Despite new safety rules requiring retrofitting or replacement of tank cars used to transport oil by rail, a host of market conditions will at least delay any boost the steel industry could have foreseen from an increase in orders for the new rail cars.
During the latest energy boom, the transport of crude oil by rail became a nimble competitor to the nations pipeline system, but high-profile accidents, an abrupt drop in energy prices and tougher regulations on tank cars conspire to keep pipelines the number one choice for moving oil from its source to refineries. This decades quick ramp-up of oil extraction through hydraulic fracturing offered the rail industry a timely opportunity to service the fledgling oil fields, but industry observers expect the pipeline industry to be better positioned to handle the volume by the time prices and local production rebound.
Whats going on here, with oil prices so low, theres just not really demand for retrofitting rail cars, according to Phillip K. Bell, president of the Steel Manufacturers Association in Washington.
Theres no question both the pipeline and crude-by-rail (CBR) industries boomed between 2009 and 2014.
Between 2010 and 2014, crude oil pipeline mileage in the United States increased 12,000 miles or 22 percent, according to the November 2015 U.S. Liquids Pipeline Usage & Mileage Report jointly issued by the Association of Oil Pipelines and American Petroleum Institute. There were pipelines stretched over 199,000 miles across the United States in 2014, a 3.5-percent increase over 2013, according to the report, and crude oil pipeline mileage grew more than 5,000 miles in 2014, a 9.1-percent increase over 2013.
Likewise, the crude-by-rail industry grew.
A November 2015 U.S. Rail Crude Oil Traffic report from the Association of American Railroads concedes pipelines historically have moved the nations oil, but noted that North Dakotas shale oil fields had offered a unique growth opportunity.
Originated carloads of crude oil on U.S. Class I railroads (including the U.S. subsidiaries of Canadian railroads) rose from 9,500 in 2008 to 493,146 in 2014, the report says, citing a nearly 5,100-percent increase in that period. Terminated carloads of crude oil on U.S. Class I railroads rose from 9,344 in 2008 to 540,383 in 2014.
Both the rail and pipeline industries tout their safety and environmental records, but neither could fully avoid the accidents and added scrutiny brought on by the added volume.
It was nice to see something growing, according to Anthony Hatch, principal at ABH Consulting in New York, but as fracking attracted controversy and rail accidents occurred, All of a sudden railroads were in the spotlight.
Most dramatic was the fiery July 2013 oil train derailment in Canada in Lac Megantic, Quebec, which claimed 47 lives and effectively leveled the town. Since then, the U.S. Department of Transportation reports at least 14 U.S. derailments involving crude oil, propane or ethanol.
The fiery rail crashes, though relatively rare, brought regulatory scrutiny and eventually led to new safety rules for tank cars. By August 2013, the Federal Railroad Administration issued an emergency order on properly securing rolling equipment. More regulations regarding train speeds, emergency response and environmental remediation quickly followed.
The biggest opportunity for the steel industry came from rules regarding retrofitting of older tanks cars and stricter standards for new cars.
According to a May 2016 report by the Federal Railroad Administration, as many as 172,174 tank cars were classified as carrying materials classified as hazardous by the U.S. Department of Transportation Pipeline and Hazardous Materials Safety Administration as of Jan. 1, 2014.
The Railroad Administration estimated in its report that the required fittings, valves, welded metal jacket and truck reinforcement to carry the cars added weight would cost $88,7000 per retrofitted legacy DOT 111 tank car. Depending on the cars specific type and vintage, retrofitting deadlines range from January 2017 through May 2025.
The report estimates that replacing the nations entire fleet of 257,459 Class 111 cars at an average purchase cost of $140,000 per tank car to conform to the latest industry standard would cost approximately $36 billion. Modification and retrofitting of the fleet of Class 111 cars is approximately $22.8 billion, or approximately $8.9 billion for those cars in flammable liquid service alone.
Despite the estimates, energy market realities have so far parked those multi-billion dollar rail opportunities on a siding.
The rail industry, for its part, does not object to the new tank car rules but defends its safety record.
There is no greater priority than safety for the freight rail industry and it is embedded in all areas of train operations, Ed Greenberg, media relations director for the Washington-based Association of American Railroads, said in an email. Advancing safety is an ongoing 24-7 focus for our industry and as the transportation provider, we take that responsibility very seriously.
Thousands of trains safely move across the country every day without any issues, and rail safety has been dramatically improving over the last several decades. That said, our industry recognizes the concern that has been expressed and as a shared responsibility with shippers, we need to continuously enhance safety even further. This is a priority of the nations freight railroads.
He said the train derailment rate on the countrys 140,000-mile mainline network in 2015 was down 58 percent from 2000 and about 80 percent since 1980, and noted that less than 1 percent (0.37 percent) of derailments involve crude oil, with 99.99 percent of all tank cars containing hazardous material (including crude oil and ethanol) arriving at destination without incident.
Although railroads do not own the rail cars, The freight rail industry. . . has advocated for stronger tank car standards for years, and it is this industrys position every tank car carrying crude oil or any flammable liquid needs to be upgraded or replaced, Greenberg said.
While safety concerns have led to rail industry changes, the sprawling pipeline industry has not escaped scrutiny.
A 2013 report Pipelines Are Safest for Transportation of Oil and Gas from the Manhattan Institute for Policy Research lists net barrels spilled from U.S. pipelines from 1992 through 2011. It shows the spills vary greatly by year with a low of 32,258 barrels in 2009 and a high of 123,419 barrels in 2010. But, the report states that reporting requirements changed in 2002.
Between 1992 and 2002 a spill only had to be reported if it was greater than 50 barrels of liquids or CO2 (after 1991), the report states. However, beginning in 2002, the limit was dropped to five gallons, with an exception for maintenance-related spills of five barrels or less confined to company sites. Hence, minor spills that were not reported prior to 2002 were reported afterwards. From 1992 through 2001 an annual average of 383 incident reports were filed with (the Pipeline and Hazardous Materials Safety Administration). Then, from 2002 through 2011, companies filed an annual average of 644 incident reports.
The previously cited U.S. Liquids Pipeline Usage & Mileage Report is unequivocal, stating, Pipelines are among the safest, most cost-effective and efficient ways to deliver energy liquids. A barrel of crude oil or petroleum products reaches its destination safely over 99.999 percent of the time. Delivering crude oil by pipeline can cost per barrel as little as half of other modes of transportation. Lower costs applied to the billions of barrels of crude oil flowing across our nation make pipelines the most efficient means of transporting petroleum products.
Even so, at least one environmental group isnt convinced. Sam Rubright, manager of communications and partnerships at Camp Hill, Pa.-based FracTracker Alliance, said in an email, We feel that pitting trains vs. pipelines against each other closes off a potential third option in the dialogue: leaving these fossil fuels in the ground to begin with.
On transporting crude by rail from the Bakken Shale formation, she said, We found that over a period of two years, crude oil trains exploded 10 times, killing 47 people. This risk is compounded by the fact that these trains can go through or near large population centers. Generally, transporting oil and gas products by train introduces the risk of spills, derailments, and explosions. Additionally, more monitoring is needed to determine how much air pollution this source contributes by way of hydrocarbon venting from the train cars.
Regarding pipelines, she said they may not be located as close to high-density areas, but they are more common than railroads (when you include gathering and distribution lines) and possibly more likely to leak due to aging infrastructure. . . . Pipelines also require numerous compressor stations, facilities that operate 24-7 to maintain the pressure of the gas within the pipeline. In addition to being noisy, compressor stations are known, stationary air pollution sources.
These data and incidents demonstrate that there is no safe way to transport oil and gas products, although safety is a relative term, she concluded.
While controversies like the lengthy XL Pipeline review process and veto or the more recent Dakota Access Pipeline protests have shined a light on the pipeline industry, industry observers remain confident of future potential.
My understanding is that most believed 2016 would be a gangbuster year for construction, but permitting and other delays have pushed a lot of the work off until 2017 and beyond, Cathy Landry, vice president of communications for the Interstate Natural Gas Association of America (INGAA), said in an email. Based on our 2035 midstream report, we still see a large amount of pipeline development in the next few years, but there seems to be a little shift in the timing.
In an INGAA Foundation Inc. summary of the 2035 midstream report, the foundation estimates capital expenditures for new infrastructure to range from $22.5 billion to $30 billion between 2015 and 2035. The report originally estimated more than 4,000 miles of pipeline being added in 2016, but market realities have crimped that number for now.
The report lists six planned spreads of pipe that have been stalled, largely by state and federal permitting delays.
Evan Martinez, communications associate of the Washington-based American Iron & Steel Institute, said in an email that although domestic steel shipments for use in the oil and gas sector fell 50 percent between 2014 and 2015, demand for line pipe steel has been relatively more stable than OCTG (oil country tubular goods, used in the drilling process) due to the long permitting process prior to constructing a pipeline, and to the fact that line pipe is also used for natural gas pipelines.
But, he said, Domestic steel producers have been negatively impacted by elevated levels of imports in recent years, due in large part to unfair trade practices. This has been compounded by weak steel demand, one cause of which has been the downturn in the oil market.
Martinez reiterated that rising oil production before the 2014 downturn meant that there was insufficient pipeline capacity to carry additional output, so rail transportation of oil in tank cars grew as an alternative. This drove increases in rail car manufacturing for several years as a backlog developed for new tank cars.
Since the energy downturn, the railroad and rail car manufacturing industries have responded quickly.
According to the Association of American Railroads 49,279 tank cars were in use for crude oil service during 2015, while 22,445 tank cars were in use in the first six months of 2016. The number of older style DOT 111 tank cars in use requiring the earliest retrofit dropped a whopping 89 percent to 763 in 2016 from 7,149 cars in 2015.
ABH Consultings Hatch noted that the rail car industry had ramped up quickly to meet tank car demand growing to almost 500,000 cars from about 5,000 from 2009 to 2014, but since the energy downturn, even some of the newer cars went right into parking.
Third-quarter results reported Oct. 27 by Dallas-based industrial equipment manufacturer Trinity Industries Inc. show a continuing weakening in the rail car sector. Trinity reported operating profit for its Rail Group of $103.6 million in the third quarter of 2016, down 53.6 percent compared with the third quarter of 2015. The rail group primarily builds and sells rail cars.
Although Trinity does not break down rail car order by type, the company said in an Oct. 26 news release on its results that, The decrease in revenues and profit was primarily due to lower railcar deliveries and changes in product mix. The Rail Group shipped 6,595 railcars and received orders for 1,260 railcars during the third quarter. The Rail Group had a backlog of $3.7 billion as of Sept. 30, 2016 representing 34,870 railcars, compared to a backlog of $4.29 billion as of June 30, 2016 representing 40,205 railcars.
Thats down from the same quarter in 2015 when Trinity reported shipping 8,220 rail cars and receiving orders for 3,655. At that time The Rail Group had a backlog of $6.25 billion as of Sept. 30, 2015, representing 55,265 railcars, compared to a backlog of $6.90 billion as of June 30, 2015, representing 59,830 railcars. That backlog of orders was expected to last into 2020.
Numbers from the Washington-based Railway Supply Institute Inc. (RSI) confirm the trend.
Third-quarter orders for all types of tank cars totaled only 881, down 39.8 percent from the same quarter of 2015 and plummeting 89.2 percent from 2014s third-quarter total of 8,137 tank car orders, according to RSIs third-quarter reports of orders, deliveries and backlog. The third-quarter 2016 backlog of 21,317 tank cars is down 51.8 percent from the third quarter of 2014.
Orders were huge, and the overall rail car backlog had reached historic highs before the unfortunate dramatic downturn in orders, according to RSI president Thomas D. Simpson. We were riding high.
Today, rail car builders continue to work through their backlogs, but Hundreds of thousands of rail cars of all types are parked, Simpson said.
It may be cold comfort to environmental activists, but Trinitys Energy Equipment Group reported that lower revenues reported in the third quarter were partially offset by higher delivery volumes in the wind towers business. The Energy Group reported revenues of $241.7 million in the third quarter of 2016, down 16.5 percent from the same quarter of 2015.
During the second quarter, we announced the receipt of a $940-million wind tower order that delivers over a three-year period beginning in 2017, William A. McWhirter II, Trinitys senior vice president and group president, construction products, energy equipment and inland barge groups, said in the firms third-quarter 8-K report to the Securities and Exchange Commission. We also received a small order for wind towers during the third quarter. Continued growth in the wind tower industry is expected due to the production tax credit and improved wind power productivity.
According to the U.S. Energy Information Association, the rail industry transported about 11 percent of the nations crude oil in 2014. Although it may be difficult to hit those numbers again, crude by rail has cemented its role in the energy system.
Because of the deliberate permitting process, pipelines were impractical during the last U.S. oil boom, but ABH Consultings Hatch expects the pipeline industry to be better positioned when demand increases. Even so, Rail showed their greatest asset to the oil industry is their flexibility, he said. (Crude by rail) will retain a role because of its flexibility.
SMA president Bell summed it up: After it (Keystone XL) was vetoed, it kind of didnt matter, and you didnt even have people talking about it because the oil is going to get where it needs to whether by a different pipeline or by train car.