US oil boom leads to pipelines, rail expansion

U.S. oil production is increasing as a result of new production techniques which allow crude oil to be recovered from oilshales.  U.S. oil production is projected to increase about 24 percent to 7.9 million barrels a day by 2014,the highest production level since 1988. Domestic crude can be delivered to refineries at prices up to 20% lessexpensive than those for imported crude. The abundant and lower-cost domestic supply drives demand forcost-effective ways to transport crude oil across the country, includingpipelines and rail service.

In general, pipelines are the cheapest way to move largequantities of crude oil from well fields to refineries.  Many existing pipelines are either fullyutilized or no longer match up with demand for transportation.  As a result, a massive amount of pipelinecapacity is under development, with 20 major projects starting in each of thenext two years.  One observer has called2013's addition of 4 million barrels a day of capacity into Houston "the biggest single oil pipeline infrastructure addition ever seen in the world."

 

At the same time, shipments of oil by rail are alsogrowing.  Like pipelines, railroads allowproducers to ship oil to coastal markets where it is generally morevaluable.  Railroads have severaladvantages over pipelines, including flexibility and the ability to connectpoints that currently lack pipeline access. In the past three months, oil producers have announced plans to invest $1 billion in rail depots and other infrastructure needed to ship crude by rail. Bloomberg reports that the American Association of Railroads projects that more than 200,000 train cars of oil will be shipped in2012, the most since World War II.

 

Both rail and pipelines have roles to play in thetransportation of crude oil in the coming years.  In many cases, rail service is available now,while expanded cost-effective pipeline transport is still under development.Each mode competes for oil transport business against the other, but the challenges of siting and building new linearinfrastructure like railroads and pipelines points to heavy reliance onexisting assets until new pipelines or rail routes can be built.  The result may be a several-year boom in railtraffic until major new routes are rationalized as pipeline paths.  If production and refinery operationsstabilize, the need for rail's flexibility may be outstripped by the value oflower-cost pipeline transport.