Rail's role in oil and gas
The crude-by-rail (CBR) business model has returned from relative obscurity to become one of the most dynamic parts of the North American oil and gas industry. It offers the ability to capitalize on regional pricing disparities and plays an increasingly growing role as a strategic source of feedstock diversification and flexibility.
There are many key drivers of CBR:
- North American production growth
- Infrastructure bottlenecks/constraints
- Crude differentials
- Rail capacity developments
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.
CBR presents a relatively efficient solution for producers to get these crudes to markets with higher potential netbacks, or for refiners to have access to cheaper, advantaged crude. In both cases, the bottom line is that the enormous flexibility and optionality that the rails have to respond to rapidly changing and unforeseeable market conditions is a tremendous asset that should ensure the industry’s long-term sustainability in the unconventional revolution.
CBR shipments and volumes
US railcar originations (shipments) of crude oil have risen dramatically in the last five years, as reported by the American Association of Railroads (AAR). The rail industry has seen an unprecedented surge in crude shipments — from less than 10,000 carloads (or about 18,000 b/d) in 2008 to more than 236,000 carloads (or more than 450,000 b/d) in 2012.
Pipelines vs. rail
Pipeline expansions could cap some of the growth of CBR, particularly the three mega-pipeline projects that are also critical to Canadian oil sands development: Keystone XL, Northern Gateway and the TransMountain expansion.
But delay or cancellation of any of these projects will certainly boost rail’s prospects for capturing more volume. However, rail is not likely to be able to economically replace the big pipelines, implying that some of the expected oil sands development could also be delayed or canceled.
In any case, we expect that CBR will remain a key supply mode for both East and West Coast refiners.
Our EY practitioners focus on helping clients operate their end-to-end supply chains, such as CBR, more effectively and efficiently in order to improve cash flow and profitability.