COMMODITIES Updated August 26, 2013, 12:07 a.m. ET
Pipeline-Capacity Squeeze Reroutes Crude Oil
More U.S. oil is moving via truck, barge and train than at any point since 1981
By RUSSELL GOLD CONNECT
More crude oil is moving around the U.S. on trucks, barges and trains than at any point since the government began keeping records in 1981, as the energy industry devises ways to get around a pipeline-capacity shortage to take petroleum from new wells to refineries.
Oil container cars sit at a train depot outside Williston, N.D.
The improvised approach is creating opportunities for transportation companies even as it strains roads and regulators. And it is a precursor to what may be a larger change: the construction of more than $40 billion in oil pipelines now under way or planned for the next few years, according to energy adviser Wood Mackenzie.
“We are in effect re-plumbing the country,” says Curt Anastasio, chief executive of NuStar Energy LP, a pipeline company in San Antonio. Oil is “flowing in different directions and from new places.”
U.S. oil production has reached its highest level in two decades, while imports have fallen dramatically. A system built to import oil and deliver it to coastal refineries has become ill-equipped to handle rising production in Texas, North Dakota and Canada’s Alberta province.
“All of the pipes are pointed in the wrong direction,” says Harold York, an oil researcher at Wood Mackenzie. “We are turning the last 70 years of oil-industry history in North America on its head, and we are turning it on its head in the next 10 to 15 years.”
With oil prices persistently above $100 a barrel, companies drilling new wells don’t want to forgo revenue while they wait years for new pipelines. That leaves them with trucks, trains and barges to move an increasing amount of crude.
Oil delivered to refineries by trucks grew 38% from 2011 to 2012, according to the U.S. Energy Information Administration, while crude on barges grew 53% and rail deliveries quadrupled. Although alternatives are growing rapidly, pipelines and oceangoing tankers remain the primary method for delivering crude to refineries.
In the Eagle Ford, a large four-year-old South Texas oil field, production has grown to more than 500,000 barrels a day, from less than 1,000 in 2009, according to state statistics. Getting that torrent out of the sparsely populated region has required modifications to the oil-delivery system.
For example, last year NuStar reversed a 16-inch pipeline built to carry crude imported from Africa and Europe northward from the Port of Corpus Christi. Now, the pipeline flows south, taking delivery from hundreds of trucks that fill up at individual wells. Some of the 175,000 barrels a day moving through the pipe is loaded onto barges at Corpus Christi and towed toward refineries near Houston.
Earlier this year, Phillips 66 began putting some of this crude on ships for a 2,200-mile journey around Florida to its refinery in Linden, N.J.
The heavy trucks moving Eagle Ford crude are causing headaches for residents and local officials, ripping up roads and causing traffic tie-ups.
“These are rural roads built for 10 cars an hour, and now it’s 100 vehicles an hour, and 75 of them are 80,000-pound trucks,” says Tom Voelkel, president of Dupre Logistics LLC. The Lafayette, La., company started hauling crude in Eagle Ford in November 2011 and has more than 100 drivers full time in the region.
The Texas Legislature appropriated $450 million this year to repair and improve roads in oil-producing counties. “It doesn’t even begin to reach where it needs to reach,” says Daryl Fowler, the chief elected county official in Cuero, Texas, about a hundred miles southeast of San Antonio.
“We’ve seen a fourfold increase in congestion around here,” he says. “The roads are crumbling.”
In July, the Texas transportation department decided to convert 83 miles of state road in six oil-boom counties from pavement to gravel, to reduce repair costs and slow traffic.
Trucks filled with Eagle Ford crude are also heading 100 miles west to a barge canal. The first barge of crude departed in September 2011, heading south toward the Gulf of Mexico and refineries near Houston. Now the canal moves 1.6 million barrels a month, says Jennifer Stastny, executive director of the Port of Victoria.
“It’s like putting your 5-year-old to bed one night and he wakes up the next morning as a 16-year-old, with the appetite and demands of a 16-year-old,” she says.
In North Dakota, trains move 69% of the state’s 800,000 barrels a day of crude, according to state figures. Energy companies say they value rail’s ability to deliver crude to the highest-paying markets.
But the deadly runaway crude train crash in Canada’s Quebec province in July, which incinerated a small town and killed at least 47 people, highlighted the risks of the mile-long crude trains crisscrossing the country. The U.S. government is imposing new regulations on oil shipments by rail.
Some state regulators wonder if their local efforts leave them prepared for a train accident, in part because federal railroad rules pre-empt state and local control over trains.
In Washington state, “we can’t say [to train operators] you have to have oil-spill contingency plans in order to operate,” says Curt Hart, a spokesman for the state’s Department of Ecology. “We do that for oil tankers, barges, large commercial vessels and refineries.”
Home to five refineries, the state levies a per-barrel tax on crude delivered by tankers and barges, which pays for spill-response officials and inspectors. The tax doesn’t apply to rail shipments.
The American Association of Railroads says it is prepared for growing crude shipments because it has long carried hazardous cargoes. In 2008, major U.S. railroads carried 9,500 carloads of crude, the association says, and are on pace this year to carry 389,000.
Most industry analysts believe that while crude on trains will last, truck and barge traffic will decline once new pipelines come into service.
Environmental groups have criticized some pipeline projects, including the Keystone XL, meant to move Canadian oil to Gulf Coast refineries. The federal government is still studying the Keystone pipeline and has yet to issue needed permits.
Steve Kean, president and chief operating officer of Kinder Morgan Inc., one of several interrelated companies that own or operate 82,000 miles of North American pipeline, says government agencies thoroughly vet new projects.
Falling imports, infrastructure investments and increased manufacturing are just some of the benefits of newly abundant energy supplies, he says. “This has got to be one of the best things that has happened in our economy in the past 10 years. It is better than the iPad.”
Copyright 2012 Dow Jones & Company, Inc. All Rights Reserved
This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit