Long-haul crude runs unfettered by higher oil price

HOUSTON: Union Pacific Corp, the largest US railroad, has seen no pullback in long-haul crude transport despite higher oil prices, company executives told analysts.
The railroad’s crude shipments from North Dakota’s Bakken shale oil play to Louisiana were unfettered by US crude’s sharply narrowed discount to global crudes, said Eric Butler, executive vice president of marketing and sales.
“We feel pretty good about the continued opportunities with that,” Butler told analysts on a conference call.
The railroad on Thursday posted higher second-quarter profits as increased freight rates offset lower volumes.
US crude oil traded at a discount of more than $20 a barrel to London’s Brent crude earlier this year, but that discount by Thursday had narrowed to less than $2 a barrel.
The wider discount helped spur increasing movements of crude by rail as US oil production is booming while pipeline infrastructure to move it to markets hasn’t caught up.
Moving crude by rail adds transportation costs of $10 to $16 a barrel depending on how far it goes, often twice as much or more than the per-barrel cost of it by pipeline.
Butler said Union Pacific had some pullback in short-haul runs from Texas shale and tight oil plays as new pipeline capacity has come online there.
But those shipments were nominal to Union Pacific’s overall crude business, where volumes shipped rose by nearly 40 percent compared to the second quarter last year, he said.
Butler said customer investment in crude oil destination terminals in the St. James, Louisiana oil hub and California bode well for oil shipments — particularly California, which is isolated from the growing inland US crude pipeline network.
“Their local crude production is declining, and that from the Alaskan North Slope is declining, so they are looking to source from Canada, the Bakken, and also from the Permian” in West Texas, “so they need destination terminals in California,” he said.
Such investments are under way by pipeline companies Plains All American and NuStar Energy. Several California refiners also are seeking permits to build offloading facilities so they can bring in crude-only trains that carry 50,000 barrels a day or more.
Producers in the Niobrara shale oil play in Colorado and Wyoming also are turning to rail as they ramp up output to move crude, mostly targeted for California, executives said.
“We have seen no diminishing in the enthusiasm for customer investment in the oil business,” Union Pacific Chief Executive John Koraleski told analysts.