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N. American rail reaps benefits of energy boom

Keywords: Tags  crude oil, railroads, shale fields, oil sands, pipelines, volume, investments, tank cars Valero Energy

CHICAGO — The oil and rail sectors are experiencing a modern renaissance, with the two becoming more closely linked than ever as the U.S. energy sector booms.

The energy industry’s explosive growth is a "kind of a rail gold rush," Morgan Stanley analyst Evan Calio said during refiner Phillips 66’s recent earnings call. Houston-based Phillips 66 is among a host of firms, including energy producers and railroads, that are ordering rail cars to ship petroleum products all over the country as well as to export markets from shale plays and oil sands.

Phillips 66 started taking delivery of its first group of 2,000 railcars this month, chairman and chief executive officer Greg Garland said.

"We are going to move more Bakken (crude) east and west," he added.

"Rail is growing very rapidly (for) every single (energy) company," Bill Klesse, chairman and chief executive officer of San Antonio-based Valero Energy Corp., told investors last month. "Part of it is because of the uncertainty surrounding some of the pipelines and a long lead time that seems to be developing" to get pipeline projects permitted.

"Buying railcars is (a) big part of our future," Klesse said, adding that lead times for new railcars are 12 to 18 months.

"Our customers are investing in crude by rail," Canadian Pacific Railway chief marketing officer Jane O’Hagan said during the Calgary, Alberta-based company’s recent earnings call. "Our 70,000-carload annual run rate (for oil shipments) was reached in January, and we have in our line of sight two to three times the present volume."

"Volume is going to grow as the market and refinery demand for different crudes evolve and as the spreads move," she said. "The beauty of this product is that—as we work with producers, marketers and transloaders—(we) basically make these markets."

With rail demand on the rise, tank car producers "have stepped up," she said. "Those that are interested in the crude-by-rail markets are certainly getting that demand in place," she said (see related story, left).

Pipelines will eventually be built, O’Hagan acknowledged, but even when they start pumping, rail will remain a viable alternative, particularly as producers and refiners invest in plants and equipment at railroad origin and destination sites.

Petroleum products as a portion of Fort Worth, Texas-headquartered BNSF Railway’s volume rose to 4 percent in 2012 from 1 percent in 2006, chairman and chief executive officer Matthew K. Rose told the Midwest Association of Rail Shippers in a keynote address last month.

Given rising demand and lease rates, "You tank car leasing guys should be buying lunch, dinner, drinks and all of the hotel rooms (for attendees)," he quipped.

And opportunities will likely continue to grow with the "explosion of drilling" in the shale regions. Although pipelines are planned for Colorado, Texas and Mississippi, "rail has a shorter build-up time," he said. In fact, at key sites, he noted, rail is actually handling as much petroleum as the pipelines are.

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