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Crude-by-Barge

U.S. maritime cashes in on the shale oil boom - finally!

By Jack O'Connell 2013-10-16 15:52:00

You already know about crude-by-rail, right? Of course you do. That’s because you read my column on the subject a few months back. Crude-by-rail is the fastest growing segment of the rail industry and is now an established partner – along with pipelines – in transporting shale oil from remote locations to refineries around the country. It’s gotten to the point that insiders are using the word “rail” as a verb, as in “We can rail the crude from the Bakken all the way to the West Coast for refining.” Now I always thought “rail” was a noun, as in “riding the rails,” or a noun used as an adjective, as in “rail car.” Isn’t the English language a wonderful thing, where words can change from one part of speech to another virtually overnight?

Okay, where was I? Oh yes. Crude-by-rail has gotten so big that it’s now the leading transporter of crude oil from the Bakken formation in western North Dakota to points west, east and south. And there’s a lot of oil coming out of the Bakken – about 800,000 barrels a day at latest count. That’s enough to fill 10 unit trains. The popularity of rail as a crude conduit has even led to the cancellation of proposed new pipelines – one from the Bakken to the massive oil storage facility in Cushing, Oklahoma and another from West Texas to southern California.

Refiners like Valero (NYSE: VLO) and Tesoro (NYSE: TSO) are ordering rail cars by the thousands, and manufacturers like American Rail Car (Nasdaq: ARII) and Canada’s National Steel Car can’t keep up with the demand (there’s currently an 18-month backlog). The business is so attractive that container-leasing company CAI International (NYSE: CAP) recently floated an $85 million credit facility to fund the acquisition of rail cars – an entirely new business for CAI, which knows a lot about leasing.

Why all the excitement? Because rail is flexible and fast, and for a long time there was no other alternative. You either moved it by rail or it sat there – the crude, that is. And sat there it did, in storage bins in North Dakota and Texas, driving down the cost of U.S. crude to well below world levels and making other forms of transporting it economically attractive. Crude-by-rail may cost more than a pipeline on a per-barrel basis, but the oil gets there a lot faster. And rail is more flexible – it can go to a lot of different places. A pipeline can’t. A pipeline goes from Point A to Point B. If you want to go to Point C, you have to build a new one – and pipelines are a lot costlier, and take a lot longer to build, than a new rail line. 

Crude-by-Barge

Now there’s crude-by-barge – another business, like crude-by-rail, that basically didn’t exist two years ago. And it’s all because of the shale oil boom, which has added two million barrels a day of new production in just the last two years. That new production initially overwhelmed the existing infrastructure of pipelines and terminals, and producers had a hard time getting their output to refiners. Crude-by-rail helped alleviate the bottleneck, but crude-by-barge was the vital missing link. 

It began on the inland waterways. About a year ago Houston-based Kirby Corp. (NYSE: KEX) announced that it had begun barging Bakken crude from St. Louis down the Mississippi to refineries in Baton Rouge and downstate Louisiana. The crude arrived in St. Louis by unit train and was offloaded there onto Kirby barges. The company had transported Canadian tar sands from St. Louis before, but this was the first shipment of Bakken crude. 

Kirby, of course, is the nation’s largest tank barge operator with more than 25 percent of the inland fleet of 3,100. American Commercial Lines of Jeffersonville, Indiana is a distant second with about 10 percent of the market. You can buy Kirby stock. You can’t buy ACL, which is a private company, like most of the major barge operators, including Canal Barge (#3), Ingram (#5) and Florida Marine (#6). You can also buy #7 Enterprise Products Partners (NYSE: EPD), a Houston-based midstream energy company. Enterprise is not just tank barges – it operates pipelines, storage terminals, natural gas processing facilities and more and, as its name indicates, offers all the benefits of a master limited partnership, including an attractive dividend. 

While there’s nothing new about tank barge movements on the inland waterways, what is new is the cargo. Tank barges traditionally carry petrochemicals and natural gas feedstocks to the nation’s chemical plants, or else bottom-of-the-barrel stuff like asphalt and tar for road work and construction. Transporting crude oil is new, and it’s safe to say that crude-by-barge was made possible by crude-by-rail.

The economics are compelling. A typical 30,000-barrel tank barge can carry the equivalent of 45 rail tank cars at about one-third the cost. Compared to a pipeline, barges are cheaper by 20-35 percent, depending on the route. And for barge operators, it’s a win-win: They can transport crude oil down the Mississippi to Gulf Coast refineries and haul refined products back up the river to chemical plants and other end-users. 

The Mississippi and its tributaries are not the only beneficiary of the rail-barge connection. Canadian Pacific (NYSE: CP) is moving Bakken crude by rail to Albany, New York, where it is transferred onto barges for transit down the Hudson River to the Phillips 66 refinery in Bayway, New Jersey. Current capacity: 160,000 barrels per day.

Coastal Movements

Inland barge movements are just one part of the crude-by-barge story. Coastal barge movements are the other. These are much larger units with capacities ranging up to 300,000 barrels of oil (compared with 30,000 for a large inland tank barge). There are about 275 coastal tank barges, including integrated tug-barges (ITBs) and articulated tug-barges (ATBs). Kirby is the leader in this field as well with 81 coastal barges, followed by Vane Brothers with 50. Crowley Maritime is the leader in ATBs with 17. 

Coastal barge movements are taking place largely along the Gulf Coast from Corpus Christi, Texas to refineries along the Texas and Louisiana coasts, an area popularly known as “refinery row.” The oil comes from the Eagle Ford formation about 80 miles northwest of Corpus. There’s so much oil coming into Corpus from Eagle Ford (upwards of 500,000 barrels a day) that the area’s own refineries (and there are several) can’t handle it all. In addition to refineries in the Houston, Port Arthur and Lake Charles areas, some of it is deposited into the Louisiana Offshore Oil Port (LOOP), where it travels by underwater pipeline to onshore facilities for processing. LOOP is normally the province of VLCCs and other large crude carriers from places like West Africa and the North Sea – vessels that are too large to enter U.S. ports and thus offload their crude at LOOP. But the amount of imported oil is decreasing rapidly as a result of increased shale oil production. 

On the West Coast, barges are now moving Bakken crude from terminals in Anacortes, Washington to refineries in the San Francisco and LA/Long Beach areas. The crude gets to Anacortes by rail – the Burlington Northern, to be precise, another example of the rail/barge nexus. With the steady decline in Alaskan production, the new supply couldn’t come at a better time for West Coast refiners and consumers.

Jones Act tankers are getting in on the action too. It was recently reported that the American Phoenix, with a capacity of 339,000 barrels, was chartered by Exxon for a two-year term at the record rate of $100,000 a day. Its mission: Haul crude oil from Eagle Ford. According to a number of well-placed sources, a half dozen or so of the 30-odd Jones Act tankers on the East and Gulf Coasts are now carrying cargoes of crude instead of the usual refined products like gasoline and jet fuel. That is driving Jones Act tanker rates up and keeping utilization at record highs. Companies like Seacor Holdings (NYSE: CKH) are poised to benefit.

Terminals & Transfer Facilities

It’s all about infrastructure, really. None of this would be possible without the terminals and storage and offloading facilities that make possible the transfer of oil from one mode of transportation to another. Those facilities are being built or expanded at a rapid pace. 

In fact, a new report from BB&T Capital Markets entitled “Examining the Crude-by-Barge Opportunity” lists three pages of them. Among the more notable is Marquis Energy’s Caruthersville, Missouri terminal, which opened last October with a capacity of 550,000 barrels of storage capacity, capable of handling seven unit trains a week of Bakken crude. Another is Wolverine Terminals planned $30 million investment in a new petroleum terminal along the Mississippi in St. James Parish, Louisiana with a capacity of 425,000 barrels. Scheduled completion date: second quarter of 2014. And a third is Seacor’s converted Gateway Terminal in St. Louis, which previously handled refined products and ethanol and last year was converted to crude oil and now Canadian heavy crude. 

The report itself, authored by Kevin Sterling, is a gold mine of information about the crude-by-barge phenomenon generally, pointing out that “In less than two years, crude-by-barge pricing has increased three-fold and now nearly a third of the inland fleet is moving oil and about 15% of the coastal fleet is transporting crude.” It concludes that “Just a few years ago, crude-by-barge was essentially nonexistent and today it has become one of the largest commodities moved by the barge industry.”

One final way to play this phenomenon, in addition to the aforementioned companies and SEACOR, which has multiple interests in Jones Act tankers, tugs, inland barges and terminal ops, is Trinity Industries (NYSE: TRN) of Dallas. Trinity is the nation’s biggest manufacturer of rail cars and one of the biggest builders of barges as well. That’s two for the price of one.

Follow-Up

A number of readers emailed me about the missing answers to the trivia questions in my last column. Mea culpa. Here they are: Leading port for grain exports – Portland; busiest port on the Great Lakes – Duluth; largest air-cargo city in the U.S. and world – Memphis. Thanks for your patience. Until next time…

The opinions expressed herein are the author's and not necessarily those of The Maritime Executive.