New transportation networks set to bring US shale fuels to market
By TOM FOWLER and BEN LEFEBVRE
Surging energy production in North America is prompting billions of dollars of investment next year on pipelines and other infrastructure projects to move oil and gas around the continent.
The existing US pipeline network isn't configured to fully serve the new production areas in the center of the country, from North Dakota to South Texas, where oil and natural gas production have started booming. As a result, companies are finding creative ways to move those fuels to market, including a return to early 1900s favorites: iron horse and barge.
The number of oil-laden tanker trains has grown, as has the number of river barges pushed by tugboats down the Mississippi River. Oil pipelines that once pumped crude north from the Gulf Coast increasingly are being reconfigured to flow south to refineries there.
Some natural gas pipelines originally built to ship fuel from the Rocky Mountains and Gulf to the East Coast are little used because of new natural gas discoveries in Pennsylvania. Those pipelines are being considered for conversion to handle oil.
"Our infrastructure over the past 40 years has been set up for this idea of the US as an energy-deficit nation," said Joseph Stanislaw, an independent senior energy adviser to Deloitte. "Now we have this tectonic shift where we can become an energy surplus nation. That means we have to transform, upgrade and rearrange our logistics."
AECOM Technology Corp., a firm that does industrial project design, management and engineering, forecasts that in 2013 as much as $45 billion may be spent on new or expanded transportation infrastructure, including pipelines, rail cars, rail terminals and other projects, said Seth Deutsch, an AECOM senior vice president.
The changes are a boon to railroads, rail car builders and companies that own and operate terminals for loading and unloading crude. BSNF Railway, owned by Berkshire Hathaway, has boosted its oil-hauling capacity from North Dakota and Montana to nearly 90 million bbl this year from 1.3 million in 2008.
Trinity Industries, a manufacturer of rail cars,, has raised new-car deliveries this year and boosted its lease-car fleet by 18% since 2000. US Development Group LLC, an oil-terminals firm, opened a new terminal in a Texas shale region this year while expanding its St. James, La., terminal.
Over the past four years, domestic oil and gas production has surged thanks to a combination of technologies, namely hydraulic fracturing and horizontal drilling, which are unlocking deposits trapped in shale-rock formations throughout the country.
There is so much new crude oil production in the central US that a barrel of crude bought at a key distribution hub in Oklahoma can cost some $27 less than an overseas barrel. That has US buyers exploring new avenues to fill up with the cheaper domestic crude.
"We're moving crude all over the place," said Bill Day, spokesman for Valero Energy, the world's largest independent refiner, which this year began shipping 40,000 bpd from North Dakota via rail-and-pipeline combination to its Memphis, Tenn., refinery. It also is considering rail shipments of that oil to California.
Rail cars are proving especially useful for moving crude from the oil fields to consumers where there are few pipelines in place able to handle the load. In 2008, there were about 9,500 tanker carloads of oil shipped in the US, according to the Association of American Railroads, but by 2011 it had jumped to 66,000 carloads and this year it is expected to top 200,000 carloads.
Moving oil via water is also on the rise. Oil shipments by barge from the northern U.S. to the Gulf Coast grew to 15.3 million bbl in 2011 from about 3.8 million bbl in 2008, and will likely top that this year.
Shipping oil via rail is typically more expensive than by pipeline, however. Loading and unloading rail cars can add as much as $4.50 to the price of a barrel of oil, according to data provided by Marathon Petroleum. The transportation costs of moving oil from North Dakota to the East Coast can add up to $10.bbl.
Even so, the delivered crude can still be less expensive than importing it from overseas.
Another factor in gains by rail transport: New pipeline construction faces legal and permitting challenges from environmental groups. Local opposition has prevented pipelines from connecting oil fields in the middle of the country to refineries on the east and west coasts, said Brad Olsen, an analyst with Tudor, Pickering, Holt & Co. "As long as there are no pipes to replace imported high-cost oil on coasts, rail is the only option."
Growing resistance to new pipeline projects makes the use of existing pipelines more attractive, industry officials say. Last summer, Enterprise Products and Enbridge completed work reversing the Seaway Pipeline so it carries crude oil south to Texas instead of north to Oklahoma.
Houston-based pipeline giant Kinder Morgan said it is considering taking an underused section of natural gas pipeline that runs from West Texas to California and converting it to an oil pipeline. TransCanada is gauging interest in a similar conversion in Canada.
Spectra Energy of Houston acknowledged the regulatory challenges recently when it paid $1.25 billion for the 1,700 mile Express-Platte pipeline that can ship up to 280,000 bpd of Canadian crude to the US Midwest.
"The fact that these assets are in the ground already is a huge advantage," CEO Greg Ebel said in a recent call with investors.
Dow Jones Newswires