CSX Corp said its crude-by-rail business has the capacity to growth seven-fold over the next couple of years, as U.S. Northeast refiners take up growing supply from North Dakota’s Bakken oil reservoir.
The East Coast-focused rail company, hard hit by a sharp decline in coal transport, said it currently moves about 70,000 barrels of crude oil per day, mostly between the Bakken region and terminals in New York and Pennsylvania.
“It makes up a small part of our business, about 1 percent, but we do think there’s an opportunity to grow it quite significantly over the next couple years,” Fredrik Eliasson, chief financial officer of the Jacksonville, Florida-based company, told Reuters on the sidelines of a conference outside of Boston.
“We probably have room to take up to six or seven trains a day - right now it is about one train a day that we’re moving,” he said, adding each train typically carries about 70,000 barrels in 100 tankers.
Shipments of crude on railways have surged over the past two years, as production of light sweet oil from the Bakken surged. With little refining capacity nearby to process the crude and insufficient pipelines to take it to market, oil companies turned to rail to gain quick access to refining hubs on the Gulf Coast as well as the East and West Coasts.
Eliasson said the company saw little competition from new crude oil pipeline projects, which mostly focus on moving oil to refineries in the Gulf Coast, and said a new effort by TransCanada Corp to move Western Canadian crude oil to Canada’s eastern seaboard was also not a threat.
“Most of the Canadian oil is much heavier. With the exception of one or two refineries in the Northeast, they all take light sweet. So we don’t think that will make a big difference for us,” he said.
The American Association of Railroads said more than 861,000 barrels per day - more than a 10th of U.S. output of 7.61 million bpd - moved by rail in the second quarter this year, up 111 percent from the same period in 2012.
Refineries on the East Coast, which had seen margins crushed by the high cost of importing crude, are taking rising volumes of Bakken oil shipped on rails to help improve profitability. Philadelphia Energy Solutions Pennsylvania plant alone takes one-fifth of Bakken output.
Crude-by-rail is one of a handful of industries CSX is relying on for growth after the company saw a dramatic decline in its coal transport volumes since 2010 that slammed revenues and hit its share price.
Coal once formed 20 percent of its business. But coal demand from power plants, the main consumer, was deeply and swiftly undercut by an increase in domestic supplies of cheaper, cleaner-burning natural gas.
“We’re down 15 percent in volume since 2004 predominantly because of this energy transformation that is happening around coal versus natural gas,” Eliasson said.
“But if I look around at the 80 percent of our business that has nothing to do with coal, I see each and every market with a positive outlook at this point,” he said, pointing to crude, along with agriculture, automobiles, chemicals and metals.
CSX last month reported a modest increase in its quarterly earnings to $463 million, from $455 million a year earlier, citing its merchandise and intermodal businesses.
He said CSX was waiting for looming federal regulations on tanker safety in the wake of recent crude-by-rail train derailments, including one in Quebec in July that killed more than 40 people in a series of fiery blasts.
The Association of American Railroads has urged regulators to improve safety standards for tank cars carrying flammable liquids, following a spate of accidents in the booming industry. In early November, a 90-car crude train derailed and exploded in western Alabama, rupturing a number of tank cars and spilling oil into a trackside wetland area.
Eliasson said the costs of any safety upgrades would likely fall upon CSX’s customers, who typically own the rail cars.
“We never like when our customers’ cost structure goes up, and obviously it’s going to go up,” he said.
“But clearly safety is paramount to everything that we do, and if there are ways to improve safety, including our customers’ equipment, that’s something that we always need to look at,” he said.
He said CSX was also continuing to see strong growth in replacing trucking for long haul intermodal transport.
“The trucking industry is under a lot of cost pressures and is looking to partner with us to do the long haul. They focus on pickup and delivery and we do the long haul,” he said. (Reuters)