Oil slump tempers Bakken drillers' worries over new rail rules

By Jarrett Renshaw

NEW YORK (Reuters) - In the first part of 2014, U.S. shale drillers watched with growing alarm as rail regulators contemplated tough new oil-by-rail rules, fearing rapid changes might slow shipments from North Dakota’s Bakken fields and force them to curtail production due to a lack of new pipelines.

What a difference a year makes.

Now, with beat-down oil prices slamming the brakes on the shale industry’s breakneck growth, even tough new rules on phasing out older oil-tank cars and speed restrictions announced Friday are unlikely to thwart new production, experts say.

The deceleration of growth in the shale plays has taken the pressure off rail operators to make up for a shortfall in pipeline capacity, particularly from North Dakota's Bakken region, which relies on trains to ship as much as 60 percent of its output, according to state figures.

"Oil producers have more to worry about than new rail regulations," Cleo Zagrean, a transportation analyst with Macquarie Securities, said on Friday.

The new regulations call for phasing out or upgrading the oldest variety of oil tank cars, DOT-111s, within three years, and retrofitting newer CPC-1232s within five years - a timeline that was shorter than generally expected last year but less aggressive than some analysts had recently feared.

That should give rail companies and tank car owners enough time to implement certain provisions, and manage higher cost, without causing a massive shock to a network that now transports more than a 10th of the nation's crude oil production.

'ACHIEVABLE TIMELINE'

Greenbrier Company Inc (GBX.N), one of the country's leading tank car builders, said the rule offered an "achievable timeline" for retrofitting older cars. It said the upgrades for crude oil cars could be completed in about 3.7 years, according to a report it commissioned.

Even so, the rules will not be good news for producers, with some of the estimated $2.5 billion (2 billion pounds) in added rail system costs likely to be passed on to shippers, cutting into local prices (BAK-) that fell to below $40 a barrel in March, well below the cost of new drilling for many operators.

Energy research firm ESAI recently estimated that replacing the older cars could add up to $3 a barrel on shipping costs.

The unexpected imposition of a new 50 miles per hour speed limit for trains carrying high volumes of crude oil also threatens to complicate logistics for shippers and curtail volumes, said Michael Wojciechowski, an analyst at Wood Mackenzie.

"If you want to move the same amount of material, at less speed, you are going to need more cars, and that's going to slow the network," Wojciechowski said.

He said the added volumes may entice railroads to borrow a page out of the pipeline play book and charge higher fees for slower moving products.

Major Bakken producers, including Oasis Petroleum Corp (OAS.N) and Whiting Petroleum Corp (WLL.N), referred requests for comment to the North Dakota Petroleum Council, an industry trade group, which said it had no immediate thoughts on the new safety standards and would review them within two weeks to determine their effect on the state’s oil industry.

Hess (HES.N), one of a handful of producers that also operates its own rail terminal in the Bakken, is "well positioned to comply with the rule on the timeline finalised by DOT," said spokesman John Roper.

DROP IN DRILLING

Energy and logistics firms had rushed to build oil-rail terminals across North Dakota in recent years as a quicker and cheaper way to ship booming Bakken output, which surged by some 1 million barrels per day (bpd) over five years.

Pipeline capacity out of the Williston Basin rose by only around 450,000 bpd over the same period, leaving rail companies racing to make up the shortfall. At the end of last year, the Bakken was pumping some 1.2 million bpd, while pipelines could carry only around 720,000 bpd, according to data from the North Dakota Pipeline Authority.

But as oil prices crashed, the number of rigs drilling for crude has fallen by more than half to the lowest since 2010, bringing years of growth to a sudden halt and giving pipeline companies time to catch up.

"The industry has already slowed down production and shipping volume," said Taylor Robinson, president of PLG Consulting, which advises clients on crude rail issues.

Crude oil rail volumes rose from about 640,000 bpd in January of 2103 to more than 1.07 million bpd in July of last year, according to the U.S. Energy Information Administration. But since July, as crude prices dropped, volumes have grown much more modestly, climbing to 1.1 million bpd in February, EIA data shows.

Lower oil production "allows people to start planning more effectively as opposed to a year ago when everyone was moving as fast as you could," said Robinson.

Bakken pipeline capacity is expected to more than double to some 1.5 million bpd by 2017, according to the agency’s estimates, thanks to major new projects planned by Energy Transfer Partners (ETP.N) and Enbridge [ENBR.UL].

While that may still fall short if shale output resumes growing next year, the expected need for additional rail capacity will be far less than producers expected a year ago.

(Reporting by Jarrett Renshaw; Editing by Ted Botha)