Oil Transportation Investing
Energy and Capital's Weekend Edition
There's no shortage of good news lately when it comes to U.S. oil production...
Since the fracking boom really took off in the United States, the country has been surpassing one milestone after the next.
This week production hit a 20-year high. The U.S. Energy Department announced oil production had surpassed 7 million barrels per day to hit 7.002 million barrels per day on average.
North Dakota, home of the Bakken Shale, saw a 40% growth in production in the ten months through October.
Texas, where the Eagle Ford Formation is located, grew production by 23%.
Production will average out to around 7.3 mbpd this year, and by next year it will be at a 26-year high of 7.9 mbpd.
It's clear that the Bakken is the fastest-growing of these areas. The formation is well known all across the country, and unemployment in Williston, North Dakota, the Bakken's hub, is an incredible 1%.
But an abundant supply of oil isn't all it takes to go from small town to boomtown...
The location needs resources —lots of them.
One of the biggest resources any oil-producing region needs is transportation infrastructure.
Oil can't just stay at the wells; it has to be moved to refineries and then to the location where it will be used. And pipelines are the best way to get the job done. They can go long distances, and they can run underground so as to not disrupt life above.
But they also require lengthy regulatory processes and construction time.
The Keystone XL Pipeline, figuring strongly in the presidential debates and still anxiously awaiting approval, is a prime example.
TransCanada's (TSX: TRP) international pipeline was approved by Canada back in 2010, but the process of receiving a Presidential Permit from the U.S. Department of State has been a tedious one.
A report from the Nebraska Department of Environmental Quality that showed “minimal environmental impacts” may force the president's hand in a decision. But even if the permit is granted in the first quarter of this year — the earliest possible — construction time could push the start-up date to as far in the future as 2015.
And as projects like these are delayed, production is maintaining its rapid pace. More oil needs to move to refineries, and it will be years before it can safely rely on these slow-to-move pipelines
But pipelines aren't the only ways oil can move...
This week, Phillips 66 (NYSE: PSX) announced it would be involved in a contract to ship Bakken crude by railroad to refineries in New Jersey.
Unlike pipelines, railways are already in place; they don't require any preliminary approvals or construction time. All the companies need are contracts and proper rail cars.
Phillips 66 is far from the first rail company to become involved in the Bakken. Billionaire investor Warren Buffett got into Bakken oil shipments early when he purchased the Burlington Northern Santa Fe (BNSF) railroad company.
His company was able to increase crude shipments by 40% this year alone. Next year, they're likely to grow even more — even if the Keystone XL approval goes as smoothly as possible.
As Jeff Siegel told you this week, railways will be the major transportation infrastructure in high oil-producing areas like the Bakken for years to come.
for Energy and Capital
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