Reinvesting in

August 11, 2014

It is quiet 20 miles to the east of where I sit; Congress is out of session. The warring factions on Capitol Hill did pass a Transportation Bill, under the wire, before they left for their summer break.

While the public sector of highway, water, and air transport searches for yet more funds to pour into the budget, the private entities of transport infrastructure, the railroads, are doubling down on capital improvements. The US Class 1 railroads committed to $16 billion in capital for track and equipment in 2014. Shippers are putting money to work too, as they lease commodity specific railcars, like new DOT-111 tank cars designed for the volatile Bakken Crude where demand may be over 10,000 new tank cars. US industry could be investing over $25 billion in 2014 in additional rail infrastructure. All of that investment is real investment, an investment of private money.

Land and Tracks

Perhaps the longest life asset on a railroad is the right-of-way and the track. The railroad owns the land under the tracks, leaving railroads as large owners of real estate. While in total, the land makes up thousands of acres, most of that land is in right-of-way, long strips of land only 10 or 20 feet wide. Mile-long narrow strips of land are not attractive real estate packages, so the value of the land the railroads sit on is almost worthless. In fact, when a railroad abandons a track, the best use of the land is as a public trail.

Still, land is a constraint when it comes to expanding the capacity of a railroad. To operate, the trains need rails, ties, and ballast sitting on land. Adding additional track is limited by the ground the railroad owns. If the existing right-of-way is too narrow to add another track, the railroad has to purchase the strip of land along the current track. They can’t force the landowner to sell, so the railroad has to be persuasive with the price.

A railroad track and right-of-way is a large civil engineering project. Trains do not like rapid elevation changes, demanding track grades under 3 percent. Gentle grades require earth movement, lots of earth movement. Sometimes the earth comes from somewhere else on the railroad and sometimes from someplace else, at a cost. The civil engineering, building trackbed, drainage, power, bridges, culverts, and grade crossings have to happen before the ballast and track arrive.

The terminal ends of the rail lines need terminal operations. Rail yards allow the railroads to take apart inbound trains to assemble into outbound trains. Intermodal facilities use cranes to transfer containers and trailers from purpose-built carrier cars. Grain, coal, and oil terminals facilitate the transfer of bulk commodities into and out of dedicated specialized freight cars.

In the past, the railroads owned and operated many of these facilities. In the case of intermodal operations, the major railroads do own and operate the ramps as part of a much larger land development project. The Intermodal Logistics Parks developed by BNSF, Union Pacific, Kansas City Southern, CSX and Norfolk Southern are all examples of the railroads taking the lead developing terminal operations.

Still, the railroads are feeling throughput capacity they never encountered before. Freight moves more efficiently through the rail network today because of a number of factors.

First, the railroads rationalized the competition. From the 1950’s until today, the furnace of competition burned away many redundant and unprofitable railroads. The ongoing competition of trucks on the highway system removed complexity for many shippers because they did not have to arrange for carriage to the freight station. The weak companies folded; their assets sometimes bought by other railroads until only five Class l railroads remain, supported by an array of mostly healthy, short-line rail operators.

Second, the railroads and unions realized that employment in the industry had to shrink. Seventy-five years ago a train carried a crew of four men. In the past 15 years, railroads lost the caboose off the back of the train and cut the train crew down to two people. Just this week, BNSF started working with its union to shrink the train crew down to one person. The railroads employed over 1.2 million people right after WWII; today about 200,000 people in total work for the US railroads.

Third, in the process of rationalizing and merging, the railroads evaluated the tracks and right-of-ways, putting the best lines and facilities together. Railroads have been merging for over 100 years, and the mergers of the past 15 years proved that the railroads knew what to do with the combined assets. Railroads agreed to joint track-use programs, where two competing railroads used the same sections of track in a shared operations agreement.

Even with all of these benefits of system rationalization, the fixed path, physical nature of the railroads presents a challenge. The volume of trains through some parts of the system highlights the capacity constraints in the network. For example, The Northern Corridor of the BNSF, from Chicago to the Pacific North West (PNW) is just one example of volume constraints. In 2013 the BNSF moved over 221 million tons of freight through the Northern Corridor, pushing trains through a number of pinch points like the Funnel, or the Cascade Tunnel under Stevens Pass, Washington.

In some cases, like the 7.8 mile-long Cascade Tunnel, or the 7 mile Flathead Tunnel in Montana, there is no simple solution to adding more capacity. The cost of expanding the tunnels is prohibitive. There are physical limitations to how many trains can flow through these long holes punched into mountains. Diesel trains burn diesel fuel to make power. The engines consume prodigious amounts of oxygen and produce even more exhaust gasses. Long tunnels like the Cascade and the Flathead require time to ventilate after a train passes, sometimes as much as 30 minutes. Mile-long trains moving at 30 miles per hour take over 15 minutes to clear one of these tunnels. If it takes 30 minutes to vent the tunnel, the cycle time is 45 minutes. In a perfect world where trains are waiting for the next turn, these tunnels may only process 32 trains per day.

Other pinch points are the product of past downsizing and shared trackage agreements. As the old James Hill railroad lines finally merged in 1970, the Burlington, Great Northern, Northern Pacific, and the Spokane, Portland, and Seattle Railroads merged, the Northwest rail corridor between Chicago and the PNW shifted from two competing networks into a single system. BN shut down redundant lines into and out of Spokane while working out a track sharing agreement with the Union Pacific. The UP abandoned most of its track in the area as part of the changes, so by the end of the 1970’s, most of the UP traffic through Spokane ran on BN tracks.

What a difference a few decades makes. The Eastbound Northwest Line carries import containers, produce, fish, wine and beer from the PNW to the Eastern US via Chicago. Eastbound lumber and grain cars originate along the route. These routes pass by the lucrative Power River coal region, and the Bakken Oil fields, creating unit trainloads of crude oil and coal in both directions, loaded outbound and empty inbound. As new rail transfer terminals open up in the PNW, the daily westbound CBR train counts will increase. A solid unit train can carry as many as 100,000 barrels of oil.

The West Coast US refineries need crude. Refineries in two of the five states (California and Washington) that make up PADD 5, (California, Oregon, Nevada, Arizona and Washington) consume 2,530,000 barrels of crude oil a day. Refineries in PADD 5 depend on a steady supply of Alaskan crude. Bakken crude is less expensive delivered by train than the Alaskan. With the four Crude by Rail (CBR) transfer terminals already in operation in Western Washington, 300 – 400 thousand bbl of oil moves every day by train westbound. Oil companies and investment groups are driving for growth, more than doubling the CBR transfer capacity. It is not inconceivable to see six to eight unit trains moving loaded every day to the Washington refineries in the near future.

Out on the East Coast of the US, the CBR demand flows to two points:  the Irving Oil Refinery in New Brunswick, Canada and the refineries along the Delaware River. These refineries need a replacement for the imported crude that they traditionally bought. The East Coast refineries now pull half of their crude via rail service from the Bakken, where last year they pulled only 18% domestic inbound. East Coast refineries draw just over 1 million barrels of crude per day, so at least five unit trains per day move to the Atlantic Coast refineries.

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