KEP LLC Economic and Management Consulting PRESENTED TO: Usaee/iaee north American conference Pittsburgh, pa Rail capacity for transportation of energy commodities October 28, 2015 John Schmitter President
KEP LLC Economic and Management Consulting PRESENTED TO: Usaee/iaee north American conference Pittsburgh, pa Rail capacity for transportation of energy.
Jan 18, 2016
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KEP LLCEconomic and Management Consulting
PRESENTED TO:Usaee/iaee north American conferencePittsburgh, pa
Rail capacity for transportation of
energy commodities
October 28, 2015 John SchmitterPresident
2KEP LLCEconomic and Management Consulting
Rail service to most locations is provided by one carrier4 Main US Class I Railroads plus over 500 regional and shortlines
3KEP LLCEconomic and Management Consulting
Canada has 2 Class I railroads
4KEP LLCEconomic and Management Consulting
Us and Canadian railroads
Private companies Own rail track, locomotives and other infrastructure Labor are railroad employees Rail customers own/lease about 50% of railcars Light economic regulation by:
Surface Transportation Board in US Canadian Transportation Agency in Canada
5KEP LLCEconomic and Management Consulting
energy carloads are mostly coal
6KEP LLCEconomic and Management Consulting
energy commodities make up 26% of railroad revenue
7KEP LLCEconomic and Management Consulting
Can energy industry afford the capacity?there is competition for railroad cash flow from investors
8KEP LLCEconomic and Management Consulting
And from other commodities butRailroad margins on energy commodities are above average
Cemica
ls an
d Plas
tics
Petro
leum
Pro
duct
s
Crude
Pet
roleu
m
Ethan
ol
Ferro
us S
crap
Coal
Farm
Pro
duct
s
Met
als
Trans
porta
tion
Equipm
ent
Woo
d Pro
duct
s
Pulp a
nd P
aper
Inte
rmod
al0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
200% 187% 180%169% 169% 164% 164% 159% 158%
139%131% 129%
119%
Average Revenue/LRVC Ratio 2013
Average All Rail Traffic
153%
Source: STB, KEP LLC
9KEP LLCEconomic and Management Consulting
there will be periodic capacity constraints when volume increases quickly
Capacity expansion is a “Just In Time” process
It is difficult for railroads to cope with rapid volume increases
Railroad Employment
10KEP LLCEconomic and Management Consulting
As volumes have declined, service has improved – for now
Industry Weighted Average Speed (mph)Commodity Carload Volumes
Customers are already starting to see service declines as railroads reduce capacity to match declining volumes
Source: AAR
11KEP LLCEconomic and Management Consulting
Energy Industry Takeaways
Capacity• Railroads do have the capacity to handle energy commodities and will in the future• Energy commodities provide good margins for the railroads so the industry can afford
the capacity and should have priority
Railroads will:• Adjust capacity up and down to meet projected demand• Have periods of congestion and relatively good service in response to volume
changes• Increase rates as market conditions allow
Energy industry supply chain managers should:• Recognize that sufficient capacity may not be immediately available when required• Develop maximum flexibility in supply• Modify inventory policies to incorporate inconsistent rail service• Manage railroad relationships and rail transportation effectively
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