Immovable Objects

FROM THE DECEMBER ISSUE: Railroad delays in 2014 forced ethanol plants to slow production or find other ways to move their products. Four years later, the situation has improved, but rail traffic is on the rise again.
By Matt Thompson | November 23, 2018

Transportation being as critical as it is in the ethanol industry, producers take notice when disruptions occur. In late 2013 and through much of 2014, ethanol shipments were stymied as harsh winter weather, heavier-than-expected rail traffic from the agriculture and crude oil industries, and a limited supply of tanker and hopper cars all combined to create substantial railroad delays.

“Ethanol producers, as well as many other businesses, depend on railroads for anywhere from a small percentage to near 100 percent of their transportation requirements,” says Brad Schultz, director of commodities and risk management for Glacial Lakes Energy LLC. “And when conditions mean service goes down, you have problems doing business that can maybe add up to just headaches, but potentially lost business and lost opportunity.”

Glacial Lakes, with locations in Watertown and Mina in South Dakota, was one of two ethanol producers to present testimony at a Surface Transportation Board hearing in September 2014. The hearing was meant to bring commodity producers and railroad representatives together to find a solution to the delays.

In his testimony, Glacial Lakes CEO Jim Seurer said the company had “suffered slowdowns and shutdowns, we have lost revenue, we have missed opportunities, and we have incurred higher costs because of BNSF's mismanagement of its monopolistic workload.”

Written comments from Dana Siefkes-Lewis, Redfield Energy LLC’s chief administrative officer, presented at the hearing read, “Historically, rail turns on the tankers was roughly four weeks. We are seeing our rail turns averaging about seven weeks per car.” She added that Redfield Energy, in Redfield, South Dakota, also increased its fleet of tanker cars, an added expense for the company.

Many who were at the STB’s hearing blamed the rail delays on increased crude oil movement, a view that Donna Hausvik, chief marketing officer for Redfield, maintains. “Probably the main issue back in ’14 was that [the railroads] were shipping so much crude oil, and the tracks became congested. Big Oil was paying more per car than the ethanol industry, and we really felt that that’s why our cars would sit on the side tracks and they’d get all bunched up and we had to slow our plants down.”

Sean Broderick, distillers grains marketing manager for CHS Inc., agrees. “It seemed to me at the time that oil and frack sand were the story and stealing a lot of time from the normal grain, and … the normal movements that you get every year, and that was what was … clogging the system.”

At the 2014 hearing, representatives from BNSF Railway and Canadian Pacific Railway denied favoring oil over any other commodities. They pointed to harsh winter weather, rail congestion in Chicago and record yields in the ag industry working together to strain the already-busy railroad system.

“I can assure you CP is not favoring the movement of one commodity over another commodity,” said John Brooks, then CP’s vice president of bulk marketing sales, during the hearing. “It seems like there was a perfect storm of factors that contributed to this extreme, unprecedented level of car requests that we received, including weather and interchange congestion. … At the end, the result was CP's car requests exceeded what we expected to move and could possibly ship.”

Schultz tells Ethanol Producer Magazine that a shortage of rail cars compounded the issues in 2013. “Tanker cars were extremely tight going into that winter, as were hopper cars, which move the distillers (grains). Both of those were functions of that first upward surge in crude oil movement. So even if you wanted to and were willing to get more cars to kind of help get through that difficult winter, they were not available at any price.”

Glacial Lakes and Redfield slowed production, but many at the hearing said the critical information needed to plan for slowing wasn’t coming. Both BNSF and CP vowed to improve their communication, and the STB instituted reporting requirements to help get information to shippers.

Current Congestion
Those reporting mechanisms are still in place four years later and are available to the public on the STB’s website.

The reports show an improvement in the statistics from four years ago. During the week of Oct. 12, 2014, BNSF reported the average dwell time at origin for ethanol units was 26 hours. For the week of Sept. 29, 2018, that number had dropped to 14.1 hours, while the average train speed for ethanol units has increased to 22.3 miles per hour, over the 2014 speed of 20.2 miles per hour.

CP reported a weekly average dwell time at origin for ethanol at 21 hours for the same week in 2014. In 2018, that number was 29.3 hours, but train speed had increased from 17.1 miles per hour to 24 miles per hour.

These improvements came despite a resurgence of oil production from the Bakken shale formation in western North Dakota, as well as an increase in production out of the Permian Basin in Texas. In July of this year, production in North Dakota was averaging more than 1.2 million barrels per day. The Permian Basin produced more than 2 million barrels per day from January through July of 2018. Although oil production is once again increasing, and demand on the rail system continues to be steady, neither Hausvik nor Broderick have been made aware of any issues that could impact rail shipments soon.

“I think that, just based on what we’ve heard, [the railroads] are able to see the Bakken rise on the future, and as far as I can tell, they’ve been gearing up for it,” Broderick says.

Amy McBeth, director of public affairs for BNSF, says that while rail traffic during the first six months of 2018 increased 5 percent over last year, the railroad will “continue to be focused on meeting the needs of all our customers.”

Hausvik says Redfield’s third-party marketer, Eco-Energy, deals mostly with BNSF on Redfield’s behalf, and they were provided an update earlier this year. Rail volumes have increased year-over-year, and the expectation is that they’ll continue to do so.

“What they’re telling us is, ‘Yep, it was up last year and it’s up another six percent this year,’” Hausvik says. She adds that, according to Eco-Energy, the main reason rail traffic is increasing is the nationwide truck driver shortage.

There was a small slowdown for rail service in the spring of 2018, but Broderick and Hausvik attribute that to weather, rather than the uptick in oil production. “You had things like wild fires and storms and avalanches and that kind of thing,” Broderick says. “The things that happened in nature were seemingly slowing it down more than, say, added demand for oil cars or frack sand cars.” He adds that rail service is back to normal for CHS DDGS marketing.

Schultz says the same for Glacial Lakes and that capital improvement projects undertaken by BNSF since 2014 have helped. McBeth says BNSF has spent about $6 billion on improving and maintaining track along the Northern Corridor during the past five years.

“I know in 2017 their plan was to spend over $3 billion on capital, a lot of that on tracks, a lot on locomotives, and that is down from the couple years before that,” Schultz says. “I’m here to tell you that, as a shipper, I can see it and feel it.”

CP has also invested in capital improvements since 2014. As of late October, the railway estimated it will spend $1.6 billion on improvement projects, including track upgrades and obtaining new hopper cars, by the end of 2018. This comes after spending more than $1 billion annually since 2014 on capital improvement projects.

For Redfield, rail service began to return to normal after it sought assistance from Sen. John Thune, R-S.D., Hausvik says. “We started corresponding with his office, and he was sitting on the STB at that time, which really helped.” After that, BNSF utilized locomotives that had been in storage and sought assistance from other railroads.

Broderick, Schultz and Hausvik all note that communication from the railroads has improved as well. “It does seem like the railroad is cognizant of the fact that you need information to run your business, and they seem to do a lot better job of providing that than they did,” Broderick says.
Moving forward

After 2014, both Redfield and Glacial Lakes undertook projects to help ease the burden of potential rail service delays. Hausvik says Redfield increased on-site ethanol storage by adding two 1 million-gallon storage tanks, nearly doubling its storage capacity.

In 2014, Redfield also trucked some of its product to a storage facility in southern South Dakota, Hausvik says. If service were to slow down again, moving product by truck would be more challenging. She says it’s been harder to find trucking companies recently than it was in 2014, because of the nationwide driver shortage and stricter trucking industry regulations.

Schultz says Glacial Lakes also added more on-site storage at its Watertown plant. But it also went a step further. “We did convert the Watertown plant, which at the time was single manifest, to a unit shipper. It was fully operational February of 2017. Along with becoming unit capable, we added 4.5 million gallons of ethanol storage as part of the same project.”

During Seurer’s 2014 testimony, he said BNSF had suggested adding unit shipping capabilities to help with congestion. At the time, Seurer said he wasn’t sure the cost of the upgrade would offer enough benefit. But Schultz says the project has proven its worth. “We’ve been extremely pleased with the investment and how we’ve been able to operate it since that, and it’s been better than what we’d expected.” That investment has allowed Glacial Lakes to save money by leasing fewer cars, and it helps with rail congestion, as there are fewer cars on the line, Schultz says.

While rail service has improved, Hausvik notes that it has come with a cost, and she expects that cost will continue to rise. She says Redfield is a single manifest facility and has seen two rate increases from BNSF this year, amounting to about 2 cents per gallon for ethanol. Typically, the yearly increase is $100 per car, per year, at the most, she says. This year, both increases were $300 per car. “They’re seeing more ethanol volume on the rail line than ever before and they believe they can continue to take the rates higher,” Hausvik says.


Author: Matt Thompson
Associate Editor,
Ethanol Producer Magazine
701.738.4922
mthompson@bbiinternational.com