The Two Sides of Oil Transportation
If we’re going to take a look at railroad stocks, we’re inevitably going to have to look at pipelines, as well as how oil is being transported – short-term, long-term, and which comes out on top.
The outcome hinges on many factors including ease of access, price, and reliability. And today, with these factors, the railroad is leading the way. But will the trend continue into the future as more pipelines become accessible? It remains to be seen.
The Association of American Railroads said that 97,135 carloads of crude oil were shipped by rail in the U.S. during the first quarter of the year. That’s right around 68 million barrels in a four month span – 20 percent more than 2012’s fourth quarter, and 166 percent more than the same period one year ago.
And the answer why is simple, really: Oil companies are turning to rail because that’s all they’ve got. With the overwhelming amount of production coming out of North America, pipeline capacity can’t presently keep up with the gains in production. So even if companies preferred pipe, it’s not much of an option.
On a side note, railroad shipments of grain, metallicores, and minerals have all declined. It’s the oil industry that is keeping the wheels in perpetual motion.
Just last week, a pipeline planned from Texas to California was put on the back burner due to a lack in shipper interest.
Efforts to build more pipelines in the U.S. is there, but it seems to run into a brick wall every time it comes up due to high costs and the politics involved – two factors that aren’t likely to change anytime soon.
The efficiency of transporting crude by rail is making it easy to overlook the problems that face pipeline construction.
Rail vs. Pipe
But the debate can’t stop there, oh no.
It is a common assumption that pipelines move resources faster and more efficiently than rail transport, but that’s just not true. It is rail that moves at a faster pace than pipelines, and according to Berkshire Hathaway's (NYSE: BRK-A) BNSF Railway Company, crude travels at a rate of 15-20 miles per hour on a train, compared to just 4-5 miles per hour via pipe.
That being said, it’s not the speed that makes rail transport so attractive but rather its reach of networks. The U.S. has 566 freight railroads with the ability to traverse 138,000 miles. Its infrastructure and far-reaching network make it much better equipped to support places like North Dakota and its Bakken shale formation, where pipeline is falling short.
By now I’m sure you’re thinking, well, what the heck do we need pipelines for then? They're cheaper – that’s one reason. And a modestly sized pipeline can transport 150,000 barrels per day. If that much were handled another way, it would require a minimum 225 rail cars or 750 tanker trucks to get the job done.
Rail cars can also experience unexpected derailments, especially during times of inclement weather. Last month, a CSX Corp. (NYSE: CSX) train that was hauling a chemical payload hit a truck and went up in flames near Baltimore, Maryland.
Thus, there are many environmental and safety benefits to pipelines. If you take away all those rail cars and tanker trucks, you’re left with less air pollution, less chance of a spill, and much less congestion on roadways and rivers. For a country like the U.S. that is constantly looking to improve environmental standards, these factors can’t be overlooked, especially as production increases.
But we’re just not ready for that. The U.S. needs a solution that can work efficiently and work now. A well-established railroad system gets the job done and is reliable.
“Now” may just be the key word to this whole debate. Shale formation output can drop off quickly, so it is vital to the success of producers that while wells are pumping output in large volumes, there is a way to move it. Not tomorrow, but today.
As many wells decline after the first year of production, many producers are hesitant to commit to a long-term deal. The railroad doesn’t require a long-term commitment and is easier to draw up a contract with. The guy building the pipeline needs that security and a long-term commitment.
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It’s rail for now, especially as pipeline projects continue to get shut down – even large scale projects like the Keystone XL, which has been the topic of much debate and still awaits government approval. Even if it does come online, it will be at least two more years before it can start pushing 830,000 barrels per day to U.S. refiners.
And this week, Cenovus Energy Inc. (NYSE: CVE), a Canadian oil company with many refiners in the U.S., announced that it will be increasing its shipments via rail from 6,000 to 30,000 by the end of 2014.
There’s no doubt that it’s rail for now, and with any luck, it will be a mix of the two in the future. Once pipelines are in place and can support production, rail would be very complimentary to pipe.
But until that happens, even pipeline companies like Kinder Morgan Inc. (NYSE: KMI) are going to be focusing on rail deliveries. The company recently scrapped a pipeline, as mentioned earlier, that would have delivered oil from Texas to refiners in California, instead deciding to focus on rail transport.
Pipeline is losing the race, but it remains to be seen what will happen in the future. Even if more pipelines do come online, the old American railroad has never let us down.
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