Big oil producers in Texas shifting to crude-by-rail

Repost from Midland Reporter-Telegram
[Editor: Significant quote: ““The Permian Basin may be a lot larger than the Bakken and Eagle Ford combined….”  Note: I have added a map of the Permian Basin below this article.  – RS]

Basin operators increase interest in shipping oil by rail

By Mella McEwen. July 31, 2014

Oil Trains

Billions of dollars have been pouring into the Permian Basin in recent years as pipelines rush to help producers move their crude and natural gas to market.

Despite the investment in new pipelines and gathering lines and expansion of existing lines, takeaway capacity remains tight and producers are increasingly turning to the railroads for relief.

Using trains to move crude to market is nothing new, points out Bruce Carswell, West Texas operations manager for Iowa Pacific Holdings. “There has been, over time, crude oil moving by rail out of the Permian Basin almost since the beginning” of oil production, he said.

The increase in pipeline construction has not kept pace with the increase in production from drilling activity, he said, and the railroads his company operators are seeing increased shipments across the board.

Judging by the ringing of his phone, Christopher Keene, president and chief executive officer of Rangeland Energy, says demand for moving Permian Basin crude by rail is growing. His Sugar Land-based company is in the process of constructing the Rangeland Integrated Oil System in the Delaware Basin. A rail terminal is under construction near Loving, New Mexico that will open in October with truck-to-rail transload operations. Initial capacity will be 10,000 barrels a day, eventually growing to high-speed unit train loading capacity of over 100,000 barrels a day. It will be served by the BNSF Railway.

Rangeland is also planning its RIO Pipeline, which will connect the new RIO Hub in Loving to the RIO State Line Terminal and then Midland, which will provide connections to various terminals and interstate pipelines to Cushing and the Gulf Coast.

Carswell’s company operates two railroads, the Texas-New Mexico from Monahans to Hobbs and Lovington and the West-Texas Lubbock, which runs from Lubbock to Seagraves and a line that runs from Levelland to Whiteface.

While new pipelines will come online later this year and into next year, Carswell said, “But my observation is they’re drilling a lot more wells, too.”

Producers, observed Khory Ramage, president of Ironhorse Energy Partners, didn’t expect as big an increase in production as has been seen.

“It just accelerated,” said Ramage, whose company is building a rail terminal at Artesia. The company, which he founded with brother Kyle, already has laid 7,000 feet of track and connected to the BNSF main line. The first phase of the development calls for 18,000 feet of track to accommodate rail cars unloading proppants. By the time development of the unit train terminal is done, there will be nine-and-a-half miles of track with a loop track to hold 200 loaded railcars at once.

“The Permian Basin may be a lot larger than the Bakken and Eagle Ford combined,” he said. “Bringing production into and out of the market is vital.” He reported that his company is talking to two different entities about moving their production.

Keene said his company “just landed the 800 pound gorilla out there in the Permian Basin,” a name he was not yet ready to announce.

The rising use of rail to move crude production has caught the public’s attention recently in the aftermath of the derailment in Canada that killed over 40 people as well as derailments that have resulted in spills. New safety regulations are being proposed by the federal government, something Carswell said the industry welcomes because it has been waiting for the federal government to approve new standards for awhile.

“There’s been a fair amount of effort to improve the safety aspect of moving any flammable liquid,” he said.

Keene said he is glad there is a conversation about safety and said he sees three areas where change is occurring or needed: Safer rail cars need to be designed, the railways themselves need to be maintained and speed in certain areas should be addressed.

“I’m a firm believer rail is here to stay,” Keene said, “if it’s done the right way, in a safe and environmentally friendly manner. I think the industry is going to continue getting better.”

For his part, Ramage sees a need for both rail and pipelines, saying there will always be options for rail. He saw the impact on rail demand with the rise in production from the Bakken in North Dakota and Wyoming. That prompted him and his brother to form Ironhorse.

Keene said the Delaware Basin is different in that the crude seems to want to move by pipeline, but when it can’t, for whatever reason, producers are turning to railroads.

Another benefit of railroads, Carswell said, is they offer producers flexibility as to where to send their commodities, especially given the price differentials. “This week, shipments may go to the Gulf Coast but next month they may go to the West Coast or the East Coast.”

“What’s predominantly driving this is the price differentials” between West Texas Intermediate-Midland, West Texas Intermediate Cushing and even Louisiana Light Sweet, Keene said, a gap that has reached as much as $20. “That’s huge,” he said.

Another driver, he said, is pipeline constraints, and even though significant new and expanded capacity is expected in the coming year, he said price differentials are still playing a role.

Ramage said flexibility is important, especially as traditional pipeline destinations like Cushing, Oklahoma and the Gulf Coast are becoming inundated with light sweet crude. In the 1990s, he noted, refineries were retrofitted to process heavier, more sulfur-laden crudes that were being imported, making them slower to respond to the rise of light sweet crudes from unconventional shale plays.

That quality, Keene said, is the third driver in rail demand. “A lot of the new crude is outside pipeline specifications” of 42 API Gravity, though some pipelines have inched that up to 44 API Gravity. Much of the crudes now coming from shale plays are 45 to 55 API Gravity, he said and can even be considered condensate or natural gasoline.

Producers then have three options, Keene said: Rail the crude to a splitter, where the condensate is split into different components like distillates and naphtha, send it by rail to Canada for use as diluents or send it by rail to coastal terminals where, hopefully, the government will classify it as stabilized condensates that can be exported overseas.

Allowing exports could be key to the industry’s future, Ramage said.

“The only concern is if the government doesn’t consider the importance of lifting the export ban,” he said. “We may see prices decrease and the energy revolution we’re experiencing slow down.

Map of the Permian Basin:

 

 

Valero Energy reports second quarter 2014 results

Repost from Energy Global
[Editor: This article refers to “Brent crude oil.”   Wikipedia: “Brent Crude is a major trading classification of sweet light crude oil that serves as a major benchmark price for purchases of oil worldwide. Brent Crude is extracted from the North Sea, and comprises Brent Blend, Forties Blend, Oseberg and Ekofisk crudes (also known as the BFOE Quotation)….Brent is the leading global price benchmark for Atlantic basin crude oils. It is used to price two thirds of the world’s internationally traded crude oil supplies.”  – RS]

Valero Energy reports second quarter 2014 results

31/07/2014

Energy Global special reports

Valero Energy Corporation has reported financial results for the second quarter of 2014 (Q2). Net income from continuing operations attributable to Valero stockholders was US$ 651 million, US$ 1.22/share, compared to US$ 463 million, US$ 0.84/share, for the second quarter of last year.

Operating income for Q2 was approximately US$ 1.1 billion compared to US$ 805 million in the second quarter of 2013. The US$ 280 million increase in operating income was due primarily to higher refining throughput volumes and wider discounts relative to Brent crude oil for sour and certain North American light crude oils. These positive drivers were partially offset by weaker gasoline and distillate margins relative to Brent crude oil in most regions and higher natural gas costs in the second quarter of 2014 versus the second quarter of 2013.

Valero CEO and President Joe Gorder commented: “Valero delivered solid financial results for the quarter despite generally weaker product margins relative to Brent crude oil. We continued to execute our strategy to reduce feedstock costs by processing additional volumes of cost advantaged North American crude oil and investing in logistics assets to deliver those feedstocks to our refineries”.

Refining throughput volumes averaged 2.7 million bpd for Q2, an increase of 115 000 bpd from the second quarter of 2013. According to Valero, the increase in volumes was due primarily to less turnaround activity and higher utilisation rates spurred by the availability of discounted North American light crude oil on the US Gulf Coast.

“We increased North American crude oil consumption at our Quebec City refinery to 83% in the second quarter of 2014 from 8% in the second quarter of 2013, so we are progressing well toward our previously stated goal of reaching 100% by year-end. We also began processing Canadian bitumen through our new crude-by-rail unloading facility at our St Charles refinery”, Gorder said.

Ethanol operating income for Q2 was US$ 187 million compared to US$ 95 million in the second quarter of 2013. The US$ 92 million increase in operating income was mainly due to higher gross margin per gallon driven by lower corn costs as a result of abundant corn crop and lower industry ethanol inventories at the start of the quarter.

Gorder said: “Our ethanol investments have continued to be strong performers, delivering a total of US$ 430 million in operating income for the first half of 2014. We expect our eleventh ethanol plant, the Mount Vernon facility acquired in March of this year, to begin operating and contributing to the segment’s earnings in the third quarter”.

Capital expenditures for Q2 were US$ 806 million, of which US$ 240 million was for turnarounds and catalyst. Valero paid US$ 133 million in dividends on its common stock and US$ 228 million to purchase 4.0 million shares of its common stock. The company repaid US$ 200 million of debt that matured in April and ended the quarter with US$ 6.4 billion in total debt and US$ 3.5 billion of cash and temporary cash investments, of which US$ 382 million was held by Valero Energy Partners LP.

Valero expects 2014 capital expenditures, including turnaround and catalyst, to be US$ 3 billion, including approximately US$ 870 million allocated to logistics investments, most of which are expected to be eligible for drop-down into Valero Energy Partners LP in the future.

“Given the strong North American crude oil production growth, we continue to focus the majority of our strategic capital on light crude oil processing capability and logistics”, Gorder said. “We expect our refineries to benefit from access to lower cost crude oil and higher netback product export markets.”

Adapted from a press release by Emma McAleavey.

Chicago Sun-Times editorial: Old tank cars put Chicago at risk

Repost from The Chicago Sun-Times

Old tank cars put Chicago at risk

Editorials, July 31, 2014
This July 6, 2013 file photo shows a worker, wearing protective gear moving though the wreckage of the oil train derailment and explosion in in Lac-Megantic, Quebec (AP Photo/Ryan Remiorz, File, Pool)
This July 6, 2013 file photo shows a worker, wearing protective gear moving though the wreckage of the oil train derailment and explosion in in Lac-Megantic, Quebec (AP Photo/Ryan Remiorz, File, Pool)

America’s drilling boom means more freight trains are snaking through Chicago carrying oil, which can erupt into fireballs if the tank cars derail. A new federal proposal to make the cars safer should be enacted as quickly as possible, and any changes in the final rules should enhance safety, not weaken it.

On July 23, U.S. Transportation Secretary Anthony Foxx proposed phasing out tens of thousands of tank cars called DOT-111s that date back to the 1960s and that too easily rupture or get punctured in derailments. In the past six years, oil has spilled in 10 major derailments, many of them fiery. In the worst, 47 people died last year in Quebec. In April, 30,000 gallons of crude oil leaked into the James River amid a blazing derailment near downtown Lynchburg, Va.

Because more than 40 oil-carrying trains pass through metropolitan Chicago every week, the safety proposal is critical. Mayor Rahm Emanuel called it a “very important step to reduce the risk of catastrophic disasters in our cities.”

The weaknesses of older tank cars, which include about 78,000 of the 92,000 now in use, have been known for 25 years. But now there’s a new reason to worry about them. A boom in American oil production, largely due to hydraulic fracturing — or fracking — that extracts petroleum from places where oil pipelines don’t go, has led to a surge in oil-carrying freights. Nationwide, the number of oil carloads jumped from 9,500 in 2008 to 434,000 last year. Trains carrying crude often are longer than 100 tank cars and can carry more than a million gallons.

In May, the U.S. Department of Transportation issued an emergency order requiring railroads to notify local officials before trains carrying large quantities of crude pass through. Now, the department has proposed a range of additional safety options, including requiring new or retrofitted tank cars to have thicker shells, more effective brakes and roll-over protections. Tank cars that don’t meet the new standards would be phased out after two years if they carry the most flammable fuels, including ethanol and most grades of crude oil.

Foxx also is calling for speed limits on trains transporting the fuels, especially through highly populated areas, and testing of the liquids they carry.

The proposals will go through negotiations, including a public comment period, before the final rules come out. Not everyone will agree: Industry representatives, for example, think the proposed speed limits are too low and environmentalists think they are too high.

Fortunately, industry players, including the Association of American Railroads and the American Petroleum Institute, agree tank cars need to be safer. They have offered their own safety enhancements, which don’t go as far as those proposed by Foxx. For example, they want a three-year phase-out period instead of two and would select a design used on tank cars built since 2011 as the new, safer standard.

The final rules should take into account legitimate concerns of business and environmentalists, but the government shouldn’t significantly water down the safety proposals nor let negotiations drag on, putting off the day crude shipments get safer.

We don’t want to see any disastrous fireballs along the many rail lines running through Chicago and its suburbs.

Emergency Management Magazine: States Focus on Rail and Energy Pipeline Safety

Repost from Emergency Management Magazine
[Editor: Note the source of this article.  From the “About” page: “Emergency Management is the award-winning, all-hazards publication of record for emergency management, public safety and homeland security stakeholders charged to protect our communities, critical infrastructure and the security of our nation.”  – RS]

States Focus on Rail and Energy Pipeline Safety

Sharp increases in U.S. oil production have caused safety problems transporting the liquid. Now states are trying to fix the problem.
Jeffrey Stinson, Stateline | July 31, 2014

The sharp increase in U.S. oil production and its promise of energy independence is coming with a disastrous byproduct: spills that threaten lives, communities and the environment.

In the past 18 months, about 1.2 million gallons of crude oil produced in the U.S. or Canada has been spilled from train cars and pipelines in at least seven states, sparking explosions, fires, or the evacuation of homes or offices in four instances.

Nobody has to tell the residents of Lynchburg, Virginia about the danger of the millions of gallons of crude oil rolling along rail lines or through pipelines every day. On April 30, more than a dozen train cars filled with crude oil derailed near Lynchburg’s downtown, causing a fire that forced hundreds of people in a 20-block area to evacuate. Nobody was injured, but thousands of gallons of oil spilled into the James River.

In response to the growing problem, the U.S. Department of Transportation last week issued proposed rules calling for upgraded railroad cars, better braking systems and tighter speed controls.

The federal action followed stepped-up efforts by several states to try to prevent spills and respond to disasters:

  • The California legislature last month approved a new 6.5-cent fee on every barrel on crude oil carried by rail and some pipelines through the state. The state will use the money, estimated to bring in $11 million in the first full year, to expand its coastal spill prevention and response program to inland streams, rivers, lakes and wetlands. It’s also beefing up its rail safety inspection program.
  • Minnesota Gov. Mark Dayton, a Democrat, signed legislation in May to implement stricter oversight of railroad companies, require more rail inspections and provide for better emergency response training and preparedness. To pay for it, Minnesota this year will collect $6.4 million in fees from railroads and pipeline companies.
  • New Hampshire Gov. Maggie Hassan, a Democrat, signed legislation earlier this month that authorizes the state to impose stricter preparation and response requirements on pipelines than federal law requires. The state Public Utility Commission also was given authority to inspect interstate pipelines to provide more frequent checks than federal officials give.
  • Oregon Democratic Gov. John Kitzhaber last week released a study of oil moving through his state that calls for more state rail inspectors, more money for training and improved cooperation with railroads. Last month, Washington Gov. Jay Inslee, a Democrat, ordered a similar review of risks, regulations and preparedness in his state. In January, New York Democratic Gov. Andrew Cuomo also issued a similar order and dispatched inspectors to rail yards to look for defects on cars that could cause derailments.

Nearly all the action in the states was prompted by disasters governors and lawmakers saw in other states or across the border in Canada. Their worst fear is what happened in Lac-Megantic, Quebec, where 47 people were killed last July when an unattended 74-car train derailed. The spilled crude caught fire, then several cars exploded and about half the downtown was destroyed.

“I want to know how much oil will be shipped through my state and how we can be assured the kind of tragedy that happened in Quebec won’t devastate families in our communities,” Inslee said last month in ordering the study in Washington.

Matt Swenson, Dayton’s press secretary, said Minnesotans only needed to look at neighboring North Dakota to see what could happen: Last December, a train carrying grain derailed in front of a mile-long train carrying crude oil near Casselton, not far from the Minnesota border. Twenty cars spilled oil, some exploded. Fire forced evacuation of the town, but nobody was injured.

Every day, seven similar oil trains with about 110 cars carrying about 3.3 million gallons of crude travel through Minnesota, the state said. Other states are witnessing similar traffic, and it’s on the rise.

About 264 million gallons of crude oil were shipped by rail through California last year, said Alexia Retallack in the state Fish and Wildlife Department’s Office of Spill Prevention and Response. That’s 46.2 million gallons more than in 2012.

Railroads Pick Up Slack

More crude oil is on the move across states as production in North America booms from the fracking of Bakken oil deposits underlying North Dakota, Montana, and Canada’s Saskatchewan and Manitoba provinces, and from the tar sands of Alberta.

Production in the U.S. alone will be 8.5 million barrels a day this year, the U.S. Energy Information Administration estimates. That’s estimated to grow to 9.3 million barrels daily next year. And there aren’t enough pipelines to get the crude to the nation’s 115 refineries to be turned into gasoline and other products.

Republican North Dakota Gov. Jack Dalrymple said last month that pipeline capacity in his state needs to double to about 1.4 million barrels a day by 2016 to carry all the crude produced there. Currently, the state is producing about 220,000 barrels a day more than pipes can carry.

Railroads are picking up the slack, even though the Congressional Research Service said in a May report that it can cost from $5 to $10 more a barrel than pipeline delivery. The number of carloads of crude oil, each carrying about 30,000 gallons, that ended up inside the U.S. rose to 435,560 last year, the Association of American Railroads says. That’s up from about 30,000 in 2010.

In a recent analysis of data from the federal Pipeline and Hazardous Material Safety Administration, the McClatchy News Service found that 1.15 million gallons of crude oil spilled from rail cars in the U.S. last year. That’s more than in all the years combined since the data was first collected nearly four decades ago.

The worst accident was in November in Aliceville, Alabama, where 748,800 gallons spilled from a 90-car train after 12 cars derailed and three exploded. Nobody was injured.

Although widely considered safer than rail shipment of crude, pipelines do spill. A split in a pipeline in March 2013 dumped as much as 5,000 barrels of Canadian tar sands oil into a neighborhood in Mayflower, Arkansas.

Concern over pipeline spills is what drove New Hampshire state Sen. Jeff Woodburn to sponsor the legislation giving his state greater control over pipelines. The source of worry is that the 236-mile Portland-Montreal Pipeline, built to carry conventional crude oil from Maine, through New Hampshire and Vermont to Canadian refineries, can instead be used to ship to the U.S. tar sands oil, which is heavier and dirtier.

A spill, Woodburn, a Democrat, said, could devastate the fragile environment in his northern area of the state, which attracts tourists.

An analysis of federal spill data by the Manhattan Institute for Policy Research last year found that through 2009, pipelines released more oil per spill than rail.  Even with the recent increase in oil transported by rail, pipelines still carry much more. Furthermore, because pipelines often run through isolated areas, it often takes longer to get to the site of a leak and seal it.

But there’s a difference between pipeline spills and rail car spills, said Carl Weimer, a Whatcom County, Washington, commissioner and executive director of the Pipeline Safety Trust that studies and advocates for greater pipeline safety.

Pipelines may spill more oil when an accident happens, Weimer said, but they usually cause mostly environmental damage because they’re located in out-of-the-way places. Railroads travel through populated areas and their spills can endanger more people and cause greater property damage.

“The real question is: Is either one as safe as they need to be?” Weimer said. “I don’t think they are.”

Lighter and Sweeter

The nature of much of the oil being shipped is heightening states’ concerns. Bakken crude is a lighter, sweeter crude that federal regulators say may be more flammable than other crude – though the American Petroleum Institute that represents the oil and gas industry disputes that.

Bakken crude was involved in the fiery crashes in Virginia, North Dakota, Alabama and in Quebec.

The new proposed federal rules are largely aimed at Bakken crude. Older rail tanker cars will be banned from shipping it across the states within two years unless they’re retrofitted with thicker skins and anti-rollover protection to meet the newest standards.

At present, the freight railroad industry says it uses about 92,000 tank cars to carry flammable liquids, such as crude, and that 18,000 are built to the latest standards.

The Association of American Railroads says the industry already has moved to reduce speeds on oil trains with 20 or more cars carrying crude and include at least one older tank car to no faster than 40 mph in 46 urban areas around the country.

Federal regulators are weighing whether they should go even slower, possibly 40 mph in all areas and 30 mph in urban areas. But the association, which represents major carriers, said going just 30 mph in urban areas could cost it 10 percent of its capacity to ship cargo, and slow down some freight and Amtrak passenger trains traveling across parts of the country.

Railroads also are alerting states when and where trains carrying 1 million gallons or more of Bakken crude will travel in keeping with a May 15 order from the U.S. Department of Transportation. And they’ve said they’ll work with the states and communities on any new spill response efforts just as they have so far.

“We take our responsibility for moving oil in a safe and efficient manner seriously,” the railroad association said. “That is why the rail industry is working with our customers, suppliers and (federal regulators) to find ways to make a safe network even safer.”

That’s what states say they’re doing, too, as they know their citizens need the energy and at a reasonable price.

“We need to move crude oil,” said California’s Retallack. “But we need to do it in a way that doesn’t pose risks to citizens or the environment.”

Or, as Sen. Woodburn of New Hampshire put it: “We want to be accepting to changes and challenges on the energy front – but we want to be in the driver’s seat.”

This article was originally published by Stateline. Stateline is a nonpartisan, nonprofit news service of the Pew Charitable Trusts that provides daily reporting and analysis on trends in state policy.