Oil & Energy

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In the past few years there has been much chatter about oil trians. There was the explosions, the shortage of pipelines during $100 crude and then enter Warren Buffet and his railroads and his backing of the US Democratic party.

That quickly morphed into the political football we know as the keystone XL pipeline. They are many theories abound paybacks, political intrigue and environmental cover ups on this topic. Fast forward and shifting oil by rail numbers have plummeted. This is not just a story about the collapse of crude prices but a story of pipeline expansion.

Rail became a 'thing' with oil when shale exploded. New shale formations where developed in virgin territory where there were no pipelines. In 2009 there was basically no oil to speak of transported by rail. By 2014 more than one million barrels a day went by train says the EIA.

As oil fall so did the transport of oil, by April this year less than half, 430,000 barrels of oil now get transported by rail. We have seen some fall as bankruptcies soared and oil production fell but much is die to structural change.

Union Pacific Corp. Chief Executive Lance Fritz told the WSJ,  “At least some portion, and it could be a pretty large portion,”

As shale grew so did the pipeline network. unreachable areas in North Dakota and elsewhere are now being reached and this provides for a much cheaper transport to market. , giving producers a cheaper way to move their oil to market. In North Dakota oil output from the state’s Bakken Shale formation has fallen by 180,000 barrels a day from its 2014 peak while pipeline takeaway capacity has more than doubled since 2010.

The Lac Mégantic, Quebec derailments which killed 47 people in 2013 has seen new and expensive regulations and particularly in Canada led to opposition to new major rail projects on the West Coast. New safer tank cars mean higher costs for transporting oil.

WSJ reports
EOG Resources Inc., one of the first oil companies to see the potential for trains to relieve pipelines, opened its first rail loading terminal in Stanley, N.D., in 2009. But that terminal hasn’t loaded a train in more than a year, according to Genscape, a data provider that tracks activity at U.S. rail terminals.

“New pipeline infrastructure has been put in place to move significant volumes of oil to market,” an EOG spokeswoman said.

 

Quote
Pipeline capacity will increase to replace all of the current volume BNSF Railway Co. is shipping out of North Dakota, said David Garin the railroad’s group vice president of industrial products. BNSF used to transport as many as 12 trains daily filled with crude primarily from North Dakota’s Bakken Shale, carrying about 70% of all rail traffic out of the area. Now it is down to about five a day. “Will this business be back to 12 trains a day? Probably not,” said Mr. Garin. “Will it be zero? Probably not.”

It should be noted that at the peak in 2014 crude-by-rail accounted for less than 2% of total rail volumes the Association of American Railroads data shows. It is however another dent in the railroad industry. It is also a reminder of politicians should be wary of getting into bed with billionaires without the whole matrix of possibilities.

Between 2010 and 2015 89 terminals were built or expanded in the U.S. and Canada to load crude on trains and nearly as many to offload it according to consulting firm RBN Energy LLC. WSJ

When shale oil was more than $20 a barrel below international benchmark prices refineries were eager to pay higher rail shipping costs in exchange for some of it. The world was all about Peak oil $100 here we are $200 to come, then we fell to $25 rather quickly.

Now that spread needs to taken into account as we trade $3 today in front month WTI. New pipelines bring that cost down and with the U.S. lifting the crude export ban there is new opportunity for producers in the region. It has also added a new competitor, oil tankers carrying foreign crude. Phillips 66 said earlier this year it may still be cheaper to take that oil and put it on a barge for delivery by sea to the coasts than to send it directly there by train.

Once rail contracts expire from the 2009-14 boom expect more of a drop of in the oil train demand. WSJ reports Phillips 66 is partnering with pipeline company Energy Transfer Partners LP to develop a pair of pipelines that will bring North Dakota crude to Illinois and then down to Texas. The endeavor which will cost close to $5 billion is expected to take a major bite out of oil train traffic. This despite the pipelines ultimately shipping oil to the Midwest and the Gulf of Mexico rather than where trains have primarily taken it, to the East and West coasts.

Source: http://www.wsj.com/articles/crude-slump-pipeline-expansion-mark-end-of-u-s-oil-train-boom-1469484016? 

 

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