New Frontiers: the rail boom makes its way to the Eagle Ford

There’s been a great deal of attention paid to using rail to move oil out of the Bakken, a mode of transportation that is now accounting for the movement of as much as 40% or more of the crude coming out of that region. But the rail boom isn’t restricted solely to North Dakota. In this week’s Oilgram News column, New Frontiers, Bridget Hunsucker catches up on how big a factor trains have become in south Texas’ Eagle Ford development.

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It’s no Bakken Shale-sized rail rush, but the Eagle Ford Shale’s prolific production has spawned a smaller shipping sensation, with owners of short-line railroads and midstream companies laying miles of tracks and new spurs in South Texas.

The developers, mostly local to the area, are taking advantage of a fairly short “interim period” before new pipeline infrastructure comes online to move the abundance of liquids to nearby destination markets. The railways are also taking in fracking sand and other drilling equipment, sources said.

Like the Bakken in North Dakota, Eagle Ford production rose faster than shipping capacity.

“The short-lines can ramp up and move Eagle Ford to take advantage of short-term dislocations where you can’t get crude to the market,” Turner Mason analyst John Auers said, calling the rail movements a temporary stopgap measure.

In the Eagle Ford, crude and liquids production has boomed in 2012 to 700,000 b/d from 100,000 b/d in 2011. Including associated natural gas, Eagle Ford production topped 1 million barrels of oil equivalent in the third quarter of this year, according to Wood Mackenzie analysts.

This compares with Bakken Blend crude output of 682,393 b/d in October, according to the North Dakota state government. North Dakota crude oil production shipped by rail has climbed to more than 50% this fall from about 1% in 2009.

Unlike the Bakken, the Eagle Ford is located next to refinery centers along the Gulf Coast. “Since the Eagle Ford has a cluster of nearby refineries to receive the oil… there is not as much need to put barrels onto rail for shipment to market,” an Eagle Ford and Bakken crude trader said.

In addition, there are a “significant amount” of pipeline capacity projects underway to move crude to the Gulf Coast refining centers from the Eagle Ford, said Andy Lipow of Lipow Oil Associates.

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A calculation of current and proposed outbound pipeline capacity shows that by mid-2013, there will be more than 1 million b/d of available takeaway in the Eagle Ford market.

Not everyone agrees that this is enough. “We don’t think the [pipeline] infrastructure will be there for five years to handle what is coming online,” said Barton Simpson, a partner in a proposed Eagle Ford rail hub named the Live Oak Railroad.

The Live Oak Railroad is expected to open by late March 2013 south of Three Rivers in Live Oak County. The railway will have 28,000 feet of track along the Union Pacific Line. The plan is for the railway to serve as a hub for natural gas liquids, condensate and crude oil.

“The crude and condensate will likely arrive by truck or rail and will leave the terminal via pipeline or by rail,” said Josh Weber, a senior vice president of Howard Energy, a partner in the project. Fracking sand and other drilling equipment will also arrive at the terminal, but will leave for destinations in the Eagle Ford on trucks. The hub will be located within easy trucking distance of existing and planned pipelines, he said.

This hub should progress into a industrial rail park, similar to one found about 70 miles west in Gardendale, Weber said.

In two years, the Gardendale Railway has grown to 25 miles of track from about 16,000 feet, said Matt Cundiff, vice president of the southern region of Ironhorse Resources, which owns the Gardendale Railroad and several other short-lines.

“About three to four years ago, we received our first inquiries on rail opportunities in almost 15 years” in Gardendale, Cundiff said. A “previously overgrown rail spur is now a very large functioning rail interchange and classification yard where Gardendale Railroad and Union Pacific interchange railcars.”

In 2012, the railroad moved 16,000 railcars and is expected to move 25,000 in 2013, he said.

Another local short-line, The Hondo Railway, will next year move about 15,000 rail cars—a large jump from its average yearly car movements of 1,500, a source close to the railroad’s operations said. A good deal of growth is Eagle Ford-related, the source said.

At the Port of San Antonio, the East Kelly Railport has recently expanded from four miles of tracks to eight miles. “We are seeing a lot of sand for the hydraulic fracturing, and a lot of pipe used for the drilling,” said the railport general manager Tony Salinas.

In the fiscal year ending September 2012, 5,100 railcars moved through the yard. The capacity has been built out at the railport to accept 20,000 railcars per year, Salinas said.

It’s hard to quantify the amount of new rail built in connection with the Eagle Ford production because the play is young, sources said.

Looking ahead, a trader said he does not think rail infrastructure from the Eagle Ford will accelerate greatly beyond what is currently there. “But, I do think volumes of rail barrels from the Eagle Ford will increase in the future as production keeps rising,” he concluded.


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