Once in High Demand, N.Dakota Oil-by-rail Shunned on East Coast

In 2012, Plains All American bought a shuttered Virginia refinery for $300 million to use as a terminal and storage hub, betting that East Coast refiners would need to look beyond their own rail yards to satisfy their thirst for cut-price inland crude in coming years.

Instead, shale production from North Dakota has been shrinking and those refiners have resumed buying imported crude. The 140,000 barrel-per-day rail terminal at Yorktown, Virginia has been sitting idle, according to two sources familiar with its operations.

The most recent weekly report from energy industry intelligence service Genscape reported no traffic at the facility, which the sources said was expected to remain dormant through next month. Refiners have been booking an armada of vessels to carry North Sea and West African crude to U.S. shores, the biggest import binge in years that will all but displace Bakken shale.

Spot shipments of crude by rail have all but vanished. Rail car lease rates have slumped to half what they were a year ago and oil-by-rail traffic has dropped 17 percent in the first few weeks of 2016, according to the latest data from the Association of American Railroads.

Rail car traffic at the Eddystone rail facility outside Philadelphia, a joint venture between a local group and Enbridge, is expected to be the lowest in years, according to two sources familiar with that facility's operations.

The terminal typically unloads about 27 unit trains a month, or roughly 65,000 barrels per day (bpd). But its main customer, the refining subsidiary of Delta Airlines Inc., has turned to oil from Gabon and Nigeria, the sources said.

Monroe Energy, the subsidiary, is cutting back "big time" on rail, one of the sources said, adding that the only Bakken still coming into the region is connected to term deals. FerrelGas Partners has an agreement to supply Monroe Energy with 65,000 bpd of crude oil at the Eddystone facility.

But Plains has no long-term contract with any customer for its Yorktown facility, multiple industry sources said. At the time of the purchase, they said, the risk seemed justified, as refiners like Monroe and Philadelphia Energy Solutions bought spot barrels through the facility.

Plains has also shut down its 65,000 bpd Manitou rail terminal in North Dakota, a trading source said, and is seeing very little activity at its nearby Van Hook facility. The facilities loaded trains headed to the Yorktown location.

Plains did not respond to calls and emails seeking comment.

Last May, U.S. Energy Information Administration data shows, oil-by-rail volumes peaked on the East Coast, with the region receiving some 472,000 bpd of crude that way, enough to fill about 40 percent of the region's refining capacity. By October, the latest data available, that rate had already fallen to 415,000 bpd.

OFF THE RAILS

Crashing oil prices and the end in December of a four-decade U.S. crude export ban have whipsawed the economics for East Coast refiners, pushing them back to imported crude just a few years after foreswearing it in favor of domestic shale.

This has hammered the oil-by-rail industry. Customers stuck with deliveries of rail cars they no longer need have chosen to put them in storage instead of in service.

Refiner PBF Energy, which announced in an October earnings call that it was relying almost exclusively on foreign crudes at its two East Coast plants, has begun using some idle tank cars to take deliveries of feedstock for its gasoline unit, according to a source familiar with the plant's operations.

Current monthly lease rates for the newest, safest tank cars have slid to roughly $700 from $1,300 early last year and as high as $2,450 in 2014, according to Tom Williamson, owner of Transportation Consultants.

The older model tank cars, Williamson said, are going for as low as $300 a month. At those prices, the lease payments are not enough to cover the cost of building the cars, Williamson said.

"It's not rock bottom, but it's pretty close," he said.