The Crude by Rail Boom in 6 Charts
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The tragic train derailment at Lac-Mégantic, Quebec has put the spotlight on the crude by rail boom. But you might not know what's going on. Here're six charts that quickly summarize the important trend surrounding this disaster.
The rise of the oil sands
The crude by rail boom had its start in the Alberta oil sands and the North Dakota Bakken where new technologies like in-situ and fracking unlocked vast quantities of previously unexploitable resources. Production is expected to grow rapidly. According to the Canadian Association of Petroleum Producers, oil sands output is expected to rise from 1.8 million b/d (barrels per day) in 2012 to 5.2 million b/d by 2030.
The boom in unconventional oil has outpaced the growth of the pipeline infrastructure needed to move this product. Efforts to add more pipeline capacity has faced stiff political and environmental challenges.
TransCanada's (NYSE: TRP) Keystone XL pipeline is a case in point. If approved, the project will ship 830,000 b/d of Canadian crude to premium markets on the Gulf coast. While the project has received approval from the State of Nebraska, Keystone is still awaiting the okay from the U.S. State Department.
Other projects have also been proposed to relieve this problem including the Enbridge Northern Gateway pipeline and the Kinder Morgan Trans Mountain expansion. Both initiatives would ship Alberta crude to the British Columbia lower mainland. But these efforts have faced political roadblocks as well.
As a results, Canadian crude remains logged jammed at terminal facilities and trades at a large discount to international benchmarks. Please note, the chart below is only up February. The discount for Edmonton Par has shrunk considerably since then.
The rail boom
As a result of this discount, rail suddenly became a viable way to transport crude across the continent. According to a report by the U.S. State Department, it costs $15-$30 per barrel to transport crude from Alberta to the Gulf coast versus $7 per barrel by pipeline.
This caused a boom in crude by rail shipping. According to Statistics Canada, 14,317 crude rail cars were loaded in April versus 5,013 during the same month in 2011.
Rail capacity could be added so quickly for one key reason - politics. Unlike pipelines, much of the infrastructure needed to ship oil by rail is already in place. There're no regulatory hurdles to jump through and rail companies can respond immediately to changes in the marketplace.
For investors, this boom has revitalized the railroad industry.
In 2013, Canadian National Railway (NYSE: CNI) expects to ship 100,000 b/d. By 2015 that figure is projected to grow to 300,000 b/d accounting for 7%-8% of the company's revenues.
The nation's second largest railway, Canadian Pacific Railway (NYSE: CP), is projected to move 70,000 crude carloads in 2013 up 30% of the previous year. By 2015, Canadian Pacific projects shipments to double to 140,000 carloads.
Which option is safer?
Following this disaster more attention will be given to the environmental and safety risks of transporting oil. The outcome of this debate will have major implications, not just for the railroad industry, but the entire energy business.
In the wake of losing market share, pipeline companies have stepped up their attacks against the rail option. TransCanada President Alex Pourbaix argues rail creates three times more climate pollution and is ten times more likely to leak or spill than pipelines. However, Canadian National Railway has argued the opposite claiming rail emits fewer greenhouse gas emissions and spills less crude by volume. It's evident that there's a desperate need for independent research on the subject to properly inform the the public.
However, what is clear is that pipelines are the safest method for delivering crude. Data from the U.S. Department of Transportation’s Pipeline and Hazardous Materials Safety Administration show that between 2005 and 2009 road and rail had higher rates of serious incidents, injuries and fatalities than pipelines.
Foolish bottom line
So after the fallout of the tragedy in Lac-Mégantic is the crude by rail boom over? That's doubtful. The need to move crude is too great and the ability the add new pipelines is too restrained. We will likely continue to see growing demand for crude by rail shipping.
However, investors should expect greater regulation and scrutiny. This will mean higher capital expenditures for railroad companies as they upgrade their infrastructure to meet new safety rules.
Robert Baillieul has no position in any stocks mentioned. The Motley Fool recommends Canadian National Railway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!