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Analysis: Rail gains steam in race to supply Mexico with U.S. fuel

Reuters  |  NEW YORK 

By Devika Kumar

NEW YORK (Reuters) - A big winner from surging of into from the is the rail industry, benefiting from beset by a lack of connectivity, limited capacity and rampant theft.

exports from the to have shot up by about 40 percent over the last two years. Today, stands as the top U. S. export market - absorbing about 1 million barrels a day, worth roughly $20 billion annually in trade. And no slowdown is on the horizon.

For one thing, experts say, faces supply constraints due to the poor condition of many of its refineries; for another, the country keeps adding cars, to its roads.

companies have taken note, and are turning to rail shipments to move products across the U. S.-border. Leasing rates for some tank cars have doubled, while a clutch of new projects are underway to expand the

Perhaps most telling: Kansas City Southern, the fourth-largest U. S. railroad, saw shipments to jump over 200 percent in 2017.

"There is a tremendous opportunity to move product into effectively by rail," said Daniel Gordon, executive vice of business development and strategy at refining company

Traditionally, companies moved into by cargo ship, loaded it on trucks or pipelines and transported it to the country's interior. But only has two major ports that handle half of all its shipments. Moreover, poor road conditions and volume constraints make trucking expensive and slow, and its pipelines suffer from underinvestment, according to industry executives.

Delek's shipments to by rail surged to 120,000 barrels in September, about six times what they were at the start of the year.

Another company, of Houston, started railing diesel into in September and is a partner with one of the companies building a terminal in central

imported its first large U. S. cargo by rail in December. "It is an efficient way, a safe way," said Martin Proske, for


Cross border rail trade is dominated by Kansas City Southern, whose tracks reach the densely-populated interior of the country, including City.

Its rail lines can move to centers of demand without the use of trucks, or pipelines owned by Mexico's that cannot guarantee safe delivery. Shippers are on the hook for the majority of losses incurred on pipelines.

While several pipeline projects are proceeding, rail holds the advantage, said Patrick Ottensmeyer, Kansas City Southern's

"The railroad is already built. Building terminals, buying equipment, all of that is easy compared to building a 1,000-to-1,500-mile pipeline," he said in an interview. "We have at least a three-to-five-year head start on pipelines."

The company is investing in terminals capable of handling high volume shipments of - up to 60,000 barrels in a single trip. In 2017, it announced partnerships with Watco Companies, and worth nearly $50 million to build storage terminals in

Although has long moved a variety of goods to by rail - including grains and autos - has only recently emerged as a growing business.

It shipped about 6,350 carloads of across the border in the third quarter excluding the impact from hurricanes, up from 1,675 in the first quarter, while revenue during the timeframe quadrupled to $16 million.

Hauling by rail is generally more expensive than pipelines. The cost to ship 1,000 tons of is $6 per kilometer for pipelines versus $37 for rail and $83 for trucks, said Eugenio Lohr, principal at in City.

But that equation is changing in because of theft by gangs siphoning from pipelines. During 2016, identified 6,873 illegal taps, up more than 30 percent from 2015. In all, thieves stole more than $1 billion worth of gasoline and diesel, according to

Meanwhile, rail investment is spreading. Among those building terminals is Rangeland Energy, which is constructing a new terminal hub in Corpus Christi, Texas, to transport primarily by rail to terminals in

In Mexico, USD Group, a Houston-based company, is building a petroleum products terminal about 150 miles northwest of City. A rail loading terminal is already online in Beaumont, Texas, owned by firm Jefferson Energy Companies, to export refined products to

The Mexican market has also become a boon for companies. Lease rates for older tank cars being phased out in the that can still be used in have jumped to roughly $500 a month, up from $200 six months ago, according to Tom Williamson, owner of Transportation Consultants.

4J Energy, which currently ships 80 railcars per month of diesel, expects to begin gasoline shipments by January and overall volumes to reach more than 100 railcars a month by February.

"We foresee fantastic growth in this segment of the business," said Jay Harbison, the company's

(Additional reporting by in Seattle, Jarrett Renshaw in New York and David Alire Garcia in City; editing by and Paul Thomasch)

(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)

First Published: Mon, January 08 2018. 18:17 IST