Crude oil: Barges are well-positioned assets

The energy sector continues to push into new frontiers, which is having a big effect on barge operators and other domestic transport suppliers. 

The recent pickup in rail tank car movements of crude oil is a remarkable break with tradition. BNSF Railway, which currently handles the largest volume of crude oil shipments of North Dakota Bakken shale oil, has announced that it would purchase up to 5,000 state-of-the-art rail tank cars. The new tank cars are designed and equipped for increased safety for domestic oil shipments. Historically, U.S. railroads have regarded tank cars as specialized equipment and have not provided the equipment, leaving it up to the shippers. 

The shift by BNSF into rail tank car ownership represents a major capital commitment (likely around $1 billion) and suggests that the company sees the long-term viability of this market, upwards of 25 years, which is the expected service life of the equipment. BNSF’s tank car position is also a response to recent accidents that involved older equipment, including its own derailment.

Oil refiners, particularly on the East Coast who are dependent on unit trains of crude oil from North Dakota, have also been investing in new tank cars as well as new terminals. Some investments have been made in East Coast river terminals to facilitate transshipment of unit trains of crude oil to domestic barge for transfer to other refiners. 

Committing capital to help facilitate shipments of domestic crude at East Coast refiners is much cheaper compared to imported oil. The savings are based on the price spread between North Dakota domestic oil and imports compared to rail freight and terminal costs. 

It is possible that domestic crude shipments could be $5 to $15 per barrel cheaper than imports. With such savings, East Coast refiners that are connected by rail and barge to North Dakota may reduce or stop its oil imports.

The barge industry continues to be well positioned to move domestic crude, whether it’s in competition or coordination with rail. To be successful in this market requires having the right assets in the right place.

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