Investing in Oil Transportation

Tanker and Rail Booms

By Justin Williams
Tuesday, October 29th, 2013

When it comes to oil transportation here in the U.S., you might assume business is booming like most anything related to oil and gas.

Domestic oil production is booming today even more than it was yesterday. And tomorrow I can say the same exact thing. It’s through the roof.

oil tanker sidebarSo naturally, the transportation for all the domestic production taking place should be booming, too. And in some places, it is. If we look to our City of Brotherly Love, it is the shipbuilding industry that is just as much responsible for a surge in Pennsylvania’s economy as oil and gas.

It’s one of America’s great laws that make it so. Passed more than a century ago, the Jones Act said any and all goods transported between U.S. ports must on a U.S.-built vessel, required to wave a U.S. flag.

That settles that. As producers have increasingly looked for more ways to transport an abundance of oil and gas, they only had to look to the U.S. shorelines to make it happen.

Today, the need is so much that shipbuilders are bending over backwards trying to keep up with the demand for more and more tankers as the bounty of oil and gas being produced rises. And the same can be said for our rail transport systems.

Tankers

Like I mentioned, Philadelphia is one U.S. port that is reaping the rewards of the bountiful oil and gas production here in the states.

In Philadelphia’s Aker shipyard, a massive 820-foot supertanker named the Liberty Bay is set for its first launch this week, destined for the West Coast. From there, it will undergo its final tuning before setting out in April for delivery to the SeaRiver Maritime, Exxon Mobil’s (NYSE: XOM) privately held maritime subsidiary.

According to CNBC, Exxon has commissioned two ships including the Liberty Bay that cost $200 million each and will deliver 33 million gallons of oil on a single trip. The Liberty Bay will make its trips from Alaska’s North Slope to refineries on the West Coast.

What’s more important than Aker’s deal with Exxon and Philadelphia is that there are at least 15 tankers on order or under construction at shipyards around the country. This is the biggest boom the industry has seen in 20 years.

When construction is completed on the two ships for Exxon, the shipyard has four more to start for another client. The company has won orders for $1.1 billion, according to CNBC, and has tripled in size since 2011.

Other shipyards are seeing the same growth.

Rail and Pipe

Expansion in shipbuilding is just one facet to the growing needs of the energy boom taking place. Railroads and tank-car makers are shooting up as well, all to ensure enough transportation is installed.

According to CNBC, BNSF Railway, a subsidiary of Berkshire Hathaway (NYSE: BRK-A), will invest $220 million to improve its rail capacity for North Dakota and its Bakken.

Last week, crude shipments by rail went right past 600,000 barrels per day. Backorders are mounting so fast that they are expected into 2015.

The American Association of Railroads said 13,644 carloads of petroleum and petroleum products were carried by U.S. rail last week, according to UPI. That is roughly 9.55 million barrels of oil and a 15.5 percent increase from the week prior. An accumulation of 564,733 carloads, or 395 million barrels of oil, were delivered by Thursday of last week, and that is up 34.8 percent compared to the same time last year.

These numbers don’t even factor in deliveries from the Canadian National Railway Co. (NYSE: CNI) and the Canadian Pacific Railway (NYSE: CP).

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As for pipelines, they’re so important because they are more resistant to risk and damages.

But as safe as they are, with the accelerated pace from the boom of production, the capacity for pipelines is maxed out. And new pipeline projects face loads of red tape.

Pipelines are extremely important because they are not only safer but also less problematic when we look at environmental factors.

The risk of a spill during a road transport is nearly 20 incidents per billion ton-miles, according to Oil & Gas Journal. For rail, the risk drops down to just over two incidents per billion ton-miles. But for pipeline, the risk is less than 0.6 incidents per billion ton-miles.

Either way, first and foremost, transportation is needed at every level of the U.S. energy boom. Workers at places like the Aker shipyard are working overtime and putting in double shifts just to try and keep up. And there is no end in sight.

The transportation sector will expand for some time. And it's going to be prime investment territory as North America enters the next stage of the oil and gas boom.

 

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