WASHINGTON ─ The crude-by-rail story─driven by a host of external factors such as weather, congestion, fatal accidents and commodity price volatility─is one that has certainly seen its ups and downs over the years. Yet, Burlington Northern Santa Fe LLC (BNSF) executive chairman Matthew Rose knows his company is poised to tackle whatever the oil industry can throw at it.

While he didn’t provide a specific time frame, Rose was adamant in saying that his company is more than prepared to accommodate a potential rebound in oil production.

“Assuming we see some market indicators—and we clearly will see it now with the price of crude—we’ll see people uncapping wells and start to frack the next well. We think we’re in a much better place to handle that next surge,” Rose said at the recent U.S. Energy Information Administration’s Energy Conference.

One-third of all domestic crude oil production increases since 2009, according to Rose, have used railroads over pipelines to get product to refineries.

Crude oil production cuts and strong demand from refineries have led prices to rebound to about $60 per barrel (/bbl) currently from a six-year low of less than $44/bbl in March.

DOE Tank Car Rules
Rose commented on a U.S. Department of Transportation’s recent ruling that requires a phase-out or retrofit by May 2023 of all legacy DOT-111 rail cars that transport crude oil and ethanol.


The final rule, developed by the Pipeline and Hazardous Materials Safety Administration and the Federal Railroad Administration, was broadened, extended and harmonized with Canada.

"It’s good to have certainty over the car design and the phase-out schedules,” Rose said.

While he supports the overall scope of what the rule tries to accomplish, Rose takes issue with the requirement to have an electronically controlled pneumatic (ECP) braking system outfitted on a crude oil and ethanol rail car by Jan. 1, 2021.

“It will be difficult to integrated ECP into our fleet of locomotives for crude and ethanol only without substantial risk of impact of network velocity. It will significantly limit how flexible we use these assets, and we certainly realize the importance of the flexibility during our recent service issues. The rule will have to be changed in the future,” Rose said.

Evolving Freight Portfolio
Energy products such as crude oil, ethanol, LPG and coal make up nearly 30% of BNSF’s freight portfolio; however, crude oil units themselves comprise around 5% of overall total units, according to Rose.

Coal from the Powder River Basin consists about 20% of BNSF traffic, Rose noted, and has traditionally accounted for about 25% of the railroad industry’s revenues. However, this is undergoing a massive transition, he said, thanks to cheap natural gas and U.S. Environmental Protection Agency regulations.

Meanwhile, BSNF is the largest shipper of ethanol. It moves about 100,000 units in 2014, which is a year-over-year increase of about 8%. The number of ethanol production facilities sited on the company’s network has also grown significantly from its beginning of 17 origins in 2003 to about 54 origins today.

“Today, ethanol demand is relatively stable,” Rose said. “We’ve seen some modest growth as margins have returned due to lower prices for corn, particularly as producers have taken advantage of our unit-train routes.”

While BNSF has seen the impact of the shale boom with high-capacity shipments of drilling inputs such as frack sand, pipe, aggregate and cement in recent years, Rose said he expects this freight to come down slightly.

“Every horizontal drilling rig requires about 40 cars of supporting materials, although that number is shrinking because the process has become increasingly more efficient. With no growth, inputs are down appreciably,” Rose said.

Eye Toward Investments
In total, Rose said BNSF aims to spend about $6 billion this year alone on rail line expansions, maintenance and renewal of assets, along with locomotive and equipment upgrades.

Maintenance and renewal of assets by far make up the biggest chunk of BNSF’s annual investments because the more capacity it adds to haul freight the more it costs to maintain. In 2015, nearly half of its investments ($2.9 billion) will go toward renewal of its assets and maintaining things like replacing rail ties.

“Proper maintenance is about more than safety. It’s about utility and leveraging the billions of dollars in new capacity that we’ve added,” Rose said.

In 2014, BNSF spent around $1 billion on network expansions. Rose said BNSF has already surpassed that amount ($1.5 billion) at the mid-way point of 2015.

“We can expand the network to take more volume for a long time to come. Our model is to build the railroad for growth, grow the business and reinvest those revenues back in the network where it’s needed, when it’s needed. Sounds straight-forward, but it’s not without risk,” Rose said.

For more information, contact the author, Bryan Sims, at bsims@hartenergy.com.