Moving Crude Oil by Rail

Moving Crude Oil by Rail Association of American Railroads May 2013 Summary Technological advances, along with relatively high crude oil prices, have led to sharply higher U.S. crude oil production. Historically, most crude oil has moved from production areas to refineries by pipeline. However, much of the recent increases in crude oil output has moved by rail. In 2008, U.S. Class I railroads originated just 9,500 carloads of crude oil. In 2012, they originated nearly 234,000 carloads. Based on the more than 97,000 rail carloads of crude oil in the first quarter of this year, another big jump is expected in 2013. Railroads have an excellent safety record regarding crude oil transportation better, in fact, in recent years than pipelines. Based on U.S. DOT data, the crude oil spill rate for railroads from 2002-2012 was an estimated 2.2 gallons per million ton-miles, compared with an estimated 6.3 for pipelines. Railroads are continuously striving to further improve safety. Beyond providing transportation capacity, railroads offer energy market participants the ability to shift deliveries quickly to different markets, enabling producers to sell their product to the market offering the best price. Additional pipelines will probably be built in the years ahead, but the competitive advantages railroads offer will keep them in the crude oil transportation market long into the future. The Shale Revolution Throughout the world, huge quantities of crude oil and natural gas are trapped in nonpermeable shale rock. Over the past few years, technological advances especially in hydraulic fracturing and horizontal drilling along with higher crude oil prices have made recovery of much of this oil and gas economically feasible. Hydraulic fracturing, or fracking, involves pumping a mixture of water, sand and chemicals down a well at high pressure to create thin cracks in the shale rock, thereby freeing oil and gas trapped inside and allowing it to be brought to the surface. Horizontal drilling involves creating an initial vertical bore of up to several thousand feet, then turning the drill and continuing horizontally for up to several miles. Shale containing oil or gas The map on the next page shows the broad distribution of U.S. shale deposits. The most important to date are Bakken in North Dakota and Montana; Barnett in Texas; and Marcellus in the east, especially in Pennsylvania, Ohio, and New Moving Crude Petroleum by Rail Page 1 of 11

York. Others include Niobrara in Wyoming and Colorado and Eagle Ford and Permian in Texas. Some shale areas contain more natural gas than crude oil; others contain more crude oil than natural gas. Estimates vary because there are still many unknowns, including the long-term productivity of shale wells and the extent to which environmental concerns will limit fracking in the future, but it s clear that shale developments mean that economically recoverable U.S. gas and oil reserves are far higher than they were thought to be just a few years ago. U.S. crude oil production peaked in 1970 at 9.6 million barrels per day, but it had fallen to 5.0 million barrels per day in 2008 as new production failed to keep pace with depletion of older fields. By 2012, though, U.S. crude oil production had risen to an average of 6.5 million barrels per day. Beginning in November 2012, production has exceeded 7 million barrels per day, the first time that s happened since 1992. U.S. Crude Oil Production U.S. Crude Oil Production By Month (millions of barrels per day) (millions of barrels per day) 7.4 8.0 7.0 7.5 6.6 7.0 6.2 6.5 5.8 6.0 5.4 5.5 5.0 5.0 4.6 4.5 4.2 3.8 4.0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Source: EIA Moving Crude Petroleum by Rail 2006 2007 2008 2009 2010 2011 2012 Source: EIA Page 2 of 11 2013

A large percentage of the recent increase in crude oil production has occurred in North Dakota, home to most of the Bakken Shale formation. Crude oil production in North Dakota rose from an average of 81,000 barrels per day in 2003 to 664,000 barrels per day in 2012, making North Dakota the 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 U.S. Crude Oil Production by State: 2003-2012 (000 barrels per day, percentages are change 2003-2012) 720% 79% -22% TX ND CA AK OK NM LA WY KS CO OTHER Federal offshore production (mainly in Gulf of Mexico) is not included. Source: EIA second-largest crude oil producing state. Crude oil output in Texas, the top producer, was relatively flat from 2003 through 2009, but has skyrocketed since then, reaching an average of 2.0 million barrels per day in 2012. Crude oil output in California and Alaska has been trending down for many years. Transporting Crude Oil by Rail Crude oil has little value unless it can be transported to refineries, but most U.S. refinery capacity is concentrated in traditional crude oil production areas (Texas, Oklahoma) or on the coasts where crude oil transported by tanker is readily accessible (California, Washington, New England, Gulf of Mexico), rather than near up-and-coming crude oil production areas like North Dakota (see nearby map). In part because of the long, rigorous process required to obtain the necessary permits to build new refineries, it s impossible for refining capacity closer to new production areas to come on line quickly. Historically, most crude oil has been transported via pipelines. However, in places like North Dakota that have seen huge recent increases in crude oil production, the existing crude oil pipeline network lacks the capacity to handle the higher volumes being produced. Pipelines also lack the operational flexibility and geographic reach to serve many potential markets. Railroads, though, have capacity, flexibility, and reach to fill the gap. Small amounts of crude oil have long been transported by rail, but since 2009 the increase in rail crude oil movements has been enormous. As recently as 2008, U.S. Class I railroads (including the U.S. Class I subsidiaries of Canadian railroads) originated just 9,500 carloads of crude oil. By 2011, carloads originated were up to nearly 66,000, and in 2012 they surged to -46% 37% 27% -22% 9% 29% 121% 15% Moving Crude Petroleum by Rail Page 3 of 11

nearly 234,000. Continued large increases are expected inn 2013. In the first quarter of 2013, Class I railroads originated a record 97,135 carloads of crude oil, 20 percent higher than the 81,122 carloads originated in the fourth quarter of 2012 and 166 percent higher than the 36,544 carloads originated in the first quarter of 2012. Crude oil accounted for 0.8 percent of total Classs I carload originations for all of 2012, 1.1 percent in the fourth quarter of 2012, and 1.4 percentt in the first quarter of 2013. It was just 0.03 percent in 2008. Originated Rail Carloads of Crude Petroleum on U.S. Class I Railroads: Q1 2009 - Q1 2013 2,860 2,498 The vast majority of crude oil moving by rail in the United States both originates and terminates on U.S. Class I railroads, so the number of carloads originated by Classs I carriers (see charts above) is always close to the number of carloads terminated by Class I carriers (see charts below). However, some crude oil that originates on U.S. Class I railroads might be delivered to U.S. short lines or to railroads in Canada for termination.. These carloads would be included in the charts above, but not in the charts below. In addition, some crude oil that terminates on U.S. Class I railroads might originate on railroads in Canada orr on U.S. short line railroads. These carloads would be included in the charts below, but not inn the charts above. Terminated Rail Carloads of Crude Petroleum on U.S. Class I Railroads: Q1 2009 - Q1 2013 2,976 2,512 2,832 2,650 3,395 6,784 8,583 2009 2010 2011 Source: AAR Quarterly Commodity Statistics 2,795 2,683 3,385 6,723 8,459 11,106 11,974 11,631 16,777 26,721 10,843 11,324 11,389 16,789 26,247 36,544 51,492 64,663 81,122 97,135, 2012 2013 36,379 53,150 65,809 81,204 99,173 2009 20100 2011 Source: AAR Quarterly Commodity Statistics 2012 2013 Moving Crude Petroleum by Rail Page 4 of 11

Assuming, for simplicity, that each rail tank car holds about 30,000 gallons (714 barrels) of crude oil, the 97,135 carloads originated in the first quarter of 2013 equal approximately 762,0000 barrels per day moving by rail. As a point of reference, according to EIA data, total U.S. domestic crude oil production in the first quarter of 20133 was approximately 7.1 million barrels per day, so the rail share is around 11 percent up from a negligiblee percentage a few years ago. As noted earlier, deposits of oil and gas in shale formations occur all over the country and, barring unforeseen circumstances, more and more of these areass will be developed. In recent years, though, North Dakota, and the Bakken region more generally, have accounted for the vast majority of new rail crude oil originations. According to estimates from the North Dakota Pipeline Authority, approximately 640,0000 barrels per day of crude oil moved out of North Dakota by rail in March 2013 (see chart below left), equivalent to seven and a half full-size trains. According to the pipeline authority, railroads accounted for around 71 percent of all crude oill production in the North Dakota region in March (see the chart below right). Source: North Dakota Pipeline Authority. The percentages in the chart at the right are for March 2013. The rail traffic charts on the previous page show quarterly rail traffic for U.S. Class I railroads (including the U.S. subsidiaries of Canadian railroads) for crude oil. Figures for a particular quarter are available within 90 days following the end of that quarter. In addition to the quarterly rail traffic data noted above, though, an alternative source of rail traffic data called Weekly Railroad Traffic (WRT) is available each week from the Association of American Railroads. Although far more timely than the quarterly data noted above ( WRT has data on rail traffic from the previous week), WRT has less commodity detail than the quarterly data. In the quarterly data, figures on crude oil alone are available. In WRT, however, and in monthly traffic figures based on WRT, crude oil is included in a broader petroleum and petroleum products category that includes liquefied petroleum gases, asphalt, lubricating oils, residual fuel oil, and other petroleum products in addition to crude oil. Still, the WRT petroleum-related figures are useful. In April 2013, U.S. railroads originated an average of 13,800 carloads of petroleum andd petroleum-relateoriginated another 6,7000 carloads per week (see the charts on the next page). Crude petroleum accounts for the vast majority of the products per week, and Canadian railroads (including their U.S. subsidiaries) Moving Crude Petroleum by Rail Page 5 of 11

huge recent year-over-year increases in the petroleum and petroleum products category. It s impossible to know precisely, but in the first quarter of 2013, crude oil probably accounted for around 48 percent of this category for U.S. and Canadian railroads, up from around 3 percent in 2009, 7 percent in 2010, and 15 percent in 2011. 8,000 7,500 7,000 6,500 6,000 5,500 5,000 4,500 4,000 3,500 Avg. Weekly Canadian Rail Carloads of Petroleum and Petroleum Products 2013 2010 2012 2009 2011 3,000 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Data are weekly average originations for each month, are not seasonally adjusted, include CN and CP (including their U.S. operations), and reflect revisions to original reporting. Source: AAR % Change in U.S. Rail Carloads of Petroleum and Petroleum Products From Same Month Previous Year: Jan. 2009 - April 2013 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% 2009 2010 2011 2012 2013 Data are based on originations, are not seasonally adjusted and exclude U.S. operations of CN and CP. Data prior to 2009 are not available. Source: AAR Weekly Railroad Traffic 15,000 14,000 13,000 12,000 11,000 10,000 9,000 8,000 7,000 6,000 5,000 4,000 Average Weekly U.S. Rail Carloads of Petroleum and Petroleum Products 2013 2012 2009 2011 2010 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Data are weekly average originations for each month, are not seasonally adjusted, exclude U.S. operations of CN and CP, and reflect revisions to original reporting. Source: AAR % Change in Canadian Rail Carloads of Petroleum and Petroleum Products From Same Month Previous Year: Jan. 2009 - April 2013 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% 2009 2010 2011 2012 2013 Data are based on originations, are not seasonally adjusted, and include CN and CP (including their U.S. operations). Data prior to 2009 are not available. Source: AAR Weekly Railroad Traffic Advantages of Transporting Crude Oil by Rail Historically, pipelines have been the dominant mode for transporting crude oil long distances. That s still the case, but railroads have become critical players in crude oil transportation in many areas. In addition to the critical fact that railroads provide transportation capacity in many areas where pipeline capacity is insufficient, railroads offer a number of other advantages for transporting crude oil: Geographical Flexibility. By serving almost every refinery in the United States and Canada, railroads offer market participants enormous flexibility to shift product quickly to different places in response to market needs and price opportunities. Whereas most Bakken crude shipped by pipeline goes to Cushing, Oklahoma, and eventually to refineries in the Gulf region, railroads deliver crude to terminals not only in Louisiana and Moving Crude Petroleum by Rail Page 6 of 11

other places in the Gulf region, but also to locations on the East Coast, the West Coast, and elsewhere. Responsiveness. Rail facilities can almost always be built or expanded much more quickly than pipelines and refineries can be. Essentially, railroads are the only transportation mode that can invest in facilities quickly enough to keep up with production growth in the emerging oil fields. Efficiency. As new rail facilities are developed, railroads are involved every step of the way. For example, at origin and destination sites, railroad economic development and operations teams help facility owners decide where to locate assets and how to lay out rail infrastructure on the site to maximize efficiency. North American Freight Railroads Railroads also help crude oil customers find ways to load and unload tank cars more quickly and reduce en-route delays. Promoting unit train shipments is often a key part of this process. Unit trains are long trains (usually at least 50 and sometimes 120 or more cars) consisting of a single commodity. These trains use dedicated equipment and generally follow direct shipping routes to and from facilities designed to load and unload them efficiently say, from a gathering location near oil production areas to an unloading terminal at or near a refinery and generally have much lower costs per unit shipped than non-unit trains. A single large unit train might carry 85,000 barrels of oil and be loaded or unloaded in 24 hours. Significant amounts of crude oil continue to be moved in non-unit train shipments too. Underlying Infrastructure. Over the past few years, railroads have invested hundreds of millions of dollars to replace and resurface tracks, buy new locomotives, build new terminals and track capacity, hire new employees, and take other steps to enhance their ability to serve crude oil-related customers. Railroad investments related to their crude oil service are just a small part of a much larger set of ongoing rail investments. In recent years, U.S. freight railroads have been reinvesting more than ever before, including a record $25.5 billion in 2012, to create and maintain a freight rail network that is second to none in the world. Crude oil producers and other market participants have made huge investments in both the infrastructure and the tank cars needed to move crude by rail, signaling confidence in the long-term viability of rail service in this market. Even as more pipelines are built or expanded, railroads will continue to provide a set of advantages especially flexibility that will enable them to continue to play a key role in the petroleum-related market long into the future. Moving Crude Petroleum by Rail Page 7 of 11

Moving Crude Oil Safely Railroads have an excellent crude oil safety record better, in fact, in recent years than pipelines. Based on data from the U.S. Department of Transportation s Pipeline and Hazardous Materials Safety Administration, the spill rate for railroads from 2002-2012 was an estimated 2.2 gallons per million crude oil ton-miles generated. The comparable spill rate for pipelines is approximately 6.3 gallons per million ton-miles, or nearly three times the rail rate. Pipelines carry and spill much more crude oil than railroads do. From 2002-2012, an estimated 19.9 million gallons (474,000 barrels) of crude oil were spilled in pipeline incidents, compared with an estimated 95,000 gallons (2,300 barrels) of crude oil spilled in rail incidents over the same period. The rail figure is less than 1 percent of the pipeline figure. From 2002-2012, there were 129 incidents involving releases of crude oil from railroads, of which 94 involved releases of fewer than 5 gallons. Railroads are required to report spills of any size, including very small spills. By contrast, in most cases pipelines only have to report spills of at least five gallons. Just 35 of the 129 railroad incidents had releases of more than five gallons. By contrast, pipelines reported 1,784 spills of at least five gallons from 2002-2012, more than 50 times the number of rail incidents. The bottom line, though, is that both railroads and pipelines are safe, reliable ways to transport crude oil. Each enhances our energy security and benefits consumers. Frac Sand and Other Petroleum-Related Commodities Incidents Involving Crude Oil Spills: 2002-2012 Number of Incidents Total Total < 5 gallons spilled > 5 gallons spilled Gallons Spilled Barrels Spilled Estimated Spill Rate* Railroads 129 35 95,000 2,300 2.2 Pipelines unknown 1,784 19.9 million 474,000 6.3 *Gross gallons spilled per million ton-miles generated Numbers for 2012 are preliminary. Source: AAR based on data from the Pipeline and Hazardous Materials Safety Administration In addition to moving crude oil, railroads also transport large amounts of frac sand to crude oil and natural gas producers. According to published reports, a single horizontal well typically uses between 3,000 and 10,000 tons of sand. A typical rail car of frac sand contains around 100 tons. Sand is used in many different industrial and construction applications, of which hydraulic fracturing is just one. Data on rail shipments of frac sand alone are not available, but data on rail shipments of industrial sand in total are available. In 2009, U.S. Class I railroads (including the U.S. subsidiaries of Canadian railroads) originated just over 112,000 carloads of industrial sand. In 2012, Class I carriers originated nearly 293,000 carloads, and another 87,000 carloads in the first quarter of 2013 (see the charts on the next page). While it s not possible to determine precise percentages, frac sand is almost certainly the primary driver behind the increased industrial sand movements on railroads over the past few years. A number of short line and regional freight railroads also carry frac sand; their movements are not included in the charts on the next page. Railroads are also key players in the movement of iron ore, scrap steel, and other raw materials to steel plants that produce the pipes used in crude oil and natural gas production, and in the delivery of those pipes from steel plants to crude oil and natural gas production areas. Moving Crude Petroleum by Rail Page 8 of 11

Originated Rail Carloads of Crude Industrial Sand on U.S. Class I Railroads: 2005-2012 110,683 115,234 124,349 139,341 112,310 181,085 244,822 292,875 Originated Rail Carloads of Crude Industrial Sand on U.S. Class I Railroads: Q1 2009 - Q1 2013 27,245 25,709 28,561 30,796 38,315 44,456 48,287 50,033 52,255 58,317 63,820 70,433 74,314 73,876 72,737 71,953 86,939 2005 2006 2007 2008 2009 2010 2011 2012 Source: AAR Freight Commodity Statistics 2009 2010 2011 2012 2013 *STCC 14413 Frac sand is only a portion of total crude industrial sand. Source: AAR Quarterly Commodity Statistics Terminated Rail Carloads of Crude Industrial Sand on U.S. Class I Railroads: 2005-2012 273,833 Terminated Rail Carloads of Crude Industrial Sand on U.S. Class I Railroads: Q1 2009 - Q1 2013 106,142 107,276 115,718 132,245 104,263 161,096 223,199 26,148 24,055 25,510 28,077 33,066 39,510 43,409 45,117 46,675 54,871 58,548 63,106 67,920 70,056 68,917 67,087 80,238 2005 2006 2007 2008 2009 2010 2011 2012 Source: AAR Freight Commodity Statistics 2009 2010 2011 2012 2013 *STCC 14413 Frac sand is only a portion of total crude industrial sand. Source: AAR Quarterly Commodity Statistics Tank Cars Crude oil is transported by rail in tank cars. The North American rail tank car fleet consists of approximately 290,000 cars, but there are thousands of different commodities, in addition to crude oil, that are carried in tank cars. In 2011, crude oil accounted for well under 5 percent of rail shipments in tank cars; in 2012. The comparable figure for 2012 is not yet available, but it was probably around 10 percent. For safety and other reasons, the same tank car can t go back and forth between carrying crude oil and, say, corn syrup or sulfuric acid. Railroads own less than 1 percent of the tank car fleet; more than 99 percent are owned by shippers, leasing companies, and other non-railroad entities. For every commodity transported by rail, there is an optimal type and size of freight car for carrying it. Generally speaking, the goal is to come as close as possible to both filling the car s usable space and reaching its maximum allowable weight (usually 286,000 pounds, including the Moving Crude Petroleum by Rail Page 9 of 11

weight of the car itself). 1 In other words, the goal is to avoid cases where a freight car reaches its maximum weight while still having room for more cargo, as well as cases where the freight car fills up but has not yet reached its maximum weight. For light crude oil (such as crude from places like the Bakken region), the ideal rail tank car has a capacity of 30,000 to 32,000 gallons. For denser (and thus heavier per unit of volume) heavy crude oil, the ideal rail tank car carries about 25,000 gallons. In recent years, demand for transporting crude oil by rail has grown faster than the supply of ideal tank cars, so some crude oil has been moving in cars that are smaller than the optimal size. In practice, this means that many rail crude oil shipments contain fewer than 30,000 gallons. In 2011, the average crude oil shipment contained approximately 28,000 gallons. However, as more new tank cars are built and put into crude oil service, 30,000 to 32,000 gallons per rail car should increasingly be the norm, depending on the mix of heavy and light crude. The Shale Revolution and Coal The shale revolution has led to sharply higher U.S. rail carloads of crude oil and frac sand, but it s also led to sharply lower coal carloadings. That s because the increased natural gas production made possible by fracking and horizontal drilling has meant sharply higher U.S. natural gas production (see the chart below left), which in turn has meant lower natural gas prices to electric utilities (see the chart below right). This has made electricity generated from natural gas much more competitive in the electricity marketplace relative to electricity generated from coal. 31 30 29 28 27 26 25 24 23 22 21 20 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: EIA U.S. Natural Gas Production (trillion cubic feet) Average Delivered Price of Fuel for the U.S. Electric Power Industry: Jan. 2007 - March 2013 (dollars per million Btu) $14 $12 $10 $8 $6 $4 $2 $0 Natural gas Source: Energy Information Administration Coal 2007 2008 2009 2010 2011 2012 2013 Consequently, the amount of electricity generated from natural gas, and natural gas s share of total U.S. electricity generation, have surged in the past couple of years to record highs. Meanwhile, the amount of electricity generated from coal has fallen correspondingly. The coal 1 All else equal, the heavier a rail car, the more damage it causes to track infrastructure and the higher the maintenance required to keep the infrastructure in safe condition. Thus, when determining the maximum allowable weight of rail cars, railroads must balance the productivity advantages of loading more freight in a car with the higher repair and maintenance costs associated with heavier cars. For most rail lines in the United States today, 286,000 pounds has been deemed the maximum allowable weight. Moving Crude Petroleum by Rail Page 10 of 11

share of electricity generation was 50 percent or higher each year from 1980 through 2003 and 48 percent as recently as 2008, but was down to 42 percent in 2011 and 37 percent in 2012. 2 Because the vast majority of coal in the United States is used to generate electricity and because coal is the top single commodity carried by U.S. railroads, reduced electricity generation from coal has meant a significant decline in rail carloads of coal. Coal carloads on U.S. Class I railroads totaled 6.25 million in 2012, down from 7.06 million in 2011 and the lowest annual U.S. Electricity Generation by Type of Fuel: 2003-2012 (% of total generation) total for coal since 1993. 3 In 2012, the decline in coal carloads far exceeded the increase in carloads of crude oil and frac sand for U.S. railroads (see chart below right), though that won t necessarily be the case going forward. 55% 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Coal Natural Gas Nuclear Hydro Renewables Other Source: Energy Information Administration 8.00 7.75 7.50 7.25 7.00 6.75 6.50 6.25 6.00 5.75 5.50 5.25 5.00 U.S. Rail Carloads of Coal Originated (millions) 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Data are for Class I railroads. Source: AAR Freight Commodity Statistics U.S. Class I Rail Carloads: 2012 vs. 2011 Coal (-805,088, -11%) Crude petroleum (+168,068, +256%) Crude industrial sand (+48,053, +20%) Food & food products (+45,136, +3%) Cement (+20,772, +14%) Liquefied petrol. gases (+19,724, +14%) Lumber & wood products (+18,965, +6%) Primary metal products (+18,041, +3%) Pulp & paper (+14,840, +2%) Crushed & broken stone (+10,005, +2%) Motor vehicles & equip. (-14,817, -1%) Waste & scrap (-18,630, -3%) Chemical & fertilizer minerals (-20,189, -7%) Chemicals (-46,546, -2%) Grain (-155,094, -10%) Iron ore (-11,450, -1%) Source: AAR Freight Commodity Statistics Conclusion The United States is experiencing an unprecedented boom in oil and natural gas production, with most of the increase coming from dense shale rock formations. Among other things, this means North America is likely to move closer to energy self-sufficiency. U.S. freight railroads are playing a critical role. Rail shipments of crude oil have skyrocketed in recent years due to the flexibility and other advantages that moving crude oil by rail offers. Railroads are continually working with energy firms and others to find ways to further improve the safety, reliability, productivity, and cost effectiveness of their service offerings to the energy market. 2 The growth of renewable energy and increasingly stringent environmental constraints have also played a role in reducing coal s share of total electricity generation. 3 Some of the reduction is also due to lower rail shipments of metallurgical coal to steelmakers. Moving Crude Petroleum by Rail Page 11 of 11