By: Scott Reed, Managing Principal for Planning, Permitting and Licensing
The shale revolution continues to modify the North American energy landscape. After the epic fall of natural gas prices in late 2011 most producers spent 2012 shifting their exploration and production to liquids-rich shale plays, particularly those containing crude oil, to obtain higher margins.
The location and volume of all this new crude oil has created a logistical problem: how to reach the market. Similar to natural gas, the existing crude oil pipeline infrastructure is significantly constrained.
But unlike natural gas, crude oil doesn’t require compression for transport. As a result, rail transportation of oil is booming. BNSF Railway is projecting its crude oil shipments to grow to 700,000 barrels per day by the end of this year.
Is rail transport a short-lived phenomenon to fill the void until new pipelines get licensed and built? Or is it a market-leading supply solution with staying power? Analysts think rail has a long-term role in the transport equation, and how big that role is depends on price differentials.
The price of crude oil on the New York Mercantile Exchange (established at the Cushing, Oklahoma pipeline hub), is $96 a barrel as of this posting. In West Texas (Permian) and Minnesota (Bakken) the price is currently $95 per barrel.
At delivery points close to coastal refining centers- East Coast/North Sea, West Coast/Alaska, Gulf Coast/Louisiana- the price per barrel is between $115 and $120.
Rail is the key to avoiding the Cushing bottleneck and getting a higher price for your product. Rail can deliver oil for around $10-15 per barrel, depending on the distance and other logistics. Rail transport currently nets producers an additional $5 to $10 per barrel as compared to pipeline delivery.
Market projections suggest this pricing dynamic could stay in place for some time. For one thing, pipeline companies are running into opposition for new projects because of the competition from rail. And given the very real rail alternative, customers are becoming less willing to pay tariffs associated with funding new pipeline development.
Not only has the transit of oil via rail impacted the pipeline industry, it has led to the growth of a new niche market: marine oil terminals. Dozens of these projects have been announced, complete with unit train unloading facilities to effectively receive and store shipments and move them to refineries.
Stay tuned for my next blog entry, which will discuss the planning, permitting and engineering challenges associated with marine oil terminal development.
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