Logistics of fracking creating boom times for truckers, rails

The North American hydraulic fracturing energy boom is creating once-in-lifetime new business opportunities for the trucking and rail industries.
 
Born in the 1940s “fracking” is one baby boomer that won’t be retiring in the next five years. In fact, recent huge discoveries of hydrocarbons in shale formations, like the Cline Shale Formation in West Texas, mean hydraulic fracturing will be working for many more decades. Fracking is the process which uses water and proppant (sand) to release hydrocarbons from shale formations deep beneath the surface.
 
Upstream exploration and production advances mean energy companies now know how to locate and extract the oil and gases trapped one to two miles below the Earth’s surface. However, midstream (well head to refinery) and downstream (refinery to your local gas station) logistics remain behind the demand curve.
  
What does this mean for logistics? Opportunity! But it must first mean investment.
  
That’s because to satisfy the logistics demands of fracking also means more safety certified tanker drivers, more rail tank cars and more coordination among producers, servicers and carriers to get product to market in the most efficient ways possible.
  
From the moment drilling begins to the start of production is a logistical challenge and an expensive endeavor that can range from $10,000 to $100,000 per day. Down-hole pipe, water, sand and cement are all required in large quantities at the right place and right time.
 
For example each well requires between 2 and 8 million gallons of water. At the low end (2 million gallons) it is equal to two swimming pools as long as a football field, 50 feet wide and 10 feet deep.  Further, each well requires about 1 million pounds of sand, equivalent to a fully loaded Boeing 747.  The Barnett Shale formation in the Bend Arch-Fort Worth Basin of Texas has 16,000 wells and expects another 13,000 wells in the next few years. The Cline Shale Formation, with 30 billion barrels of recoverable oil, is expected to have over 100,000 wells.  
 
The fracking boom is expected to continue as the United States is on pace to pass Saudi Arabia as the world’s largest oil producer by 2020, according to the International Energy Agency. Fuel is currently the largest U.S. export item.
  
“OPEC will find it challenging to survive another 60 years, let alone another decade,” Edward Morse, a researcher for Citigroup, recently told CNBC.
  
Thanks to fracking, North Dakota has come out of nowhere to become one of this country’s leading oil producers. One estimate says nearly 65 percent of all fracking freight in that state is hauled by railroads. Just imagine the number of rail tank cars and tankers required just to get the wells producing?
  
Once wells start producing, oil and gas needs to get from the wellheads to the refineries. Federal interference has delayed pipeline construction such as the Keystone line. Although such delays are bad for Canada and a hindrance to America’s energy independence desires, they are good for the rail and trucking industries.
  
Tankers are not as cost effective as rail tank cars but there are not enough rail tank cars.  Backlog is approaching 50,000, according to industry experts. The basic rule of thumb is that a railcar carries the equivalent of four trucks’ capacity. The math is one unit train of crude oil is equivalent to 400 trucks on the road.
  
In the race for efficiency trains can be loaded in bulk on the originating end and on their way faster than 400 trucks can. Rail cost per barrel is $10 to $15 per barrel, truck costs are between $13 and $18 per barrel, while pipeline costs are the cheapest at $5 per barrel.
  
Early estimates are that there are 30 billion barrels of oil in Cline Shale alone. That translates into billions of dollars for the logistics industry.
  
Richard McClure spent 25 years in the rail industry and formerly was chief executive and chief operating officer of American Railroads Corp. and currently is CEO of ARC Strategic Advisors Group, a buy-side advisory firm that specializes in railroad infrastructure assets and rail car leasing, says that “until Obama administration approves the Keystone Pipeline the rail industry will continue to be the second-most efficient way to bring product to market ensuring rails profits for several more years.”
     
Trucking is trying to catch up to rails’ efficiency but has enjoyed the fracking boom as well. Dan Van Alstine, senior vice president and general manager of Schneider National’s dedicated truck business, says fracking has been a boom to his company and other truckers because of the wide geographic area in which such operations exist.
 
“They’re in the Upper Midwest, the Northeast, certainly the Texas and Southwest areas, it’s all over,” Van Alstine said.
  
Although most trucking companies are equipped with GPS units and centralized dispatch that give well operators more accurate arrival times, low tanker truck utilization still persists. This is evident in the percent of revenue attributed to demurrage charges. In some parts of this supply chain such as. filling at the sand mines, demurrage can account for up to 40 percent of revenues.
  
These inefficiencies ripple through the supply chain adding unnecessary costs, according to James Guyette, managing director of OpEx, a Chicago-based consulting firm.
  
“Collaboration is the key to success,” Guyette says. “The supply chains that collaborate best will have a competitive advantage over their rivals.”
  
But Guyette adds that the shale energy boom will continue to tax the existing logistics infrastructure and capital equipment. Until capital investments catch up to demand, he said, logistics providers will need to become more efficient and effective with existing resources. The multiple decades of growth in shale oil and gas means multiple decades of opportunity for logistics companies.