GILLETTE — The importance of rail to Campbell County is easy to see.
The county seat is named for Edward Gillette, a Chicago, Burlington and Quincy Railroad surveyor who helped bring the railroad and put the city on the map.
As much as Gillette owes the railroad, the city and the coal mines that surround it also mean big business for the two railroads that operate here. More coal moves on U.S. railroads than any other commodity, and more U.S. coal is mined in Campbell County than anywhere else.
For more than a year though, that relationship has been strained.
Mine executives from every company in the Powder River Basin have pointed to poor rail service limiting their ability to move coal from their mines to their utility customers. Missed shipments have added up to about 20 million tons of undelivered PRB coal.
When mines sell less coal, their profit margins shrink on the coal they do sell.
“Cost in the PRB once again came in above our expectations primarily due to rail underperformance, which continues to hinder shipment volumes across all regions, but especially in the PRB,” Alpha Natural Resources CEO Kevin Crutchfield said.
Poor rail service has been one more obstacle for coal companies already struggling with tough market conditions.
The PRB has remained one of the most profitable coal mining regions, and only one mining company with operations in the basin, Cloud Peak Energy, has posted a profit for a quarter this year.
It is also the only company that doesn’t have operations outside the basin.
During the third quarter of 2014, Cloud Peak netted $91 million, Alpha lost $185 million, Arch lost $97 million and Peabody lost $149 million. The other mine operators in the basin have other divisions that contribute significantly to their earnings.
It takes cooperation, coordination and a lot of man hours, horsepower and steel to move coal out of the Powder River Basin to its destinations, which are in most states in the country.
It takes more than 20,000 100-plus-car unit trains to get PRB coal to power plants every year.
Unlike just about any other track in the country, the main line through the PRB is owned by two class I railroads — Union Pacific and Burlington Northern Santa Fe. That infrastructure has the capacity to handle about twice as many trains as are needed to move the region’s coal.
“There is zero congestion in the Powder River Basin rail infrastructure,” said Trevin Hogg, director of crude rail operations and marketing for Meritage Midstream, the operator of a new crude oil terminal at the Black Thunder coal mine.
Other rail resources — locomotives, cars, crews for operations and weather response — have become strained, often down the road from the joint line in the PRB. As certain sectors of the economy have recovered since the recession, those rail resources start being needed more and more outside the coal fields.
This has been especially true as oil production booms in several regions in the country and as farmers set record grain harvests.
Two new facilities to load locally produced crude oil onto trains opened near Douglas in 2013. The Black Thunder terminal started operating in April, and another two west of Douglas are under construction.
As demand for rail service has expanded, UP made business decisions that put it in a place to dispatch more capacity. BNSF’s response has come slower and more in the form of a reaction.
“Everybody in North America understands the challenges that BNSF is facing, and that is they just didn’t manage their growth from a marketing and operating perspective,” Hogg said. “Union Pacific, they went down a different path. There was a more stringent business development process, so they managed their growth.”
By last fall, the railroads couldn’t keep up, and Mother Nature just piled on. An October blizzard and a cold winter slowed locomotives and brought them to a halt at times, adding strain to an already taxed infrastructure. That snowballed into a low point in rail service.
It’s something that tends to go in cycles, Peabody Energy CEO Gregory Boyce said.
“We have seen these in the past,” Boyce said. “The railroad hires more people. They get more locomotives and they debottleneck the track and the turnaround times, cycle times, and the system opens up.”
BNSF executives point out that a slowdown in rail performance in this case is not a result of a lax commitment on their part as much as it is a result of increasing demand. The company has set records for spending on equipment the past two years and expects to follow suit again next year, said Carl Ice, BNSF president and chief executive officer.
“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.
BNSF spent $4.1 billion on capital in 2013, the most it had spent in any year. That was mainly driven by increased industrial demand related to North Dakota’s Bakken shale, according to a January 2013 statement from the company.
BNSF plans to spend $5.5 billion on capital this year and announced earlier this month that it expects to spend $6 billion next year.
“We have made great progress in expanding the segments of our railroad that have been most constrained by rapidly increasing demand,” Ice said. “Once these new capital programs are completed, we expect to further restore the capacity flexibility we have historically enjoyed to manage the periodic demand surges that come from a dynamic and fast-paced economic environment.”
It’s difficult for someone used to managing a household budget to comprehend what $5.5 billion can buy.
So far this year, BNSF has taken delivery of nearly 575 locomotives and hired more than 5,500 new employees. The company has also taken deliberate steps to keep trains running closer to normal during harsh winter weather.
The company is adding about 150 heaters to remotely-controlled switches that were in danger of freezing during extreme cold. Switches allow trains to change tracks. It has also added snow removal crews and hired new rapid response crews for mechanical issues, including a new crew in northern Colorado and several in North Dakota.
The company already had several rapid response crews in the PRB.
Union Pacific, on the other hand, has had a quieter response.
“Our rail times with UP, you could almost set your watch to,” Hogg said. “It’s four days down to the Gulf Coast. It’s two days to the Chicago interchange with the Norfolk Southern. From that perspective, we couldn’t be happier.”
BNSF has held up its responsibilities and worked with shippers also, he said.
“To give the BNSF credit though, they have been forthright with us,” Hogg said. “I look at railroad weekly numbers, and what the BNSF has been informing me has jibed with their weekly and monthly reported numbers. So I have to give hats off to the BNSF as well. .. As long as they tell me these things, I can design a plan and then work that plan.”
Despite investments to keep up with new demand, the slowdown has been worse this time and lasted longer than in the recent past. The reaction from customers and regulators has also been more significant.
Last month, on the regulatory side, the Surface Transportation Board began requiring class I railroads to file weekly reports about their rail performance. This came as a reaction to a public meeting of rail users that expressed concern at the lack of transparency about rail shipments.
“Many rail shippers expressed concerns about the lack of publicly available rail service metrics and requested access to certain performance data from the railroads to help them better understand the scope, magnitude and impact of the current service problems,” the board wrote in a statement. “The data collected pursuant to this order will give the board and interested parties a better real-time understanding of the current rail service issues.”
On the customer side, mines in the Powder River Basin have not been able to ship about 20 million tons of coal they would have under normal circumstances. This means that several mines have been unable to ship as much as is required in long-term contracts with the utilities they sell to.
“Near-term deliveries are still problematic,” Boyce said. “Everybody is focused on getting their contractual deliveries, and additional volume, as it becomes available on a railroad, is going toward trying to maintain and meet those contractual requirements.”
This means they will be playing catch-up into 2015 for coal that was contracted to be shipped this year.
Without access to the coal they need, utilities’ stockpiles have dropped to well below normal levels and they have been forced to conserve coal. Since they don’t have the option to simply stop producing electricity, utilities have been burning more natural gas than would be economically justifiable with normal rail service.
“Utilities are looking through near-term rail issues,” Boyce said. “So our multi-year discussions actually are stronger today than any kind of near-term improvement in end volumes.”
Because of this, coal companies are expecting some rebound demand as utilities rebuild their coal inventories, possibly to higher levels than in the recent past.
“We’ve got utilities that are now rethinking what is an appropriate level of normalized inventory,” Boyce said. “That really started with the polar vortex of last winter, but the rail issues have kind of compounded that thinking. So we see once the rail system opens up, strong pull for a number of years.”
Railroads say they aren’t prioritizing other commodities over coal, and they are legally required to give all customers equal priority.
While they may not be ignoring coal, an evenly distributed slowdown has a disproportionate impact on coal companies. That’s because there are simply fewer coal producers shipping more product than there are producers of other commodities.
Seven companies own the 13 active coal mines in Campbell County. In comparison, 116 companies have filed applications for permits to drill an oil or gas well in the state since the beginning of the year.
The number of coal cars loaded each year also dwarfs the numbers for other commodities.
The railroads have been working to add crews, power and equipment, and that has already led to improvements. Coal companies hope those incremental improvements continue.
Performance improved for Arch Coal by about 5 percent between the second and third quarters of this year, COO Paul Lang said during the company’s third quarter earnings report.
“That’s actually a little bit more than I would have thought,” Lang said. “We don’t need 5 percent improvement every quarter. I’d like to see, what we need to see, is sustained incremental 1 percent, 2 percent, 3 percent improvement to get where we need to be.”
Opinion on when performance will return to normal varies. Part of that has to do with the differences in service from mine to mine.
Nationwide, railroads are responding differently, and Alpha President Paul Vining said the company doesn’t expect service to return to normal until well into 2015.
“It’s certainly going to last well into next year,” Vining said. “Beyond that it’s going to depend on what’s going to happen in the Bakken when oil is at 80 bucks and how much oil is going to get hauled and what’s the crop going to look like, so I say it’s going to be a long slog certainly well into 2015.”
Cloud Peak executives are more optimistic. The company even announced that, based on faster-than-expected improvements, it will ship more coal this year than estimated.
With the improvements so far, they are hoping for a strong and improving showing from the railroads through the end of this year.
“We are now starting to see increased shipments as rail performance is steadily improving, which should give us a decent fourth quarter if it continues,” Marshall said.
Railroaded: Coal losses continue as mines wait for lagging rail to catch up - Casper Star-Tribune Online
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