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Published September 06, 2012, 04:30 PM

Investing for the Long Haul

Railroads expand infrastructure to meet growing demand

By: Kris Bevill, Prairie Business Magazine

Railroads have been a part of the U.S. landscape for nearly two centuries, but the ongoing agriculture and fossil fuel production booms in the northern Plains provide a reminder of the important role rail plays in all types of freight movement throughout the nation. Experts have predicted that U.S. freight shipments will increase by 40 percent over the next 30 years, and railroad companies say they can provide the best shipping option, so long as adequate rail capacity is available.

The Association of American Railroads says the industry invested more than $23 billion into rail infrastructure in 2011 and will probably match or beat that investment amount this year. In the northern Plains, improvements have been most noticeable in the Bakken region, where new facilities are being constructed at a steady pace. But it’s not necessarily the railroad companies footing the bill for these expansions and each railroad appears to have a slightly different strategy to continue building business capabilities throughout the region.

Inbound Traffic

Canadian Pacific Railway Ltd. hauls large amounts of grain and other products, but the company has recently also taken a keen interest in hydraulic fracturing operations in the Bakken region. The railroad is working to expand its energy franchise and has committed $90 million to ongoing capital investments in the Midwest, primarily to expand capacity for oil-by-rail services. Some of the infrastructure work being undertaken by the railroad will support a new crude terminal in the ghost town of Van Hook, N.D., near New Town, which is being developed by Texas-based U.S. Development Group (USD). The terminal is currently capable of handling up to 35,000 barrels of crude oil per day, which means the terminal can fill up to 17 104-car unit trains per month. Eventually, the terminal will be expanded to accommodate up to 30 unit trains per month. USD declined to release costs associated with the project, but company leaders commended CP for its dedication to expanding rail infrastructure for new facilities. “CP’s commitment to joint market development, service and infrastructure enhancements in the Bakken region make them an important partner as USD continues to grow our network of crude origins and destinations,” USD President and CEO Dan Borgen said in a statement. “We have a strong market opportunity in front of us — by working in close collaboration with CP, our customers and the community, we can safely and rapidly maximize rail shipments of Bakken crude.”

CP executives say the Van Hook terminal agreement reinforces the company’s commitment to increasing capacity in order to match its customers’ growth, particularly within the energy sector. CP recently forecasted its crude-by-rail business to grow from 13,000 carloads of crude in 2011 to 70,000 carloads in 2014, but business has been increasing faster than expected, according to railroad spokesman Ed Greenberg. “We now expect to reach that run-rate by 2013,” he says. “That’s not just the Bakken, but certainly the Bakken is a significant area for our oil-by-rail business.”

Sand used for hydraulic fracturing operations has become another significant focus of CP’s energy sector. The railroad has already been delivering some sand to the region, but it recently signed agreements to serve as the exclusive rail provider for three major frac sand facilities in Wisconsin, positioning itself to become a key supplier of the product to the Bakken region.

In June, CP signed a multi-year commitment with U.S. Silica Holdings Inc. to deliver frac sand from U.S. Silica’s facility in Sparta, Wis., via unit train to the Bakken beginning in early 2013. Earlier this year, Connecticut-based mineral supplier Unimin Corp. agreed to work exclusively with CP to deliver sand to Bakken producers from a 2-million-ton facility in Tunnel City, Wis. That facility is also expected to be complete early next year. In July, CP took its involvement in frac sand supply operations to the next level, signing a long-term agreement with Smart Sand Inc., a logistics and proppant supplier to the oil and gas industry, to build a frac sand transload facility in the tiny town of Makoti, near Minot, which will serve the Williston Basin beginning in 2013. The project is unique in that CP is a direct partner with Smart Sand for the facility. Typically, railroads provide mainline infrastructure improvements as needed while the customer retains full responsibility for the facilities.

Customer Support

Burlington Northern Santa Fe Railway Co.’s budget this year includes $30 million for infrastructure updates and railway expansions in South Dakota, $100 million for similar work in Minnesota and $86 million for projects in North Dakota. Denis Smith, vice president of marketing for industrial products at BNSF, says that while the railroad has funded some recent expansion projects in the area, including a new storage yard and carshop in Minot, the railroad’s customers, specifically in the Bakken region, are doing the lion’s share of the region’s railroad build-out. “We’re spending money in terms of infrastructure and upkeep and maintenance, but the customers are the ones who are truly putting in the big dollars to move the oil out of North Dakota and to accept the oil,” he says. “The oil companies have spent upwards of a billion dollars in terms of building facilities and that only includes the rack, the rail, the connection to the mainline for us, and the cars they’ve purchased.”

Smith declined to reveal exactly how much Bakken oil BNSF is transporting to destination points, but says the railroad is hauling about 75 percent more petroleum than last year. The increase in business in the Bakken has simply been “astounding,” he says. “That part of the state has always been agriculture and carload-type business, but for the most part it was just a place where the trains went through coming from the Pacific Northwest or from Chicago going west,” Smith says. “It’s a place that saw maybe 15 or 20 trains a day passing through. Now it’s the origination and destination point for tens of thousands of cars on a monthly basis.”

Elsewhere in the region, agriculture continues its reign as king of the railroad and business is booming, although this year’s drought will have a negative impact on railroad activity, according to Smith. “Agriculture is a very important part of our business, so when we have a drought it’s very painful,” he says, adding that the situation in the northern Plains will not be nearly as severe as further south.

Export demand for products from the region, particularly agriculture products, is a major component to BNSF’s business and will continue to be a factor in the railroad’s decision-making process for expansions in years to come across all sectors, including grain, coal, and Bakken petroleum headed for domestic destination points in the Western U.S., Smith says. He assures smaller customers that the railroad is not headed exclusively toward unit train-only operations, noting that some existing facilities were simply not built to accommodate trains hauling 100 or more cars. However, the new projects are all being built to load multiple unit trains per week because, for certain types of products, big trains are the most efficient way to go. “If we’re going to grow the business and utilize the existing capacity we have to do it as efficiently as possible,” Smith says.

Railroad companies say that, for the most part, they have been able to keep up with the area’s increased demand. It’s been a different story for tank car availability however. High demand from the Bakken region has caused tank car shortages nationwide, causing issues for many types of customers. Ethanol producers, for example, have been subjected to skyrocketing lease prices for tank cars because of the short supply. Smith says BNSF doesn’t own tank cars and so has no control over prices or supply, but he notes that the drought and consequent rise in corn prices has lessened demand from the ethanol industry as producers have reduced their output, making more cars available to haul crude.

Passenger Traffic

In addition to increased freight traffic, more people are riding the region’s rails than ever before. Ridership on Amtrak’s Empire Builder route in Williston, N.D., and Stanley, N.D., has doubled since last year according to Marc Magliari, Amtrak media relations manager, although he points out that flooding in the Minot area last year resulted in the temporary closure of that station and some riders were diverted to Rugby, N.D., and Stanley stops instead.

Amtrak service will be disrupted in the region again this fall due to water-related issues. In October, BNSF will replace two bridges that are being threatened by rising water in the Devils Lake, N.D., area. The $100 million project is being equally funded by BNSF, Amtrak and the state of North Dakota, with BNSF providing the financing for Amtrak’s share of the project. Track work has been conducted in the area previously, but the bridge project is a significant undertaking and will be the railroad’s largest project in the state this year, according to BNSF. At the height of activity, BNSF will have 75 crew members working on the bridge replacement. Magliari says the bridgework will make several weeks of detours necessary, but parties involved in the project are committed to do what it takes to retain service to the Devils Lake region. “We want to stay there, BNSF wants to stay there and the state wants us to stay there,” he says. PB

KRIS BEVILL

Editor, Prairie Business

701-306-8561, kbevill@prairiebizmag.com

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