Category: BNSF

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A lawsuit brought by AFPM, a trade association representing 400 refining and petrochemical companies, over BNSF Railway’s $1,000 tank car surcharge is the latest round in a battle between keeping costs low in producing crude oil from the Bakken formation and the safety of its transport to refiners.

With the Bakken oil boom, BNSF has become the largest transporter of crude oil in North America, moving some 600,000 barrels of oil per day, but the steep decline in worldwide oil prices has put pressure on Bakken oil producers due to the high cost of production as compared to oil from the Middle East.

The $1,000 per tank car surcharge started January 1, 2015, as BNSF pushed oil producers and refiners to shift to new safer tank cars that decrease the risk of fire in the case of derailment. With each tank car holding up to 34,500 US gallons, the charge adds just under 3 cents per gallon, or $1.26 a barrel.

BNSF’s Limited Options

As a common carrier, Berkshire Hathaway’s BNSF Railway can’t refuse under most circumstances to carry cargo, despite the potential loss or damage presented by the cargo. And, while BNSF’s growing role as a mobile crude oil pipeline has meant billions in new revenue, it also has presented new risks in regards to fire in the event of derailment, collision, or other accidents. In addition to pushing for safer tank cars BNSF has boosted training for both its crews and emergency responders in communities along its routes.

All Crude Oil is Not the Same

Crude Oil from the Bakken formation is classified as “light sweet crude,” a type of crude oil that has high volatility and flammability. The Wall Street Journal reported that “U.S. regulators recently called Bakken crude an imminent hazard because of what they believe is its unusually flammable nature…”

According to The Wall Street Journal, the oil derived from North Dakota’s Bakken shale has an 8 pounds per square inch Reid Vapor Pressure in warmer weather and 12.5 in colder weather. This is significantly higher than oil derived from the Eagle Ford Shale in Texas.

AFPM’s position is that the surcharge on tank cars ignores the root cause of derailments, which they assert is tied to poor track conditions and human error. In a letter to Transportation Secretary Anthony Foxx, AFPM stated that “Any effort to enhance rail safety must begin with addressing track integrity and human factors, which account for sixty percent of derailments. Investment in accident prevention would result in the greatest reduction in the risk of rail incidents.”

In response to the lawsuit, BNSF issued a statement that called the surcharge “consistent with BNSF’s ongoing efforts to ensure the safe transport of crude on our network, including voluntary adoption of enhanced operating practices around crude oil shipments and requesting the federal government to make newer, safer tank cars the new standard for crude-by-rail shipments, replacing the older DOT-111 and non-modified CPC-1232 cars.”

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

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In 2014, BNSF Railway made a record $5 billion in capital expenditures, coupled with another $500 million in other network expansion initiatives. The massive $5.5 billion in spending was part of an effort to keep up with record demand coming from all sectors, including from oil producers in the Bakken formation, utilities demanding coal deliveries, grain producers, and a wide-range of intermodal shippers.

The record shipping demand generated a tsunami of complaints about delays, and left BNSF facing questions from both government regulators and customers. In March of 2014 the backlog for grain shipments alone hit 8,000 cars, before being trimmed to 1,000 cars by October.

Among the regulators concerned with the impact of delays, the U.S. Surface Transportation Board (STB) instructed BNSF to provide a detailed description of its contingency plans to prevent potential coal shortages for electric utility shippers.

The $5 billion in single-year capital expenditures represented record spending not only for BNSF, but according to the company, for any railroad ever. And, in order to continue to tackle its demand issues and delay backlogs, BNSF will again set a record in 2015 with an announced capital plan that totals $6 billion of investment in everything from rails, ties and ballast, to a slew of new locomotives.

Roughly $500 million of the record capital expenditure will be spent in the North Dakota region, with 55 miles of new double track running between Minot, North Dakota, and Glasgow, Montana, to be a top priority.

2014 Progress

In a letter to customers, BNSF’s Group Vice President, Consumer Products, Katie Farmer, laid out the impact of some of the 2014 expenditures.

“Projects in 2014 which positively impacted service while providing additional capacity for our intermodal network include: completion of the Tower 55 project. Located near downtown Fort Worth, Texas, Tower 55 is one of the busiest and most congested railroad intersections in the U.S. As many as 100 freight and passenger trains move through the area every day. With the completion of this project, network fluidity has benefitted traffic moving through this key area.

We have kicked off double track, line-capacity expansion projects to address the remaining Transcon bottlenecks. In all, we have invested more than 3 billion dollars over the last 10 years double tracking nearly all of this route and making this the fastest intermodal route connecting Southern California to the Midwest. When complete in 2015, nearly all of the Transcon will be double tracked and even triple tracked in some areas. In addition, we have completed several terminal expansions in the Chicago area and added 800 new container and trailer parking spots at three Chicago hub facilities. We also expanded our Houston Intermodal Hub facility in Pearland, TX to allow us to handle growing business in and out of this market.

In our Auto network, we moved into our new Big Lift automotive facility, serving Denver and the state of Colorado. This 57-acre facility has more than three times the acreage of our previous facility and offers more capacity and greater highway access. We also increased track capacity for loading operations at our San Diego, Albuquerque and Pearland Hubs and we increased automotive parking capacity at our Portland, Logistics Park Chicago (LPC) and Albuquerque facilities.

We were able to double our auto facility capacity in Kansas City, as a result of transition of all intermodal business to Logistics Park Kansas (LPKC), which opened in late 2013. LPKC is another example of our growth initiatives with current capacity of 550,000 annual lifts and future growth capacity that can scale to 1.5 million lifts. The more than 440 acres of developable property at LPKC offers opportunities for current and future customers to grow.

BNSF Railway, in joint service with Ferromex (FXE), initiated a new 6th morning intermodal service between Chicago, Illinois and Silao, Guanajuato, Mexico. The new service offering is the first and only direct Intermodal service to connect the Midwest to the Heart of the Bajio Region.”

2015 Capital Expenditure Plans

In a separate release on November 20, 2014, BNSF detailed its priorities for 2015:

“The largest component of the 2015 capital plan will be for the renewal of assets and maintenance, which is expected to cost $2.9 billion. These projects will go toward replacing and upgrading rails, ties and ballast that are due for updating. Track replacement projects typically make up the largest percentage of BNSF’s annual capital projects and are important for ensuring BNSF can optimize its rail network for ideal speeds for trains that carry a wide range of commodities.

BNSF also plans to spend almost $1.5 billion on expansion projects. Nearly $500 million of that expansion work will occur in the Northern Region, which is where BNSF is experiencing the fastest growth. That region primarily serves agriculture, coal, crude oil and materials related crude oil exploration and production.

BNSF will also increase the size of its locomotive fleet through the addition of new, energy and fuel efficient locomotives. BNSF will acquire 330 new locomotives to add to its fleet of 7,500 and replace others that will soon reach the end of their useful life.”

Carl Ice, BNSF’s president and chief executive officer, framed the capital expenditures as a vote for the continued strong growth of the U.S. economy.

“BNSF’s capital investment program since the beginning of 2013 through the end of 2015 is unprecedented and is clear evidence of our confidence in a growing economy and our intention to meet the demand for service that comes from all our customers,” Ice said.

Upping the Ante

In 2009, Warren Buffett described the acquisition of BNSF as “an all-in wager on the economic future of the United States.” Clearly, Berkshire Hathaway and BNSF continue to make that wager year after year.

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

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As a common carrier, Berkshire Hathaway’s BNSF Railway can’t refuse under most circumstances to carry cargo, despite the potential loss or damage presented by the cargo. And, while BNSF’s growing role as a mobile crude oil pipeline has meant billions in new revenue, it also has presented new risks in regards to fire in the event of derailment, collision, or other accidents.

Now, BNSF has stepped up its efforts to ameliorate the financial cost of that risk through a $1,000 surcharge for each older crude oil tank car it transports.

BNSF, which this past February issued an RFP for 5,000 tank cars that meet higher fire and crash standards, will put the surcharge on older DOT-111 tank cars. Each tank car can hold up to 34,500 US gallons, so the charge adds just under 3 cents per gallon, or $1.26 a barrel.

BNSF’s crude oil trains can exceed 100 tank cars and a mile in length, giving the railroad potentially as much as an extra $100,000 in revenue per trainload.

With the Bakken oil boom, the railroad has become the largest transporter of crude oil in North America. The company recently celebrated its 1,000th crude-oil unit train at the COLT rail hub in Epping, North Dakota, which only opened in June 2012.

However, according to the Wall Street Journal, the oil derived from North Dakota’s Bakken shale has an 8 pounds per square inch Reid Vapor Pressure in warmer weather and 12.5 in colder weather. This is significantly higher than oil derived from the Eagle Ford Shale in Texas, and makes safety concerns in regards to older tank cars all the more important.

In addition to transitioning to safer tank cars, BNSF has boosted training for both its crews and emergency responders in communities along its routes. In August, BNSF gave emergency responders from 12 states specialized training focused on managing incidents related to crude oil trains.

© 2014 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

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While much has been written about BNSF’s booming oil transport business in the Bakken formation in North Dakota, Berkshire Hathaway’s wholly-owned railroad is also looking south of the border for growth opportunities.

Of particular focus is expanded businesses with Mexican railroad Ferromex to haul automobiles and trucks assembled in Mexico north to Chicago. The vehicles leave from Mazda and Honda assembly plants that recently opened in Silao in Guanajuato state and flow through access points in El Paso, Texas, owned by BNSF.

Ferromex, a subsidiary of Grupo Mexico, is Mexico’s largest cargo carrier, and hauls 17% of Mexico’s total cargo.

Ferromex recently expanded its FXE Silao Intermodal Facility inside the Inland Port of Guanajuato in Silao, Guanajuato.

According to BNSF, the route offers “a centrally located intermodal hub within 100 highway miles of the Bajio’s major manufacturing centers of Leon, Irapuato, Celaya, Salamanca, Queretaro and Aguascalientes.”

A Lucrative Market

The move cuts BNSF in on the lucrative business that is primarily going to Kansas City Southern and Union Pacific Corp. through Laredo, Texas.

BNSF’s access point in El Paso, Texas, has the downside of some 360 miles of extra travel when heading east to Chicago, as El Paso is roughly 600 miles west of Laredo. However, BNSF’s intermodal transport has the advantage for goods moving west to Los Angeles.

Bloomberg reports that cargo hauled both to and from Mexico by rail is booming, with $69.8 billion in goods hauled annually.

“Our partnership with Ferromex to launch this service from Chicago to Silao means that automakers and manufacturers in the U.S. and Mexico will now have direct access to the advantages of intermodal rail in the Bajio region,” said Steve Bobb, BNSF executive vice president and chief marketing officer. “This service offers Mexico’s fast growing manufacturing sector in the Bajio region a simple way to reduce trucking costs and delays.”

BNSF also notes that moving goods by rail has a distinct advantage over trucks when crossing the border because it avoids congested highway bridges.

© 2014 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results

It’s back to the drawing board for BNSF’s plan to reduce labor costs. The Sheet Metal, Air, Rail and Transportation Workers union voted “no,” defeating a proposed new contract that would have allowed BNSF to employ one-person crews over roughly 60-percent of its routes.

The one-person crews would have been allowed instead of the standard two-person crews, provided that a remote-site-based Master Conductor is using monitoring technology known as Positive Train Control (PTC).

The trains would have had a locomotive engineer but no other onboard crew.

Declining Crew Costs

Even without the change crew costs for railroads have been steadily dropping over the past four decades. As recently as the 1970s, various states mandated as many as six employees per train.

BNFS had proposed union concessions that would have diminished at least a portion of its expected savings through increases in the pay of conductors and ground service workers.

© 2014 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.