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

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: