PBF at Delaware City two trains a day plus additional crude from all over that may make it three trains per day. But all except Westville, which is a transfer place and not a refinery, still get the lightering ATB's from Big Stone and then the half full ships themselves.

Don't worry about the price of oil. It is not going away. Others are very correct, any capital investment made by a railroad for crude oil business, and it goes away for awhile, can still be used for other purposes. A railroad can haul anything, and there is more demand in almost all commodities. A pipeline cannot do that. Some in Delaware (the lowere/slower) part think the Keystone XL pipeline will reduce the crude oil trains to here. They do not understand geography, or where Cushing, OK really is.

tp117 Wrote:
-------------------------------------------------------
A railroad can haul
> anything, and there is more demand in almost all
> commodities. A pipeline cannot do that. Some in
> Delaware (the lowere/slower) part think the
> Keystone XL pipeline will reduce the crude oil
> trains to here. They do not understand geography,
> or where Cushing, OK really is.

It is maddening. You hear that in al parts of the country. A simple Wikipedia inquiry shows the Keystone XL proposed from Alberta to Steele City, Nebraska, nowhere near either coast. Most of the Keystone project is already done.

http://en.wikipedia.org/wiki/Keystone_Pipeline

NYC6001 Wrote:
-------------------------------------------------------
> tp117 Wrote:
> --------------------------------------------------
> -----
> A railroad can haul
> > anything, and there is more demand in almost
> all
> > commodities. A pipeline cannot do that. Some in
> > Delaware (the lowere/slower) part think the
> > Keystone XL pipeline will reduce the crude oil
> > trains to here. They do not understand
> geography,
> > or where Cushing, OK really is.
>
> It is maddening. You hear that in al parts of the
> country. A simple Wikipedia inquiry shows the
> Keystone XL proposed from Alberta to Steele City,
> Nebraska, nowhere near either coast. Most of the
> Keystone project is already done.
>
> http://en.wikipedia.org/wiki/Keystone_Pipeline

Yes.

TransCanada was smart about a lot of the pipeline. They built sections where they could, and tied in other pieces as they were completed. The border crossing part was/is the hardest.