Working on the railroads

The rapid increase of North American crude production has resulted in pipeline bottlenecks in some areas, forcing more reliance on rail transportation to access some of the highest-value markets, said analysts with PIRA Energy Group in New York.

US President Barack Obama in his second inaugural speech called for a $50 billion upgrade of the US transportation infrastructure, including rail, that political analysts say will be hard to finance. Now PIRA Energy analysts have partnered with Transportation Economics LLC of Lebanon, Pa., for a multiclient study of the growing need to transport crude by rail from producing regions with limited pipeline capacity to refining centers in North America. They said, “Since wellhead prices are significantly influenced by a netback of the marginal barrel produced, and rail supply chain costs are typically much higher than pipeline costs, in many cases the cost of delivering the crude via rail is a crucial determinant of wellhead crude prices in these landlocked regions relative to crude prices in coastal markets.”

The rapidly growing need for more rail transportation of crude has triggered sizeable investments in both loading and unloading facilities and soaring orders for tank cars “making movement of oil by rail a major growth market for North American railroads,” PIRA Energy consultants reported. This calls for “a better understanding of the many specific logistical challenges that are raising key questions around the movement of crude from field to refinery, with particular emphasis on whether there will be adequate rail and barge capacity and if the current tight market for rail cars will loosen.”

Peter Jaquette at PIRA, one of the authors of the study, said, “The supply chain for moving crude oil by rail in North America is complex, involving trucking in the field, storage and loading, railroad line haul, tank car expense, unloading, and potentially barging to the final destination. While the entire supply chain cost is often referred to as the ‘railroad’ transportation cost, the direct railroad line haul portion may be less than 40% of the total cost. Each of the cost components has individual market dynamics.”

PIRA analysts report the cost of some of these supply chain links will jump almost 30% in the next 5 years while the cost of others will decline 10%. “This is why we are doing the study: to provide a deeper understanding of each of the cost components of moving crude oil by rail,” Jaquette said. The study is scheduled for publication in early April.

Weather and energy

Meanwhile, a separate study by the federal National Climate Assessment and Development Advisory Committee reached the obvious conclusion transportation of oil, coal, and electricity “is vulnerable to extreme weather events.” So are natural gas and LPGs, of course.

Not everyone subscribes to the committee’s politically correct conclusion in its report draft that climate change is already affecting “the frequency, intensity, and length of many extreme weather events” and will only get progressively worse, “particularly heat waves, wildfire, flooding, longer and more intense drought, heavy precipitation in winter storms, and extreme coastal high water due to storm events and sea level rise.”

Their fear the concentration of refineries and offshore production along the Texas and Louisiana Gulf Coasts is particularly vulnerable to hurricanes is easily resolved: extend production and refining along the Eastern Gulf Coast, the East Coast, and the West Coast. Even another Hurricane Katrina couldn’t hit it all.

Still the committee pointed out one pertinent fact. Rail lines, which already carry coal to power plants and are carrying more oil to refiners, often follow riverbeds. Intense rainstorms—whether more or less in number and volume as climate change advocates suggest—can lead to flooding “that degrades or washes out nearby railroads and roadbeds.”

The committee projects energy demand for cooling will increase in the Pacific Northwest over the next century from increased use of air conditioners because of global warming and population growth—no doubt augmented by refugees from coastline flooding. The committee said average sea level around the world is to rise 1-4 ft by 1921, but a projection of 6½-ft increase “may be useful for decision makers with a low tolerance for risk.”

Perhaps public demand for oil and gas drilling off the East Coast also will increase by then.

(Online Feb. 26, 2013; author's e-mail: samf@ogjonline.com)

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