The shale gas boom is making a lot of executives rich, but the quiet players making the most impressive moves during this new American energy renaissance are the railroads.
By now, we’ve read how cheap natural gas has supplanted some of coal’s share of the electricity market. Railroads ship coal, and thus analysts often say the two industries’ financial health is linked. But lately, railroads have been able to thrive even as the dirty energy giant slides. In the first quarter of 2012, Union Pacific saw an 8 percent decline in coal shipments, but the number of new cars and trucks shipping on its lines increased 15 percent. What’s more, chemical shipments saw an 8 percent boost.
The rise in chemical production and shipping is also a direct result of cheap natural gas. American petrochemical producers use natural gas as a raw material for an array of products from plastics to insulation. And cheap natural gas prices predicted for the next few decades have encouraged many producers to bring overseas manufacturing operations back home to the U.S, so railroads stand to benefit long-term.
The two Western railroad giants, Union Pacific and Burlington Northern Santa Fe (BNSF), are also having huge success in the oil and gas fields of North Dakota, West Texas and anywhere else the energy industry booms. Their trains deliver frac sand, drill pipe and other construction materials. They’ve made big investments in infrastructure to help move oil. BNSF and Canadian Pacific have built nine North Dakota oil terminals in the past two years, and BNSF has plans to build three more by 2013. BNSF’s first 120-car train left a Bakken oil terminal with more than 60,000 gallons of crude two weeks ago. Railroads have found themselves an eager cadre of crude shippers since the transcontinental Keystone Pipeline has been delayed, though most industry experts expect pipelines to carry the majority of the Bakken’s crude in the future.
“As pipeline (infrastructure) expands, they’ll have a position and they’ll have their share. But we don’t see that completely pushing rail out of the equation. We are able to get crude directly to the refineries.”
“As pipeline (infrastructure) expands, they’ll have a position and they’ll have their share,” Tom Williams, top salesman for BNSF’s industrial products division told Bakken blogger, Todd Melby. “But we don’t see that completely pushing rail out of the equation. We are able to get crude directly to the refineries.”
At the same time, the railroads are chugging along a fine line between eternal market sunshine and regulatory rainstorms. Coal-based utilities recently started raising the volume of their complaints against the four large, Class I railroads who enjoy a monopoly over 90 percent of rail shipments. Congress deregulated the rail industry in the early '80s, which exempted them from anti-trust laws to help spur their flagging profits.
Therefore, Union Pacific has the leverage to hold utilities like Arizona Electric Power Cooperative Inc. captive for coal transport over their track. Over 50 percent of the Arizona utility’s coal costs are for the fuel’s transportation.
Union Pacific and BNSF have also suddenly found themselves involved in a class-action lawsuit brought by a number of shippers who claim the railroads conspired to inflate billions of dollars in fuel surcharges from 2003 to 2008.
So if you enjoy watching the market games -- if your voice shrills when companies slide into positions of genius conquest, keep your eyes on the railroads.
Neil LaRubbio is an editorial fellow at High Country News