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North American Crude by Rail addresses the implications of the growing need to transport crude oil by rail from producing regions with limited pipeline capacity to refining centers. Rail movement of crude is not a simple supply chain; it is complex, often including trucking from the field to loading points, rail movement to an unloading point, unloading to barges or pipelines, and final movement to a refinery. Over the next five years, different portions of this chain will experience quite different economic pressures. A written report — the study’s central component — explains in detail the issues related to capacity, costs and constraints of each leg of this complex supply chain, consistent with PIRA's outlook on prices and volumes through 2017. In addition to the report, the study includes a live briefing, where subscribers can engage the study’s authors, as well as an Excel model for calculating the costs for rail movement of crude over more than 30 origin-destination routes in North America.
The answers to these questions are neither simple nor straightforward since they involve the interaction between the growth in North American crude production and the specific conditions and market dynamics of every link in the railroad supply chain moving crude oil from field to refinery. PIRA's ongoing detailed analysis of oil and gas supply/demand and balances, combined with the freight expertise of Transportation Economics, makes us uniquely qualified to carry out these assessments.
Companies purchasing the North American Crude by Rail study are entitled to have three users to each of the following deliverables (licensing options are available to add extra users):
The report — some 75+ pages in length — explains the findings of the study and outlines the bases underlying those results, while providing a discussion of the key uncertainties that impact the major conclusions. The report also includes an executive summary and a full set of charts, with descriptions.
Given that understanding the complexity of the rail supply chain may go beyond written words and numbers, study participants will have the opportunity to hear the principal study authors discuss the details of the analysis and major conclusions. During this half-day WebEx briefing, participants will see a presentation of the key results, hear a nuanced discussion of those findings and their implications, and have the opportunity to question the study’s authors, both during the online briefing and in private offline conversations with the authors.
A model of each component of the rail supply chain for over 30 origin-destination routes, showing costs for each link in the chain and allowing users to modify PIRA's Reference Case assumptions to generate their own custom cost scenario. The model will be provided in an Excel spreadsheet and will include PIRA's projections through 2017.
1. How many crude terminals are in North America right now?
A. We examine 15 destinations, within which a few, such as Albany, have multiple terminals that we model explicitly. For origin sources, we model 4: Bakken, Canada oil sands, Eagle Ford, and Niobrara. Some of these sources, like the Bakken, have many terminals, but we model each origin field as a single location.
2. Will your study include Canada?
A. Yes. We examine Canadian heavy production transported via rail to various destinations.
3. Will your study provide terminal by terminal detail (by refinery) for capacity today and into the future?
A. Yes. We will include estimates of both current unloading capacity and PIRA's projection for future capacity.
4. Will you be able to distinguish by grade (i.e. light vs. heavy)?
A. Yes. We explicitly distinguish between light and heavy in both our price and volume forecasts. Much of the light/heavy distinction will come from the producing region, with the Bakken production, for example, being light while much of the Western Canada production will be heavy.
5. Can you talk about the number of natural gas pipelines that may be converted or the volume in BCF/D gas that may be displaced by gas to oil pipeline conversion?
A. This is not directly within scope of the study, but we are including PIRA's projections of pipeline capacity out of these producing regions, including specific project assumptions. You may be able to draw conclusions about gas pipeline capacity to the extent that PIRA is assuming any conversion projects.
6. Is the North Dakota price of $84 the wellhead price?
A. The price example was a hypothetical calculation of what refiners would be willing to pay for crude at the wellhead in the Bakken, given our assumptions about prices of competing waterborne light sweet crudes and transportation costs.
7. What is the price to move crude from North Dakota to Pacific Northwest?
A. While we focused on transportation from the Bakken to the East Coast in the Preview presentation, we are explicitly modeling rail-based transportation routes from the Bakken to Anacortes, Washington, in the study itself.
8. What does the category "electronic stability" mean on the number of truckers slide?
A. This is an example of one of the safety related regulations that are scheduled to be implemented over the next several years. The study looks closely at all the scheduled regulatory changes to estimate the impact on available trucking capacity and the cost of trucking. In this case truckers will be required to install sensors and controllers that will reduce the possibility of a truck turning over. Such mechanisms tend to increase maintenance downtime, hence the need for a small number of additional trucks to haul the same amount of freight.
9. How does the economics behind coal rail transport affect oil transport?
A. Because coal and crude trains tend to move on different routes, declines in coal traffic will have relatively little operational effect on crude movements. However, crude oil transport is benefiting from recent weakness in coal volumes, due to the railroads' interest in replacing that source of attractive revenues. Crude oil is the rare growth market for railroading.
10. Do the trucking costs include capital for replacement vehicles?
A. Capital costs are implicitly included in our calculations. We do not, however, explicitly call out specific issues in oil-field trucking capitalization. Such issues are subsumed in our overall adjustments to standard trucking costs, when we estimate oil-field base trucking economics. Those adjustments bring oil-field trucking costs well above those of comparable short-haul trucking elsewhere in the U.S. economy. Note that we do make explicit assumptions on a number of productivity variables that strongly drive oil-field trucking costs.
11. Does your customizable model include the ability to modify assumptions of oil production by play?
A. Yes, the model will allow the user to specify their own assumption about the profile of oil production by major region (Bakken, Eagle Ford, etc.) over time.
12. Will the study take into account new pipeline capacity coming on stream and the effect it will have on differentials and rail car demand?
A. Yes, PIRA will make explicit our assumptions about new pipeline capacity coming on in these producing regions and will show the impact this will have on both differentials and rail movement.
13. I understand that newly built pipelines in the Bakken are not yet full even though volumes are moving by rail. Will you comment on the choice to use rail over pipeline even when pipeline is available?
A. The rail-based supply chain for crude oil gives producers more options than the pipeline supply chain. And once capital investments are made and contracts signed, rail may continue to be used even after pipeline capacity is built. The study will make explicit PIRA's conclusions about crude oil transportation flows between rail and pipeline, taking into account both operating costs and PIRA's assessment of other factors that may keep rail volumes moving even after pipeline capacity is built.
14. Do you believe that crude oil shipments are negatively impacting normal rail freight service levels in the petroleum industry?
A. The rise in crude oil shipments by rail is coming at a time when coal shipments are weakening and grain shipments are below peak levels. So, thus far crude by rail has probably not affected normal rail service levels for other petroleum products. But in the future as rail volumes grow this will become an important issue. The industry will experience episode of increased congestion until the requisite capacity enhancements are made. The study will identify capacity limits by route. In those cases or routes where crude by rail approaches capacity limits there may be greater impact on normal rail freight service levels in the oil industry.
15. What about transportation costs to Southern California refineries?
A. The study includes both Los Angeles and Bakersfield as destinations for rail-based crude oil shipments, and it will cover both rail-based transportation costs and capacity to these destinations.
16. How do you model terminal economics?
A. The model incorporates terminal capital cost, operating costs, utilization, capacity, lifetime, required return, and maintenance to arrive at the implied terminal breakeven economics. The assumptions are customizable by the user.
The rapid growth of crude oil production in parts of North America with less than adequate pipeline takeaway capacity has led to significant volumes of crude moving to high-value markets by rail and other means. Since wellhead prices are typically determined 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 rapid emergence of this major new crude oil supply chain has led to sizeable new investments in loading facilities and unloading facilities and soaring orders for tank cars. Simply put, movement of oil by rail has been a major growth market for North American railroads.
This development will not be news to those who follow the industry closely. However, what will be of great value is a better understanding of the many specific logistical challenges that are raising key questions around the movement of crude from field to refinery:
Answering these questions has not been easy for any company. Many of the specific implications for the industry are complex and reliable data and analysis are often elusive — until now. With the North American Crude by Rail: The Outlook for Capacity, Costs and Constraints study, PIRA — jointly with the expertise of Transportation Economics, a leading freight consultant and a co-author of the study — is closing the data and analysis gap by undertaking an exhaustive assessment of the industry. The study’s findings, including an outlook through 2017, is provided to clients through a written report, a half-day WebEx briefing, and a rail supply chain cost model (in Excel), which can be used by clients to modify PIRA's Reference Case cost forecast.
Beyond the rail outlook itself, the study will circle back to consider the major implications of these results for North American crude pricing at the key producing (Bakken, Eagle Ford, western Canada) and delivery centers (WTI, Gulf Coast, East Coast).
The development of substantial movement of crude oil by rail in North America is so recent, and the outlook for further growth is so large, that the details of the costs and capacity constraints of the rail supply chain may be poorly understood by many market participants. North American Crude by Rail helps market participants understand how growth in production, investments in rail-related infrastructure, and non-oil related developments in the overall freight transportation market will all interact to change the costs for moving crude by rail in North America over the next several years. The following market participants can all benefit from this study:
Noël Perry (Primary Author; Principal, Transportation Economics LLC) is a leading industry consultant specializing in transportation and logistics: rail, truck, barge, the supplier sector and shipper economics. Before establishing his own practice, he served for 30 years in senior research positions at Schneider National, Cummins Engine Company, and CSX. Today, Noël continues his strategic work on North American transportation economics. Teamed with FTR Associates, the industry leader in freight transportation forecasting, he produces comprehensive forecasts of U.S. transport, including unique measures of driver labor economics, truck capacity utilization and comprehensive market sizing. He is frequently heard on the logistics speaking circuit, where he is known for blunt, colorful and understandable commentary, and he is quoted widely in the business media. Noël earned his BA from the University of Pennsylvania and is an honors graduate of the Harvard University School of Design.
Peter Jaquette (Study Leader; Senior Director, Global Oil) oversees PIRA’s World Energy Demand Forecast Database and Model and is a key contributor to PIRA's Scenario Planning Service. He was the coordinator for PIRA's Planning for Tomorrow study series. He joined PIRA in 2007 with more than 25 years of experience in corporate strategic planning and economic consulting, including 14 years with ARCO and nine years with Weyerhaeuser, where he was involved in evaluating cellulosic ethanol and other energy projects. Peter has a B.A. in economics from Swarthmore College and an M.A. in economics from Stanford University.
Dr. Mark Schwartz (President and Managing Director, Scenario Planning) works closely with PIRA's Global Oil and Natural Gas groups to evaluate the key assumptions underlying their outlooks and to develop plausible alternative assumptions and outcomes. Before joining PIRA in 2002, he was the Chief Economist of ExxonMobil Corp., where he was responsible for developing the company’s long-range economic and energy outlook. During his 25 years at Exxon he also had assignments in Upstream Planning, Treasurers, and Corporate Planning functions. Mark holds a Ph.D. in economics from the University of Pennsylvania.
F.W.A. (Bill) Fuller (Senior Director, International Oil) had over 30 years of energy forecasting and analytical experience with Exxon International before joining PIRA in 1997. He now oversees PIRA’s analysis and forecasting of near-term industry oil balances, with particular emphasis on international supplies, and monitors events impacting PIRA’s oil market view. Bill has a B.S. in chemical engineering from Cornell University.
Richard Joswick (Managing Director, Global Oil) develops PIRA’s outlook for crude and products pricing, refinery margins, and inter-regional supply balances. He authors the monthly European Oil Market Forecast and numerous special projects. Over the last few years he was the study leader for the successful multi-client studies: Bottom of the Barrel: The Future for Residual Fuel Oil (2007 & 2012); Heart of the Barrel: The Future for Middle Distillate Fuels (2009); and Top of the Barrel: The Future for Gasoline, Naphtha, and LPG (2011). He joined PIRA in 2004 after 20 years with ExxonMobil in supply logistics, planning, refining, and engineering. During his time at ExxonMobil, he had assignments developing near-term oil market forecasts, designing heavy oil upgrading processes and evaluating refining economics. Rick has M.S. and B.S. degrees from Rutgers in chemical engineering.
Kenneth M. Bogden (Director, Freight Markets) is responsible for PIRA’s monthly Freight Market Outlook. Prior to joining PIRA in 2005, Ken worked for ExxonMobil for 27 years, primarily in its oil supply and trading and planning functions. He also served as Coordinator of Transportation Planning for Exxon International. Ken has a B.S. in chemical engineering from Lafayette College and an M.B.A. from Colombia University.
Miriam Levy (Associate Director, Global Oil) leads PIRA's upstream modeling efforts including a new generation of play-by-play shale liquids models. She is responsible for the weekly Energy Market Recap, and contributes to special projects and multi-client studies. From 2006 to 2009, she consulted electric utilities on power procurement at NERA Economic Consulting. She also worked as an analyst at an emerging markets hedge fund. Miriam has a B.A. in Ethics, Politics, and Economics from Yale University and an M.A. from Columbia University in International Energy Management and Policy.
James D. Feaster (Consulting Senior Advisor, North American Oil) works on crude oil supply/demand analysis for North America and oversees PIRA’s North American Midcontinent Oil Forecast report. Prior to joining PIRA in 2012, he had 35 years experience in the energy industry with Shell Oil Company. At Shell Jim worked in various businesses, including Oil Products, Chemicals, Transportation and Trading, including the last five years as Manager, Oil Market Analysis for Shell Trading US. He holds a B.S. in chemistry education from the University of Wyoming and an MBA from Louisiana State University.
Ethan Groveman (Analyst, Global Oil) joined PIRA in 2012 to focus on upstream modeling, refining, supply balances, and vehicle technologies. From 2008 to 2011, he served in product strategy and corporate development roles at Better Place, an electric vehicle infrastructure provider. Ethan has a B.S. in Management Science and Engineering from Stanford University.
North American Crude by Rail: The Outlook for Capacity, Costs and Constraints can be purchased by both PIRA retainer clients as well as non-clients. Existing PIRA retainer clients receive a reduced price. Companies that order before February 28, 2013, receive an early-bird discount.
The standard fee allows for three users to the study (and three invitations to the Briefing); extra report copies, database passwords and Briefing invitations can also be purchased.