Sunday, August 19, 2012

Rail Industry Benefits from the Shale Revolution

Here's another example of how the shale revolution and energy prosperity are working their way down the supply chain, and revitalizing the support industries that supply materials, inputs, and drilling equipment to the shale industry.   I've reported before how the shale boom in North Dakota, Texas, Ohio, Pennsylvania and elsewhere has boosted the demand for Midwest sand found in Wisconsin and Minnesota that is ideal for use in the hydraulic fracturing drilling process, which has brought "sand prosperity" to America's new "sand box," and created many new "sand millionaires."

Now the frac sand boom and sand prosperity are revitalizing another industry - the railroad industry in Wisconsin and Minnesota that ships the frac sand to nearby North Dakota, as the StarTribune reports:
Hydraulic fracturing has created a major new business for railroads, because each horizontal well requires between 3,000 and 10,000 tons of sand. Drillers in North Dakota and elsewhere need the sand -- together with water, chemicals and organic lubricants -- to break up shale thousands of feet underground that holds natural gas and oil.

The demand -- about 60 new sand mines are in the works in Wisconsin -- is reviving sleepy trade routes. Railroads are striking deals with a spate of new sand processing plants, bringing dormant rail lines back into service, upgrading tracks and building rail yards and loading facilities across the Upper Midwest.

That has helped small-town industry that depends on freight trains, helping preserve jobs and clearing the way for industrial development.  All the major railroads are expanding across the region to accommodate sand in one way or another.

In two years, Union Pacific recorded a 265 percent increase in frac sand shipments. The railroad has rebuilt interchanges in Wisconsin, lengthened track at a Mankato rail yard and will lengthen another track this year. The company built a side track at Bricelyn, Minn., lengthened several tracks at a rail yard in Council Bluffs, Iowa, and is considering four more yard improvements in Wisconsin and Iowa.

Over the past six months, Canadian Pacific has struck deals with new sand-processing plants in Tunnel City, Oakdale and Sparta, Wis. The company is building a facility in Makoti, N.D., where sand will be loaded on trucks and driven to wells in the Bakken oil fields of North Dakota.

Unless energy companies figure out a less expensive way to get oil and gas out of the ground, they're going to need sand from Wisconsin and Minnesota, said Jean-Jacques Ruest, chief marketing officer for Canadian National. He expects railroads to be busy in western Wisconsin for 10 years, probably 20, maybe 30.
MP: Through its impact on the entire supply chain, the shale revolution is delivering a huge multi-billion dollar economic stimulus to the U.S. economy and creating thousands of new shovel-ready jobs.  Not only is the shale revolution bringing thousands of new direct jobs and economic prosperity to North Dakota and Texas, but it's also creating thousands of new jobs and prosperity in Wisconsin and Minnesota working in the frac sand industry, and it's now bringing jobs and new investment to the railroad industry in Wisconsin and Minnesota.  As the StarTribune article points out, the "added rail service doesn't only benefit energy companies," but provides benefits for many small and large industries that operate near the rail routes and depend on rail service to deliver their products to the market.  Count those as even more additional indirect benefits to the economy from shale.

Welcome to the shale revolution!

30 Comments:

At 8/19/2012 11:15 AM, Blogger Henry H said...

This comment has been removed by the author.

 
At 8/19/2012 12:41 PM, Blogger rjs said...

didnt you just have a post on how rail carloads were down due to shale gas replacing coal?

 
At 8/19/2012 1:27 PM, Blogger PeakTrader said...

"...the shale revolution is delivering a huge multi-billion dollar economic stimulus to the U.S. economy and creating thousands of new shovel-ready jobs..."

It's a false sense of prosperity, because more time and effort are needed for the same barrel of oil.

I suspect, at some point, in the 21st century, the time and effort required for an equivalent barrel of oil will decline.

Then we'll really have prosperity.

 
At 8/19/2012 1:35 PM, Blogger juandos said...

Well I'm wondering what sort of inside track or 'faith' regarding the Williston Basin Warren Buffet had when Bershire-Hathaway spent $26.3 billion cash-and-stock acquisition of Burlington Northern Santa Fe back in '09?

Apparently there's going to be some serious money to be made on that BNSF investment by Berkshire-Hathaway: approximately 25% of all Bakken production is being moved by rail, according to a spokeswoman for BNSF Railway, who added that an aggressive expansion plan is underway, which will have nine BNSF trains running daily, carrying up to 730,000 bpd of Bakken crude, Fig. 1. Today, each of the railway’s more than 100 weekly trains that traverse the Williston basin carries capacity of up to 81,000 bbl, she said... (interesting article BTW)

Also it seems that the BNSF will be in the frac sand hauling business in both N.D. and Texas...

Gee! Any guesses how this sort of situation might affect the presently not so great employment picture?

 
At 8/19/2012 1:49 PM, Blogger PeakTrader said...

Juandos, are you suggesting crony-capitalism?:

Buffett’s Burlington Northern Among Pipeline Winners

"Warren Buffett’s Burlington Northern Santa Fe LLC is among U.S. and Canadian railroads that stand to benefit from the Obama administration’s decision to reject TransCanada Corp Keystone XL oil pipeline permit.

The rail option, though costlier, would lessen the environmental impact, such as a loss of wetlands and agricultural productivity, compared to the pipeline...Greenhouse gas emissions, however, would be worse."

 
At 8/19/2012 2:05 PM, Blogger Henry H said...

It's no surprise that the housing markets are booming in Minnesota and there is low unemployment.

http://mjperry.blogspot.com/2012/08/anatomy-of-real-estate-recovery.html

 
At 8/19/2012 2:07 PM, Blogger marmico said...

What the shale man giveth BNSF the coal man taketh.

That's rjs' point. I thought Buffett's acquisition was more along the lines of "if we could just get some West Coast coal export terminals built" that's a lot of Powder River basin coal carloads.

The BLS is not showing any job gains in mining and logging in Wisconsin.

 
At 8/19/2012 2:20 PM, Blogger juandos said...

"Juandos, are you suggesting crony-capitalism?"...

Well pt anyone who buddies up to the Kenyan Kommie Klown does make me at least wonder about the possibility of crony capitalism being in play...

Then again Buffet was making serious money long before Kenyan Kommie Klown was leeching off the taxpayers...

RE: State Department analysis, well what a sad load of crap that line is...

BTW this is the same State Department that was totally clueless regarding the whole Arab Spring song & damnce...

 
At 8/19/2012 2:36 PM, Blogger hancke said...

The direct economic benefits of shale production is indeed amazing. The indirect benefits of cheaper energy for manufacturing and power generation has a phenomenal effect on the economy. Obama wouldn't have a shot at re-election if the oil&gas industry had not pressed forward in spite of EPA interference and the moratorium on offshore drilling. GDP would be down, tax revenue would be down and unemployment would be way up.

 
At 8/19/2012 3:01 PM, Blogger PeakTrader said...

Hancke, the direct and indirect economic costs are also "amazing," (including opportunity costs).

However, it seems, the ending of cheap oil was inevitable.

 
At 8/19/2012 4:00 PM, Blogger hancke said...

I'll take the opportunity costs of shale gas over it's subsidized or less environmental alternatives. Overall, shale is a huge plus.

 
At 8/19/2012 5:01 PM, Blogger FloridaSteve said...

I marvel at the trust being granted almost by default in these comments that the hyper-political EPA is not going to interfere in the fracking industry should Obama win a second term.

 
At 8/19/2012 6:10 PM, Blogger PeakTrader said...

Hancke says: "I'll take the opportunity costs of shale gas over it's subsidized or less environmental alternatives. Overall, shale is a huge plus."

What about the opportunity costs of shifting limited resources, e.g. labor and capital, from high-end manufacturing and emerging industries into shale oil?
Is that a "huge plus?"

 
At 8/19/2012 6:31 PM, Blogger Ron H. said...

Peak

"What about the opportunity costs of shifting limited resources, e.g. labor and capital, from high-end manufacturing and emerging industries into shale oil?
Is that a "huge plus?"
"

That seems like an odd question from someone who complains about actual GDP being below "potential" GDP due to capital and labor sitting on the sidelines.

If left alone by meddlers, resources will tend toward their best use.

 
At 8/19/2012 6:33 PM, Blogger hancke said...

Sure it's a huge plus. Labor supply is high and capital is under utilized in the current economy. Shale drilling, fracking and extraction is also emerging technology. What's not to like?

 
At 8/19/2012 6:43 PM, Blogger PeakTrader said...

Ron, what's odd about a fall in living standards when a country is forced to use more resources to produce the same amount of oil?

Would you rather work one-third of a day to produce nothing and have two-thirds of a day for leisure, or have the full day for leisure?

 
At 8/19/2012 6:49 PM, Blogger PeakTrader said...

Hancke, I guess, you believe working harder for the same amount is a "huge plus."

 
At 8/19/2012 7:09 PM, Blogger hancke said...

Peak, Working harder for oil/gas started years ago with offshore drilling and deeper wells. The easy stuff is long gone.

Apply your critique to the effort to develop wind and solar energy sources. Does that add up to a plus? If not, what is the alternative that is a plus?

 
At 8/19/2012 7:16 PM, Blogger PeakTrader said...

Hancke, it's not a "plus," but it's inevitable.

However, someday, it'll be a plus again, although not soon.

 
At 8/19/2012 7:51 PM, Blogger hancke said...

In this economy shale production is an overall plus. The absence of the shale boom would be a negative. What do you suppose the economic void would look like?

 
At 8/19/2012 8:24 PM, Blogger juandos said...

"However, it seems, the ending of cheap oil was inevitable"...

Well pt how much of the cost of that 'once cheap oil' is driven by government overreach?

 
At 8/19/2012 9:09 PM, Blogger Ron H. said...

Peak:

"Ron, what's odd about a fall in living standards when a country is forced to use more resources to produce the same amount of oil?"

One of us misread your previous comment about shifting limited resources. Let's both go back and read it again.

As many of the resources required for oil production aren't the same as those required for high end manufacturing, comparing opportunity costs between the two may not be your best argument.

Are you one of those who attributes human charactreristics to groups of people as in "countries are forced"?

 
At 8/20/2012 7:04 AM, Blogger PeakTrader said...

Ron says: "As many of the resources required for oil production aren't the same as those required for high end manufacturing, comparing opportunity costs between the two may not be your best argument."

People aren't attracted to jobs? And higher-paying jobs? Capital doesn't flow to the highest returns? Other inputs will flow to economic activity.

 
At 8/20/2012 7:49 AM, Blogger PeakTrader said...

Juandos, I wouldn't be surprised regulations cost $1.75 trillion a year.

And I wouldn't be surprised if the benefits of regulations are less than half the costs.

 
At 8/20/2012 8:32 AM, Blogger VangelV said...

MP: Through its impact on the entire supply chain, the shale revolution is delivering a huge multi-billion dollar economic stimulus to the U.S. economy and creating thousands of new shovel-ready jobs. Not only is the shale revolution bringing thousands of new direct jobs and economic prosperity to North Dakota and Texas, but it's also creating thousands of new jobs and prosperity in Wisconsin and Minnesota working in the frac sand industry, and it's now bringing jobs and new investment to the railroad industry in Wisconsin and Minnesota. As the StarTribune article points out, the "added rail service doesn't only benefit energy companies," but provides benefits for many small and large industries that operate near the rail routes and depend on rail service to deliver their products to the market. Count those as even more additional indirect benefits to the economy from shale.

Unfortunately, the producers are unable to self finance because the cost of production is higher than the market price of the product mix coming out of the average well. Are you ever going to supply evidence that the producing companies are making money from their shale operations?

The people in ND and the vendors are doing fine from the shale boom. But the equity and debt holders are sweating it out.

 
At 8/20/2012 8:35 AM, Blogger VangelV said...

I'll take the opportunity costs of shale gas over it's subsidized or less environmental alternatives. Overall, shale is a huge plus.

They are both losers because they are not economic over the long term. Shale accounting only works if you set the sunk costs to zero and forget about them. But if you are going to count the depreciation costs over the useful lifetime (not the imagined one) of the well there is no profit just as there is no positive cash flow for non-core area wells.

 
At 8/20/2012 9:31 AM, Blogger hancke said...

I guess it's an amazing feat of accounting wizardry that I even get a royalty check every month. ; )

 
At 8/20/2012 1:38 PM, Blogger Ron H. said...

"People aren't attracted to jobs? And higher-paying jobs? Capital doesn't flow to the highest returns? Other inputs will flow to economic activity. "

Are you just being obtuse, or did you really not understand my comment?

You referred to "shifting limited resources, e.g. labor and capital, from high-end manufacturing and emerging industries into shale oil."

Currently those resources don't seem to be particularly limited, and in the case of labor, isn't necessarily fungible. for example tool and die makers won't leave their current jobs to become petroleum engineers. "Labor" isn't an amorphous lump of Play-doh, but individual LEGOs.

In other words the differences between high end manufacturing and the shale gas industry may mean that there's not as much "shifting" as you imply.

 
At 8/20/2012 4:00 PM, Blogger VangelV said...

I guess it's an amazing feat of accounting wizardry that I even get a royalty check every month. ; )

And as long as the funding gaps are closed by asset sales, new borrowing, or equity dilution you will continue to get your royalty check and the workers will continue to get paid.

 
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