DALLAS - The nation's largest petroleum pipeline hub may see rail service for the first time in more than three decades after Oklahoma agreed to sell a short line railroad known as the Sooner Sub to its current operator for $75 million.
At the same time, the state's two largest cities - Oklahoma City and Tulsa - are expecting their first passenger rail connection in more than four decades under terms of the deal.
The sale of the 97.5-mile rail line was approved by the Oklahoma Transportation Commission May 5. The decision followed a 180-day process mandated by the 2013 State Legislature. The sale is expected to close July 31.
The Sooner Sub has been state property since Burlington Northern Santa Fe Railroad sold Oklahoma the abandoned line for salvage value of $5.9 million in 1998.
BNSF was one of two qualified bidders for the Sooner Sub, which has grown in value because of booming oil and gas production in the state.
The current operator, Stillwater Central Railroad, which manages the line under a lease, outbid BNSF with an offer of more money upfront and what the commission considered a more beneficial plan to develop new service.
Stillwater Central offered $75 million cash, while BNSF bid $25 million. The state required a minimum bid of $9.1 million, said John Bowman, director of capital programs for the Oklahoma Department of Transportation.
"About 60% of the weighting on this decision was for the business plan, and only 40% was on the bid price," Bowman said. "The more that line generates, the better for the whole state's economy."
To qualify for consideration, the two final bidders of the original four had to agree to consider combining freight and passenger service on the line that runs from the Oklahoma City suburb of Midwest City to the Tulsa suburb of Sapulpa.
Stillwater Central plans to spend about $2.2 million on a test of passenger rail service that could begin as early as November. The railroad said that it ran three excursion trains on the route in February that sold out within 10 days.
Advocates of passenger service, primarily in Tulsa, had urged the state not to sell the line, figuring that chances of developing passenger service between the two cities were better under state ownership. One of the options that the commission considered was "no sale."
"We did not feel it was only possible to have passenger rail if this line were owned by the state," Bowman said. "We didn't see that as a prerequisite."
Stillwater Central, a subsidiary of the Watco Companies of Pittsburg, Kan., agreed to pay the state $2.8 million if it fails to start the pilot passenger service program within five years. The railroad would also be required to return a passenger rail easement to ODOT if it is not operating passenger rail service after 10 years.
Oklahoma Secretary of Commerce Larry Parman, who developed a recommendation for the sale with Gov. Mary Fallin's other cabinet secretaries, said that continued state ownership would not have improved prospects for passenger service on the line.
"Our state doesn't have the money it would take to improve that track to the condition it would need to be in for passenger service," Parman said. "A successful buyer would have to find a commercially viable way to upgrade that track and straighten out a lot of curves."
The sales contract requires Stillwater Central, also known as SLWC, to improve the track to Class 3 status within seven years, which would allow freight trains to travel up to 40 miles per hour and passenger trains up to 60 miles per hour.
At current speeds allowed under federal law, given the condition of the track, a passenger trip on the line would take more than six hours, Parman said.
"I don't know that passenger service will ever be commercially viable," Parman said. "That's what we're waiting for the market to tell us."
Prospects for a connection to the pipeline hub in Cushing, Okla., look a lot more bankable.
Watco and Stillwater Central proposed spending more than $100 million to tie the oil hub into the Sooner Sub, which would then provide connections to three Class 1 national railroads, including BNSF. That would mean a link between Cushing and the Bakken Shale Play of North Dakota, where rail operations have struggled to meet demand for transportation of oil from hydraulically fractured or "fracked" horizontal wells.
"Competitive access and competitive rates have helped grow the traffic on the Sooner Sub from zero cars to 30,000 cars per year since 1998," SLWC said in its proposal to buy the line. "This especially applies to the increase in crude oil shipments the SLWC anticipates for energy customers who want to move their crude through Cushing."
At Cushing, oil is stored and shipped based on demand throughout the nation. Billing itself as the "Pipeline Crossroads of the World," Cushing is the pricing point for West Texas Intermediate Crude oil and futures contracts on the New York Mercantile Exchange. When traders expect oil prices to rise, Cushing fills up. When they expect prices to fall, Cushing's tanks do too.
In recent years, Cushing has experienced a glut due to limited pipeline capacity. That is where rail connections are expected to provide relief.
"It's just like putting in another spigot," Parman explained.
Cushing would also serve as the connecting point for TransCanada's planned Keystone XL Pipeline that would deliver oil from Alberta tar sands to refineries on the Texas coast. The leg of the pipeline from Cushing to Houston was completed in January, while the northern leg from Canada is awaiting federal approval.
Stillwater Central's link to Cushing would also serve western Oklahoma's Anadarko Basin via the rail line, which continues westward past Oklahoma City.
Rail oil tanker traffic has surged in the wake of fracking, which has brought drilling booms in places far from traditional oil fields and the pipelines that serve them. Pipelines have not kept pace with production, leaving transportation trucks and railroads.
Once the scene of local gushers, Cushing evolved into a refining town before emerging as the pipeline hub. In the 1980s, Cushing's last two major refineries, Kerr-McGee and Hudson, closed, and rail service ended in 1982.
In its proposal, Stillwater Central said its operations would bring development from other companies, including T&J Marketing, a Chandler, Okla., propane provider, Mid-Way Environmental Services, a company that is developing injection wells in Davenport, Okla., and Timco Blasting and Coatings, a Stroud, Okla., company interested in increasing the volume of hydrochloric acid it is moving, as well as bringing in additional sand used for developing oil and gas wells.
The influx and outflow of hazardous materials along the Sooner Sub have raised safety concerns, but railroad officials promised to improve safety measures where they proved feasible.
After a series of tank car explosions U.S. Secretary of Transportation Anthony Foxx issued an emergency directive May 7 on how shipments of Bakken Crude should be handled by railroads.
After the sale of the Sooner Sub is completed, Oklahoma will own about 200 miles of railroad that would have been abandoned years ago by private companies. When the railroads were suffering from a deep slump, the state acquired about 882 miles of railway to maintain in the event that demand returned.
To build a new passenger line from scratch between Tulsa and Oklahoma City today would cost a minimum of $1 billion and probably closer to $3 billion, according to official estimates. The current value of the track to the state's economy shows how government can sometimes bridge gaps between recessions and recoveries, officials said.
"I think we were good stewards of that track while we owned it," Parman said. "And when the market came back, we followed the legislative intent to sell it. I think we achieved our mission."