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Shipping crude oil is going to become an increasingly unpredictable business for railroads, as refiners have now demonstrated they will turn to the cheapest source for oil—no matter its location.
“And when prices and spreads—more importantly spreads—are wide enough to support moving crude by rail, they will want to have those options,” Patrick J. Ottensmeyer, incoming chief executive at Kansas City Southern, said in an interview.
Crude-by-rail helped fuel a boom in the rail industry through 2014, as U.S. domestic producers drilled more wells in areas with few pipelines to carry it to market. As a result, an enormous amount has been invested in facilities to transport crude-by-rail in Canada, North Dakota, Texas and the receiving terminals along the U.S. Gulf Coast, an area Kansas City Southern serves, Mr. Ottensmeyer says.
But since then, volumes have plummeted along with the price of oil. In the first quarter, crude-by-rail shipments fell 44% compared with the same quarter a year ago, according to the Association of American Railroads.
The willingness of refiners to switch back and forth from international to domestic sources “is going to introduce more volatility than some of our other businesses have,” Mr. Ottensmeyer said.
Canadian Pacific Railway Ltd. CEO Hunter Harrison in April declared the long-term prospects for crude-by-rail “virtually over,” but said it would come back to some degree.
Mr. Ottensmeyer said that low energy prices are expected to provide growth in other areas along the Gulf Coast, however. The plummeting price of natural gas is resulting in new plastics plants and other facilities to tap that resource, he said.
In addition, autos and other imports out of Mexico are expected to increasingly become a growth engine. A number of car companies are building out capacity in Mexico, and Kansas City Southern is the only major U.S. freight railroad with a network into that country.
Some of that production will come online and help offset weaker volumes in industries like coal.
“We feel like next year could be a turning point. This year is going to be a scramble,” he said. “Everything seems to be stagnant to slow right now.”
Mr. Ottensmeyer will succeed current Chief Executive David L. Starling on July 1.
Write to Laura Stevens at firstname.lastname@example.org
This article first appeared on www.wsj.com
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