Proposed DOT Rail Regulations To Hike Transport Costs

By The Bakken magazine staff | September 22, 2014

The cost of shipping Bakken crude by rail will increase the price per barrel between 26 and 31 cents if regulations proposed by the U.S. Department of Transportation are implemented, according to a study by Cost & Capital Partners.

DOT published the proposed regulations for transporting volatile crude by rail on July 23. They will reduce the speed limit for unit trains carrying crude, particularly from the Bakken region. The regulation also calls for upgraded tank cars to better withstand damage from derailment.

Reduced speed limits for trains carrying Bakken crude will increase the time to reach destinations, which the report said will reduce the number of tanker cars and locomotives available while increasing the amount of oil inventory in transit.

“What it means from a strategy perspective is that if you can take the Bakken crude via pipeline, you’re obviously not going to have the same impact,” said Tom Bokowy, Cost & Capital senior partner.  “It will give a slight additional advantage to the pipelines and it will make shorter routes more economically viable.”

The report said that for major destinations from the Bakken, the impact of complying with the regulations will be a 2 to 4 percent increase per barrel over the current cost of shipping oil by train.

“You’re going to have more of your rail originations in North Dakota being offloaded at barge terminals and places like that because that way, you can turn those assets more quickly and you’re less impacted by the cost of the tank car,” Bokoway said.

According to the report: “Producers, carriers and refineries will need to incorporate the impact of these changes when calculating the netbacks for transporting crude from the Bakken to major consumption areas. These changes will affect the decisions for both where and how to transport crude from the Bakken to major consumption areas.”

The DOT proposal to upgrade the current tank car fleet to meet new safety standards also increases costs. The report notes that there are four major companies capable of producing these tanks cars, which will create a bottleneck. 

This report calculates the change in costs for common destinations for Bakken crude. It includes cost models for tank car leasing, rail freight and a lane-by-lane analysis of the impact of the changes.

Producers, carriers and refiners will all be affected by the changes over the coming years. As these changes increase the cost, this will affect netbacks that producers are currently able to achieve for Bakken crude.
Cost & Capital Partners is a management consulting firm with offices in Boston,  Sandpoint, Idaho, and partners in Shanghai, China.