Trains and Trucks are Critical Links in Getting Bakken Crude Oil to Market

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Brother, can you spare a truck? Or some asphalt, workers and railcars? In effect, that's what oil producers, energy analysts, transportation executives, investors and the North Dakota governor said at a late-October conference in Denver on infrastructure needs and investment opportunities in the Bakken Formation.

"Business is booming in the Bakken like never before," North Dakota Governor Jack Dalrymple told about 350 attendees at Infocast's Second Annual Bakken Infrastructure Finance & Development Summit. "The growth has been incredible, to levels we never envisioned only a few years ago. We are creating jobs at a faster rate than any other state right now."

For more on the business opportunities and the infrastructure needs of the Bakken, see October 26, 2011, article - Bakken Formation Has More Oil and Gas Than Prudhoe Bay, CEO Claims; October 27, 2011, article - North Dakota's Electric Grid Strained by Dramatic Growth of Oil & Gas Drilling; and October 28, 2011, article - Oil & Gas Drilling Boom Creates 'Gold Rush' in North Dakota's Bakken Formation.

"There's been a significant expansion of North Dakota's outbound rail capacity for crude oil, and by the end of 2012, we'll see another sharp increase," Ed Metz, a vice president at PennWell Corporation (Tulsa, Oklahoma), told conference attendees. Last year, North Dakota had about 65,000 barrels per day (BBL/d) of outbound rail transportation capacity for its crude oil. But by the end of this year, the state will add about 235,000 BBL/d of new crude-oil rail transportation capacity. And another 350,000 BBL/d of crude-oil rail transport capacity will be operating by year-end 2012, he said.

"Rail companies are an important part of the Bakken story," Metz said. "They got in early and they're here to stay because this is big business for them." His comments were echoed by other speakers at the conference.

"We haven't seen unit trains of crude oil for decades--but all that's old is new again," said Alan Roach, senior vice president for business development at Watco Companies LLC (Pittsburg, Kansas), one of the largest short-line railroads in the U.S. Brisk business in the Bakken will help push his company's annual revenue to about $1 billion in a few years, up from about $350 million now.

Watco currently has three crude-oil transloading facilities operating in North Dakota, two more under construction, and an additional nine under development, Roach told conference attendees. "Transloading crude oil is our fastest-growing business segment," he added.

It takes about 12 months and $35 million to $50 million to construct a crude-oil rail loading facility that can handle 120,000 BBL/d, he estimated. Oil production in the Bakken formation also is driving an increase in demand for railcars: "We're going to need thousands of new railcars just to transport crude oil out of the Bakken. Fortunately, the recession means there's spare production capacity at the major railcar manufacturers."

Today, rail companies transport somewhere between one-quarter and one-third of all crude oil produced in North Dakota. That proportion is expected to increase over the next year or two as crude-oil production continues to grow and more rail facilities are brought online. It is faster and cheaper to add incremental railroad capacity compared to crude-oil pipeline capacity. But several crude-oil pipelines are scheduled to be completed over the next two to three years, easing transportation crunches and bringing back some market share from railroad companies. For more on this issue, see November 1, 2011, article - Bakken Formation: Hydrocarbon Infrastructure Can't Keep Up with Rising Production.

Alan Shaw, a group vice president for Norfolk Southern Corporation (NYSE:NSC) (Norfolk, Virginia), said his railroad wants to transport crude oil from the Bakken to refineries on the East Coast, which are now paying high prices for the Brent crude oil they are processing.

The state's still-developing rail and pipeline infrastructure has meant a sharply increased reliance on trucks to transport crude oil the "first mile," from the well site to a rail transloading facility or a pipeline, speakers said. "Trucks and rail companies have to work collaboratively as the state's pipeline network is still being built," Watco's Roach said.

That strong reliance on trucking has created its own set of challenges and bottlenecks. "It's really hard to get trucking capacity today because trucking means drivers, and you can't find drivers," Roach said. "Labor is difficult to find and even harder to keep. We need all the help we can get." Recent stories in the national news media have pegged truck drivers' pay at $80,000 per year.

Work conditions in the Bakken can be arduous: Temperatures run from 40 below zero during the winter to 110 degrees in the summer. Food, housing and everything else is expensive. Roads are clogged and beaten up by a seemingly endless procession of trucks. What was a 90-minute trip a few years back is now a four- to five-hour gruel, speakers said.

So many of the state's roads are unpaved that trucks come back to worksites caked in mud up their wheel hubs. "I'm sure looking forward to the day when they pave some roads up there," Roach noted wryly. Governor Dalrymple said the state has spent more than $1 billion to build roads last year, but agreed that truck traffic has caused "extreme wear and tear" on the state's roads. "That's one of the challenges of the welcome oil boom we are seeing."

Speakers and attendees were hopeful that the Keystone XL pipeline would be approved and constructed, as it would add a lot of transportation capacity. For more on the Keystone XL project, see October 19, 2011, article - Keystone Crude Oil Pipeline Expansion Draws Strong Support, Fierce Opposition. But if that project is not permitted, or if construction takes longer than expected, "it will put a big kink in people's plans," said PennWell's Metz. "If the Occupy Wall Street people become the Occupy State Department people, we're going to have a lot of problems."

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