Houston, 20 July (Argus) — Union Pacific's best option for replacing sagging coal volumes is continuing to increase its shale energy-related business, as an increasing amount of oil and natural gas liquids (NGLs) as well as equipment and materials needed for onshore hydraulic fracturing are transported by rail.
Catering to the fast-growing shale energy sector is the company's biggest opportunity to overcome weakness in coal, company executives said while discussing second quarter financial results.
UP's coal volumes fell 17pc on a year-over-year basis in the quarter ended 30 June, and this year's drought is likely to moderate fall harvests, executive vice-president of marketing and sales Eric Butler said.
But the ramp up in US onshore drilling has been a boom for rail operators, as exploration and production in remote, infrastructure-constrained locations require trains to bring in drilling materials and push out crude. The sector is expected to contribute about two points to overall growth for UP this year.
Even so, carloads derived from shale energy are “a little off” expectations so far in 2012, the company said. This stems from the slowdown in natural gas drilling and a slower than expected ramp up of customer facilities. Still, UP's petroleum shipments rose 92pc on the year in the second quarter thanks to greater oil shipments out of the Bakken and Eagle Ford formations, and moving to terminals in St James, Louisiana, and Galveston and Houston, Texas.
UP previously said it expected to quadruple carloads of oil out of shale plays to 100,000 this year, transporting an estimated 100mn bl of crude as output from the Bakken, Permian basin and Canada ramp up.
The company added new capacity in west Texas during the quarter that will serve inbound and outbound loads for the Permian. UP will also bring new capacity to the crude delivery and emerging pricing hub of St James in the second half of this year.
Shale energy will again be the largest driver for the railroad's industrial and chemicals segments. Growth in the company's crude business is “tremendous,” Butler said. The company is largely moving oil in unit trains, which are entire trains devoted to carrying nothing but oil. Shipments of sand – needed for onshore drilling – largely move by manifest rail service, where trains are loaded with cars taking many types of cargoes to multiple destinations. But UP is pushing to move about 15pc of its sand business to unit train service.
The company made a $1bn profit during the second quarter – its best on record – which was higher by 28pc on the year. The gain was also helped by a surge in automotive shipments.
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