Why There Is A Need For Crude By Rail
The United States is currently experiencing a major oil and gas boom. In fact in recent months we’ve written a series of articles about major pipelines such as the Keystone and Keystone XL, the possibility of US energy independence, and how Louisiana and the Gulf Coast are benefiting from this exciting resurgence in production. What may surprise some readers, however, especially given the usual focus on pipelines within the energy sector, is that an ever-growing amount of crude oil is being transported by rail instead. This article will briefly address why there is a need for crude by rail, and what benefits it offers.
As recently as 2008 only 9,500 carloads of crude oil were transported by rail. However, by 2011 that figure had increased almost sevenfold to nearly 66,000 carloads. The estimate then nearly quadrupled the following year in 2012 to 234,000 carloads. Additionally there is no sign of this crude by rail boom slowing down. In the first quarter of 2013 a new record high of 97,135 carloads of crude oil were transported. This represented a 20 percent increase from the fourth quarter of 2012 when 81,122 carloads were moved by rail. It also indicated a massive 166 percent jump from the previous year, first quarter of 2012 figure which was 36,544 carloads. Estimates indicate that this rising trend will continue throughout the rest of 2013.
Now that we have discussed the figures, let’s take a look at the reasons behind this growing trend. In simplest terms the basic reason for this dramatic increase in crude by rail boils down to the fact that pipeline infrastructure takes time to develop, yet US crude production is already experiencing a major boom thanks to advancements in technologies such as hydraulic fracturing and horizontal drilling. These new techniques are making previously unrecoverable resources fully harvestable. Additionally, higher crude oil prices as well as greater drilling efficiency make many previously uneconomic sites now profitable.
To get a sense of the scope of the increase in US crude oil production, the production rate peaked in 1970 at 9.6 million barrels per day. By 2008, shortly before the new oil and gas boom, the US production rate had slumped to about 5 million barrels per day as older fields were depleted. Thanks to the discovery of new fields, as well as the technological advances and economic factors discussed above, by 2012 US crude oil production was back up to 6.5 million barrels per day. Beginning in November of 2012 crude production had risen further and exceeded 7 million barrels per day, marking the first time since 1992 that this has happened. Production is still continuing to climb.
This confluence of events ultimately means that many of the new regions where crude oil is being recovered do not have an existing network of operating pipelines in place. The oil is being discovered and recovered more quickly than the pipeline infrastructure can keep pace. Additionally, many of the areas that are serviced by existing pipelines are seeing those pipelines reach their capacity as overall output is increased and new rigs in the region come online. In order to move this abundance of crude oil, many companies are turning to railroads.
Advantages of Crude by Rail
Though it is unlikely that crude by rail will ever supplant traditional pipelines, there are a number of benefits and advantages offered by crude by rail.
In recent months high profile spills such as the Mayflower spill and the Arkansas spill have made headlines and led many to question the overall safety of transporting oil by pipeline. The good news is that despite these serious incidents, for the most part transportation of oil by pipeline is very safe and reliable. Nevertheless, those concerned about pipeline safety will be relieved to learn that in recent years railroads have actually reported a better safety record and lower incidence rate in terms of crude oil spillage. Between 2002-2012 there were an estimated 2.2 gallons of crude oil spiller per million ton-miles. By comparison the figure for pipelines over this same period of time was 6.3 gallons. Railroads are also continuously making strives toward further improving safety.
One advantage of transporting crude by rail versus pipeline is the enhanced flexibility this option offers. Because the network of railroad trucks is more extensive and spread out than the network of pipelines, this means that transporting crude by rail allows shippers to send it to the markets that need it the most, or are offering the best price for it.
Building a pipeline is a very time-consuming, logistically challenging project. This is especially true in the case of major pipelines such as the Keystone which cross international borders as well as many state borders. Thus, while a pipeline may take years to get approval and be built, railroads are already operational and ready to go in most parts of the country.
In addition to being time consuming to build, pipelines are also costly to construct and require a large initial investment. By contrast transporting crude oil by rail using existing networks of tracks, does not require a large, upfront investment.
Ultimately the energy sector needs both pipelines and railroads to transport crude oil, and while it is unlikely that pipelines will cease to be the main, preferred transportation method thanks to their economy, reliability, and overall performance, the industry is nevertheless fortunate to have the option of also transporting crude by rail. As the US oil and gas boom continues to expand, it is likely that the need for crude by rail will only increase, and thanks to the many benefits and advantages crude by rail offers, this will be a net positive in the industry.