Riding the Rails

Railways are essential to an ethanol producer's business. Ships are a viable option for only a small number of facilities and trucks can't handle all of the volume. So rail it is. As the ethanol industry expands, so must the railroad's capability to handle this commodity.
By Kris Bevill / Photos by Arian Schuessler | May 09, 2008
In 1995, 32,000 carloads of ethanol were moved by rail, according to the Association of American Railroads. That number increased to 146,000 in 2006. "The ethanol industry is growing and, up until now, the railroads have not really had any problems handling that growth," says Tom White, AAR communications director. "Rail is the most efficient way to ship ethanol at this point. I think rail is shipping 70 percent of what's being produced now."

Although railroads ship the majority of U.S. ethanol, it's a fairly insignificant amount when compared with the total commodities moved by rail. For instance, ethanol shipments made up less than 1 percent of the 32 million carloads of freight moved by rail in 2006. However, despite its insignificance when compared with other commodities, ethanol represents a growth opportunity for the country's railroads. White anticipates ethanol transportation via railway will continue to grow, and infrastructure needs to be expanded to accommodate that growth.

New legislation has been introduced that, if passed, could help to speed that expansion. The Freight Rail Infrastructure Capacity Expansion Act would provide a 25 percent tax credit for investments made to increase rail capacity. White says the AAR-backed proposal was introduced in both the U.S. House and Senate last year but is still in the committee process. So far, he says, the bill has received bipartisan support and he's confident that with increased support it will be passed into law. The incentive could make a real difference for railroads because they would have more money to invest in improving other areas. "It may in fact lead to an increase in the capacity of the rail network," White says. "The network has, in certain corridors, been operating at close to capacity for a few years. So there is definitely some need to increase capacity, especially when we look toward the future where the Department of Transportation is predicting the demand for rail freight service will almost double by 2015."

The proposed incentive would apply to railroads, and any business that wants to invest in railroad expansion. "For example, if an ethanol producer or a refinery made an investment in rail terminal facilities so that they could make use of unit trainsthat would be an eligible type of investment," White says.

The Perfect Couple: Railroads and Terminals
Railroads are willing to work with facilities from the start so that everything goes smoothly, according to White. As it becomes more popular for terminal operators to team up with railroads, producers can expect to see better options and increased reliability from the transportation sector.

One of the busiest terminals in the Midwest was born out of a partnership among Manly Terminal LLC, the Iowa Northern Railway Co. and Hawkeye Energy Holdings LLC. Manly Terminal opened for business in December in the heart of Iowa's ethanol producing region. Company President Lee Kiewit says the terminal was built in response to a need for flexibility and reliability when transporting ethanol. He knew area producers were suffering because cars weren't returning on time, and there was a lack of destination and off-site storage options. Kiewit and his partners decided to build a terminal that offered all of those things and in addition direct truck-to-rail and rail-to-truck transloads. The 164-mile Iowa Northern short line runs diagonally from the terminal down to Cedar Rapids, Iowa, and offers several Class 1 railroad connections along the way. Because of the short line's route, Manly customers have more flexibility in choosing where and when to ship their commodities, Kiewit says. The partnership between railroad and terminal allows him to offer a permanent daily schedule so producers don't have to come up with their own schedule.

Lincoln Oil Co., a Greenville, S.C.-based petroleum marketing business, began splash blending in 2005. In July 2007, the company started offering ethanol on a wholesale basis. After a frustrating summer spent trying to ship blended fuel, President Jim Farish read about the impact of mandated splash blending on the shipping industry and decided to build a terminal. He teamed up with a local short-line railroad, Greenville & Western Railway, to design and construct a terminal capable of off-loading 96 cars in 18 hours. Farish will invest up to $15 million to build the facility, which includes 13,500 feet of rail, and says he's banking on mandatory blending increases to make his terminal successful. By partnering with a local short line, Farish's customers will be able to connect with larger Class 1 railroads to more efficiently transport their goods. He expects his terminal in Belton, S.C., will be operational by the end of the year.

The Train of the Future
Kiewit, Farish and White all consider unit trains a vital element in increasing the efficiency of the railroad infrastructure. Units usually consist of 85 to 95 cars loaded with the same product. Unit trains have been utilized by railroads for years to haul coal and grains. The recent increase in demand and production of ethanol has made shipping by unit trains more efficient than single-car trains. According to the USDA, the industry "rule of thumb" is that the ethanol railcar utilization rate for a unit train is 30 turns per year, compared with 12 turns per year for a single-car shipment.

The benefits of using unit trains to haul ethanol are economic. Railroads need fewer cars because large volumes of ethanol can be shuffled from origin to destination. Producers and refiners benefit by paying less in shipping and car rentals. Farish is convinced a bulk load-out facility is the way to go and plans to accommodate units at his terminal. "It is taking us 10 to 22 days to deliver single cars to the Southeast markets that we serve," Farish says. "Therein lies the problem."

Manly Terminal runs unit trains through on a regular basis, but Kiewit says they will probably fill more single cars than units in the near future. He believes that, although units will become more common, there will always be a need for single-manifest cars and has no plans to discontinue that service.

Problems and Improvements
Although unit trains make sense economically, some small producers can't make enough ethanol to fill a unit train in one cycle. Therefore, more storage is needed in order for unit trains to be cost-effective for them. Manly offers rental storage space, which has steadily remained two-thirds full since opening, Kiewit says. The added storage allows him to fill unit trains with ethanol from several producers. That option comes in handy for producers when considering that it takes three weeks for a 50 MMgy plant to fill a unit, he says. "By the time you figure all your costs and expense in filling that one train, for a 50 MMgy plant all the savings are gone and there's no cash flow to the plant while they're waiting for that last bit [of ethanol] to be produced."

More tank cars are also needed to accommodate the large amounts of ethanol being shipped by rail. White says tank car manufacturers have ramped up production to alleviate the back log that was created by increased demand for ethanol. Shortages are not substantial, although there may be a few producers who would disagree, White says. Blenders like Farish aren't accustomed to tank shortages. "Petroleum refiners are used to putting product in a pipeline and taking it off a very dependable number of days later," Farish says. "I anticipate a lot of pain and suffering in the next year during the learning curve to find out what works and what doesn't work. I've been doing it for seven or eight months and it's not fun. It's been good for us, but it's just not easy to manage getting cars." Farish predicts that a battle could evolve between producers and refiners for tank cars, and that's another reason adequate storage is a must for producers. "Producers are not going to be able to tie up the number of cars that petroleum refiners can financially afford to sit on," he says.

Railroads also continue to work with developers to build terminals that can unload the large volumes of ethanol being shipped by unit trains. Currently, not many facilities are capable of handling unit trains but that will change, White says. "It all comes down to destination," Kiewit adds. "There are going to be 20-car markets [and] there are going to be markets that can only take in two cars at a time. I think there's going to be a large pull, with the Class 1 rails working with the short-line rails. Then, these short-line guys can kind of gather all those gallons off the Class 1 and distribute 20 cars to this market and five to here and service those people on a daily basis. The Class 1 railroads can do what they do best, which is run the long miles."

Both terminal operators and railroad companies are confident that all these issues will be addressed and handled in an effective manner. Producers just need to be patient. "It takes time to get permitting done, build tankage, get construction crews, get tanks certified and things like that," Kiewit says. "And it's all being done on a daily basis, and in different markets. The ethanol industry is in its infancy stage and as it has grown the railroads have been great at working with everybody and continuing to grow with the industry. You're going to run into the average producer who doesn't have his cars back this week and he's going to cuss the railroad, but all in all it's a big business and it's a big world out there."

Kris Bevill is an Ethanol Producer Magazine staff writer. Reach her at kbevill@bbibiofuels.com or (701) 373-0636.