Jumping aboard North Dakota's oil boom

Two years ago, Gabe Claypool had nothing to do with oil and railroads.

Today, he is CEO of a Wayzata, Minn.-based company that ships 3.5 percent of North Dakota’s oil to East Coast and other refineries in railroad tank cars.

The company, Dakota Plains Holdings, is part of a revival of the old way of shipping crude oil – via rail – that last flourished during World War II. And it’s another case of North Dakota’s oil boom igniting spinoff businesses.

“If the capacity to move oil isn’t there by pipeline, the only alternative is to get it out by rail – or you stop producing oil until the pipelines catch up,” Claypool said.

Claypool, 37, who grew up on a farm in Hampton, Iowa, was living in Minnesota in 2011 when investors in Wayzata and Minneapolis approached him to run their startup crude-oil-to-rail business. At the time, he was a manager at a networking company and had spent nearly a decade at AT&T.

He was puzzled initially that anyone would ask him – a farm kid working in the technology industry – to run an oil business, he said. Then someone explained that the business model “is remarkably similar to a farmers’ elevator,” he said.

Dakota Plains in 2010 opened a crude-oil-to-rail loading terminal in New Town, N.D., in the Bakken oil region. The company was among the first to see that pipeline capacity would be insufficient to ship all of the region’s oil.

Crude oil is brought to Dakota Plains’ rail terminal by truck, then put on trains of up to 120 tank cars stretching more than a mile. Dakota Plains was the first crude-to-rail terminal on Canadian Pacific’s North Dakota system, and it already has been expanded, with more growth planned.

Claypool said the company’s 1,100 leased tank cars have carried crude to Albany, N.Y.; Philadelphia; St. John, New Brunswick; Galveston, Texas; and Walnut Hill, Fla.

Today, 20 crude-to-rail terminals have sprouted along the North Dakota tracks of Burlington Northern Santa Fe and Canadian Pacific. In November, the railroads hauled 57 percent of the region’s crude.

An estimated 200,000 tank-car loads of crude oil rode the U.S. rails last year, up from just 9,500 in 2008, the Association of American Railroads says. That level of crude oil traffic hasn’t been seen in decades.

More pipelines are planned in North Dakota, Minnesota and other states, but they are years away from completion.

BNSF, owned by Warren Buffett-led Berkshire Hathaway, said it shipped 100 million barrels of crude in 2012. It also invested nearly $200 million last year in North Dakota and Montana, and has hired more than 560 new workers since 2011, the company says.

“One of the reasons why the oil industry has really taken to heart the expansion of crude by rail is the flexibility,” said John Miller, vice president of industrial products sales for BNSF. “If you load a unit train in North Dakota, you can go to the West Coast, you can go south or to the East Coast.”

Miller said BNSF expects crude traffic to pick up in the East as more unloading terminals are built there. Many East Coast refineries want the lighter crude oil produced in North Dakota because they aren’t equipped to refine heavier crude from Canada and elsewhere.

Canadian Pacific has reported five consecutive quarters of double-digit growth in its crude-by-rail business, and now transports 70,000 tank cars of crude annually, up from about 500 in 2010. That’s just the beginning. “We see that increasing two to three times in three years,” said Tracy Robinson, CP’s vice president for energy.

In Canada’s oil sands region, producers are copying the crude-to-rail business model, adding terminals to load tank cars.

“You can get onto rail easily, with low capital, and the rail infrastructure is there,” Robinson said. “Relative to other modes, we are very flexible. We don’t need long-term commitments and big volumes. You can make much shorter-term deals, and you can access rail if you are not a big player.”

Railroads also are making money shipping equipment, pipe and sand to the oil fields. The sand, which is mined in Wisconsin and Minnesota, is used in hydraulic fracturing, one of the technologies driving North Dakota’s oil boom.

The oil-rail profits are flowing partly because of the price difference between oil sold on the East Coast and the midcontinent price at Cushing, Okla. The glut of oil being piped from North Dakota into Cushing means it often sells at a $20 discount per barrel compared with the East Coast price.

Claypool said rail shippers typically charge $16 to $18 to take a barrel of oil to East Coast. Shipping by pipelines costs a third of that, but many distant refineries can’t get North Dakota oil by any means except rail, he said.

He’s betting oil producers will have long-term need for rail. Among the refineries that benefit from rail is one in Philadelphia purchased last year by Delta Air Lines, which hopes to reduce its jet fuel costs.

East and Gulf coast refineries aren’t the only destinations for oil trains originating in North Dakota’s booming oil fields.

Tacoma and the Puget Sound-area refineries are developing a thirst for the domestically produced crude oil, and they’re building major rail facilities to handle the long trains transporting oil from the Bakken formation wells.

Three Puget Sound refineries have or will soon be building major crude oil receiving and storage facilities for the 100-car-plus trains transporting crude.

In Tacoma, U.S. Oil and Refining Co. is expanding its rail yard and storage tanks to handle oil originating in the upper Great Plains. Part of that $8 million-plus expansion has been completed and other facilities are still under construction.

Two major refineries north of Seattle, BP’s and Tesoro’s, are spending millions to import crude oil from North Dakota and Eastern Montana.

Tesora has already constructed a $55 million, four-track rail unloading facility near its Anacortes refinery. That facility can unload as many as 50,000 barrels a day from BNSF Railway trains.

At Cherry Point near the Canadian border, BP is spending $60 million to construct a rail yard for crude oil unit trains. Those trains could bring 40,000 barrels of crude oil to the BP refinery, the Northwest’s largest, every other day.

And in Tacoma, Port of Tacoma commissioners recently approved a lease on 80 acres of a former Kaiser aluminum smelter site to Targa Sound Terminal LLC for construction of a petroleum products and biofuels storage and unloading facility.

Targa will spend between $80 million and $150 million to build the facilities on the former smelter site between the Blair and Hylebos waterways northeast of Highway 509.

The construction of the rail yard and storage facility will provide jobs for up to 100 construction workers. The resulting facility will create 50 permanent jobs.

Next Sunday

More specifics of how the port and Targa worked together to create the new terminal project will be detailed in next Sunday’s News Tribune’s Business section.