What's ahead for the energy railway industry after crude by rail went bust?

"Maybe we'll talk about shipping water by rail at the next Railway Age gathering in 2017," is what several delegates said at the Energy by Rail conference in Arlington, Virginia in October.

The crude by rail landscape must be in a dire state when delegates from the railway industry are toying with the idea of hauling water to draught-prone regions or shale production sites in order to repurpose the currently 113,000 rail tank cars — 28% of the entire 400,000 strong fleet — sitting idle on offline tracks or in storage amid declining CBR volumes.

Lease rates for the 287,000 tank cars that are still moving have declined to $300-375/month from a high of over $2,400/month during the CBR boom in 2013-2014 and $700-800/month a year ago.

The one faction that didn't mind the downturn in the CBR landscape were the rail car service companies that are cleaning the tank cars, in order to prevent corrosion during storage.

BNSF's executive chairman Matthew Rose opened the conference, held October 27-28, by pointing to the structural decline in both the oil and coal business and that natural gas liquids could well be the next commodity for the railroads. Shortline companies, such as Omnitrax, were optimistic about railing frack sand to shale producing fields, as the increased use of sand below ground resulted in higher yields above ground. In other words, alternatives to crude by rail was on the forefront of delegates' minds, in order to circumvent the current bust cycle of the crude by rail landscape.

According to the Energy Information Administration, total CBR shipments, not including Canada, have more than halved in the past two years from a peak of 1 million b/d in late 2014 to 348 MBD in August 2016. 85% of that volume is sourced in PADD 2 railing Bakken crude to those US refinieries where there is no pipeline capacity.

And access to pipelines is what is at the heart of the boom-and-bust cycle of CBR, as rail cars take crude where pipelines do not. The US CBR boom started in 2010 as a means of transporting then stranded shale crude production to refining centers on the US coasts. As soon as pipeline carrying capacity was built and expanded, CBR volumes decreased in favor of cheaper pipeline transport.

Total US CBR receipts declined 13% in 2015 in response to the expansion of pipeline networks and narrower crude spreads. In order for CBR to make economic sense vis a vis West African imports on the US Atlantic Coast, WTI needs to trade at a minimum $3-4/b discount to Brent, according to industry sources. In 2011 and 2012, when shale crude volumes were building and by far exceeding pipeline carrying capacity, the Brent/WTI spread blew out to over $10/b for most of the period and peaked at $24.13/b in September 2011. The chart below shows that CBR volumes were building in tandem with a widening Brent/WTI spread and contracting once that spread started to narrow.

Click to view full-sized image.

So CBR does not appear to be the Walmart Movement to the World, except for where pipelines cannot go and that is across the Rocky Mountains to the US West Coast. Only environmental concerns are currently delaying and ultimately may halt the expansion of rail receiving terminals in California.

But beyond repurposing tank cars to haul water across the continent to distant sites, some energy railers felt that LNG was ready to go on the rails as an alternative transport mode to pipelines during peak heating demand on the USAC and the Midwest during the winter season.

"There are shippers out there that would like to transport it. Natural gas production is booming in the US. Inquiries have come from Marcellus gas to liquefy and take to New England. [This] would compete with imported LNG from Trinidad. Despite its good and very extensive pipeline network, the US is developed and there are loads of places for the rail roads to move LNG," Scott Nason, product manager at Chart Inc. said at the conference. "Large LNG satellite stations can be used to provide backup gas supply to gas fired power plants during pipeline shortages or outages."

Nason further explained that LNG is a safe commodity to transport by rail in pressurized tanks, as LNG by itself does not explode, but instead the vapors will only ignite if mixed with 5-15% of  air. LNG vapor has a spark ignition temperature of 1,000 degrees Fahrenheit.

Canada has allowed the transport of LNG by rail since July 2014 and in Europe the transport of LNG is considered safe in ISO containers. In Alaska, the Federal Railroad Administration granted approval to transport LNG in tank cars since October 2015, but the permit is to expire in December 2017. Liquid ethylene, a cryogenic liquid similar to LNG, has been shipped in DOT-113 cars in the US from 1961 to the present.

So in the end, next year's rail gathering may not just be about hauling water.