(Bloomberg) -- Oil producers may be getting in their own way in the race to pump crude from the fertile Permian Basin.
Railcars full of sand have helped producers unlock record amounts of crude in the Permian Basin. The resulting surge of crude supply has pushed regional prices well below the going rate on the Gulf Coast as pipelines needed to carry the oil to the market are full and the railroads are backed up with sand shipments.
The stakes are high. Spot crude at Midland, Texas, in the heart of the Permian is trading Monday at almost $16 a barrel below the grade of oil in Houston, 500 miles (805 kilometers) away. This discount more than covers cost to ship crude by rail to the coast, so theoretically, oil traders stand to make about $8 a barrel if they can arrange for transportation to Houston.
The Permian is the leading destination for fracking sand shipments for two of the country’s major rail service providers, Union Pacific Corp. and Warren Buffett’s Burlington Northern Santa Fe LLC, according to Joseph Triepke, founder of oilfield research firm Infill Thinking.
“The vast majority of the oilfield rail infrastructure is designed for sand,” Triepke said in a phone interview.
Shale producers are emphasizing to investors their ability to get oil out of the region. The pipeline shortages are creating “haves and have-nots” among Permian producers, based on who’s secured the best arrangements, Anadarko Chief Executive Officer Al Walker said May 2 on a conference call.
“We have been working hard to be among the haves by proactively aligning our production growth with midstream and downstream solutions,” Walker told analysts at the start of the call. “We like the position we’ve created.”
Inquiries to move Permian oil by rail have picked up, though there hasn’t been any actual surge in crude-by-rail activity, at least not yet, Dan Lester, vice president for commercial operations at transport service provider Watco Cos LLC, said. The company operates three short line railroads in West Texas, two of which directly serve the Permian Basin.
Oil and sand might not use the same type of railcars, but they still compete for resources.
“Once they are in the Basin they are using the same track,” Infill Thinking’s Triepke said.
There is also competition for locomotives, crews and power in a region that is forecast to consume 48 million tons of fracking sand this year, he said. That accounts for 45 percent of total U.S. fracking sand needs.
While BNSF and Union Pacific will provide the long-haul rail shipment routes that will move the barrels from the Permian Basin to the U.S. Gulf, shippers still have to use short lines such as those provided by Kansas-based Watco Cos LLC to transport oil from a close as possible to the well head to long-haul service providers.
“The short track lines will get the commodity from the customer to long-haul rail services, or vice versa,” Watco spokeswoman Tracie VanBecelaere said in a phone interview.
“BNSF is moving modest volumes today from the Permian basin, this is not new. As always, BNSF will respond to market developments as rail becomes an option for shippers in and around the Basin,” company spokeswoman Amy Casas said in an email.
In addition, there’s rail routes and extra tariffs required to reach customers’ doorsteps that will challenge Permian crude shippers.
“Railing crude has got more moving parts than a pipeline shipment,” Sandy Fielden, director of research and commodities for Morningstar Inc. in Austin, Texas, said by phone. “It happens day in day out elsewhere but in the Permian, this has not happened on a regular basis.”
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