Meritage Midstream will be developing a crude oil rail loading facility right inside the Wyoming shale oil play.
But there’s an added advantage to Meritage’s decision. That area of Wyoming happens to be coal country, and that’s why Meritage went ahead and paired up with Arch Coal (NYSE: ACI) of St. Louis, which owns the Black Thunder mine. The two will be sharing rail capacities for dual loads.
From Progressive Railroading:
“The Powder River Basin has been the largest coal-producing region in the country for many years and currently accounts for approximately 40 percent of U.S. coal production. Now, new drilling technologies are being applied to legacy oil fields in the basin, allowing operators to expand their drilling programs,” said Meritage Midstream Chairman and Chief Executive Officer Steve Huckaby. “What the basin lacks is sufficient pipeline and rail infrastructure at the right location to move crude oil and condensate to the highest value markets.”
Under the terms of the deal, Arch will be the minority owner of the 60-40 split. The new entity will be named Black Thunder Terminal LLC.
Meritage will develop the facility using one of Arch’s lesser-used rail loops. Since the coal market has been seeing declining numbers all around for some time now, it has become possible for such partnerships due to unused rail capacity. For example, Arch produced some 93 million tons from the Black Thunder mine last year, a decrease of 11 percent.
The new facility will start out with a capacity of 10,000 barrels of oil per day but will build up to 120,000 barrels per day at peak capacity. That’s roughly two fully-loaded trains with 110 cars each. Although it is expected that the oil will be supplied to the trains by trucks initially, Meritage is strongly considering moving up to pipelines at a later time.
Pipelines and Rails
Rail versus pipeline has been a subject of debate in the energy sector for a while now. There is certainly a lack in the national pipeline infrastructure, and this problem has received increasing attention in recent months.
However, rail offers a degree of flexibility that pipelines can’t readily afford. As Huckaby pointed out, rail allows access to the East, West, and Gulf Coasts – and the Gulf Coast has been under spotlights for so long that it’s quite possibly reaching a point of saturation.
The oil that comes to the Meritage facility from the Wyoming Powder River Basin is expected to be routed to the West Coast. According to the U.S. Geological Survey, that basin contains around 1 billion barrels of recoverable crude oil.
Most of the infrastructure for the new facility is actually already in place, since Arch is providing the necessary land, rail switching system, and rail loop. Meritage’s role is to supply the capital and oversee actual development of the facility.
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Due to this advantageous blend of circumstances, the first loading operations could begin as soon as September. All necessary approvals ought to be confirmed within the next 3-6 months.
The Black Thunder Terminal will be responsible for providing a whole range of services to the Basin’s providers. These include oil handling, storage, actual loading onto the trains, and related marketing services.
The shale boom is clearly a long-term thing. Right now, the major plays are being thoroughly developed, and the infrastructure is coming up. The next big thing, logically, will be transportation infrastructure. As mentioned earlier, there is a pipeline bottleneck that’s causing a lot of producers a lot of headaches.
And then there’s the Keystone XL project, which continues to hang in the balance. The Canadian PM, Stephen Harper, recently tried to put some pressure onto President Obama, who is expected to issue a verdict on the matter any day now.
Beyond that, though, the rail versus pipeline debate is an active one. It’s worth considering rail while pipeline developers continue to plan out their longer-term projects. The winners of the oil and gas transportation wars will receive some major bounty. Gas, especially, is in need of more efficient transportation, as so much of it is presently being flared off.
However, given the U.S. as a whole is reversing the import/export balance, pipelines also need to be reversed and re-routed, and wholly new ones need to be built. All of that predicts an active market for energy transportation soon.
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