Oil by Rail Eases Logistical Bottlenecks

As North American crude oil production increases, rail offers efficiency in logistics and an effective alternative in an environment challenged by pipe...

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|Sep 4|magazine8 min read

As North American crude oil production increases, rail offers efficiency in logistics and an effective alternative in an environment challenged by pipeline constraints. EY's report released recently, Rolling with the revolution: rail's role in the new oil and gas era, addresses how the crude-by-rail (CBR) business model continues to increase as a strategic source of feedstock diversification while offering producers the ability to capitalize on regional pricing disparities and providing added flexibility for refiners.

The strong growth in production from the Canadian oil sands, combined with the surge in U.S. unconventional oil production as a result of the advances in drilling and completion technologies, has significantly stressed the North American oil transportation infrastructure and caused unprecedented quality dislocations and price disparities for the benchmark crudes.

The resulting supply/demand imbalances and logistical bottlenecks point to a need for better long-term pipeline solutions and a more efficient pipeline network. In the meantime, these imbalances have created opportunities for both oil producers and refiners to take advantage of these imbalances and bottlenecks by using rail transportation. And as a result, the industry is witnessing a fundamental change in crude logistics.

“CBR is more than just a short-term solution and/or opportunity. While it is not going to be a complete replacement for pipelines, it is positioned to grow and will remain a long-term strategic complement or supplement to pipelines,” says Dale Nijoka, EY’s Global Oil & Gas Sector leader.

Rail transportation is moving from niche volumes to base-load for a number of refiners, allowing them access to previously inaccessible crudes or in some cases to capture price differentials as pipeline capacity additions lag production gains in many regions. Rail has also allowed producers to link inland prices to a broader set of benchmarks than just West Texas Intermediate (WTI), at a time when pricing is very dynamic. Additionally, given the optionality on destinations that rail has created, producers are, in many cases, reluctant to commit volumes to new pipelines.

Although pipelines generally are the least expensive crude transport option, the benefits of rail – speed to market, extensive geographic coverage, faster transit times, fewer permitting/regulatory hurdles – imply that that the industry will continue to utilize both modes. Landlocked or logistically-constrained crude will generally trade at a discount to other comparable crudes, creating opportunities and incentives for both upstream producers and downstream refiners.

Nijoka adds, “Where pipelines are not an option, oil and gas companies that have a crude-by-rail strategy with an integrated operational plan that includes tracking and analysis, along with a clear inbound and outbound logistical scheme, will be most successful in getting their crude to market or their feedstock sourced in the most cost-effective manner.”

CBR presents a relatively efficient solution for producers to transport crudes to markets with higher potential netbacks, or for refiners to have access to cheaper, advantaged crude. In both cases, CBR provides enormous flexibility and the ability to respond to rapidly changing and unforeseeable market conditions; this is a tremendous asset that should ensure the industry’s long-term sustainability in the unconventional revolution.

Source: ey.com