Refiners, railroads gear up as oil boom resonates in South Sound

When recent headlines proclaimed that the United States was poised to become the world’s largest oil producer by 2017, the import of that news may have seemed distant and abstract.

Yes, the oil fields of North Dakota, Montana and Texas are alive with new activity. But for Northwest residents, the effects are not something they see every day.

But that is quickly changing, in businesses from Olympia to the Canadian border.

The arrival in Tacoma last week of a 103-car train from North Dakota was a sign of just how swiftly the sudden abundance of oil in this country is shifting business even in an area 1,200 miles distant from the booming oil fields.

That BNSF Railway train was the first of what will ultimately become weekly trains bringing oil to Tacoma from the new fields opened up by hydraulic fracturing technology in the country’s northern Great Plains.

The train’s arrival and the construction of a new $8 million rail yard at the Tacoma Tideflats refinery of U.S. Oil and Refining Co. is indicative of a shift in the source of crude shipments to Puget Sound refineries.

Marcia Nielsen, U.S. Oil spokeswoman, said the refinery is shifting some of it feedstock procurement from its traditional sources in Alaska to the Great Plains because of better availability and price.

Consider these facts:

• Alaska’s crude production peaked at 2 million barrels a day in the ’70s. In March this year, that Alaskan production had fallen to 567,481 barrels a day.

• Meanwhile in North Dakota, March production of crude oil rose to 575,490 barrels a day, surpassing Alaska and putting North Dakota behind only Texas in overall crude oil production in the U.S.

• Because of the quadrupling of production in the Bakken and Three Forks shale formations in the Dakotas and Montana over the past five years, the usual means of transporting oil – pipelines – has not kept up to the demand.

• Railroads are filling the gap in crude oil transport capacity, creating long trains typically numbering more than 100 cars to carry that crude oil to refineries. Train transport is more expensive than pipeline movement, about $16 a barrel on longer trips, but it takes only months to get the crude oil trains rolling versus years to build new pipelines.

• Oil companies are building new loading facilities in the Great Plains to fill the 700-barrel tank cars with crude oil. Refiners such as U.S. Oil are spending millions to create new rail yards and unloading facilities to handle the new shipments at the refinery and export end of the train routes.

• The surge in production in the new oil fields is forcing crude prices downward, said Tim Hamilton, executive director of Automotive United Trades Organization, a service station operators group, and providing an alternate supply for Puget Sound refineries.

U.S. Oil reportedly has been receiving oil from North Dakota for months, but only in smaller batches that could be more easily handled on existing trains. Now, with the construction of the new yard and unloading facilities, the refinery will be handling regular unit trains of oil.

The Tacoma refinery isn’t the only one to make changes in the mix of where it gets its oil. Tesoro recently completed a $55 million, four-track rail yard near its Anacortes refinery 70 miles north of Seattle. That yard has the capacity of receiving up to 50,000 42-gallon barrels of crude oil a day to feed the 120,000-barrels-per-day refinery.

And BP has applied for permits to construct a $60 million rail car receiving and unloading facility near its Cherry Point refinery north of Bellingham. The oil company hopes to have the project complete by 2014.

BP said the refinery will still get the vast majority of its supply of crude oil from Alaska, but the rail yard gives the company a greater variety of sources to feed the refinery, the largest in Washington.

“On average, the refinery would receive one standard trainload of 40,000 barrels every other day – so about 20,000 barrels a day – less than 10 percent of the refinery’s crude requirement. Cherry Point can process up to 234,000 barrels every day, so North Slope and other crudes shipped by tanker will remain its primary source of oil,” BP said in a statement.

And in Tacoma, another local fuel supplier, Targa Sound Terminals, reportedly is considering expansion of its rail yard on the Tacoma Tideflats on Taylor Way.

Targa has an existing yard there with the capability of handling 36 cars at once. The company has talked with neighboring landowners about expanding that yard to handle more rail cars, said Tideflats sources.

And the Port of Tacoma itself, the Tideflats’ biggest landlord, has received multiple proposals from several companies to build a bulk liquids handling facility on the 70-acre former Kaiser Aluminum smelter site. The port acquired that site in 2003, demolished the World War II-era smelter and cleaned up environmental hazards on the site.

The vacant land, near the south end of the port’s busy Blair Waterway, could be ready for occupancy in a few months after a small number of remaining environmental cleanup projects are completed, said port spokeswoman Tara Mattina. Mattina said she couldn’t discuss what companies have proposed for the site, citing ongoing negotiations.

Some Tideflats sources said crude oil and ethanol storage and handling facilities are among the proposals considered for the site. Ethanol is a fuel additive that’s produced largely from corn in the Midwest. The port commission may see the fruits of the port’s attempts to market the Kaiser land in the next few months.

The steel-wheeled pipeline for crude oil and for the more controversial coal exports (there are several proposals for new coal-export facilities in the Northwest) are bringing new traffic to rail lines along the country’s northern tier.

Other businesses outside the energy industry are also profiting from the energy boom.

BNSF Railway is the biggest beneficiary. The rails across the northern U.S. from Chicago to the Puget Sound region are largely owned by BNSF, the successor to two of the three railroads that connected the Midwest to the Northwest – Great Northern and Northern Pacific. (The third railroad, the Milwaukee Road, is defunct.) Those rail lines serve both the Dakota oil fields and the coal mines of Wyoming and Montana.

The Port of Olympia has found new business in importing oil-field supplies, including the special sand used in the fracking process. In recent weeks, Olympia has seen two ships call on the port to deliver oil-field supplies.

And Tacoma’s Bradken foundry last year announced a $23 million expansion that included a new production facility for large castings and a radiographic scanner to check the quality of metal parts.

The scanner has been built, but the expanded production facility is awaiting capital from the parent company, said Bradken Energy President Steven Gear. Construction is likely to begin next year.

Gear said the foundry has seen demand rise for large metal castings for use in pipelines in the energy industry. The increasing demand has created 74 jobs at the Nalley Valley foundry, about a 25 percent increase in the work force, he said.