Crude Oil Price Drop: Pipelines Still Competitive Against Barge and Rail, Industry Optimistic

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Researched by Industrial Info Resources (Sugar Land, Texas)--While initial fears of the crude oil price drop included mass project cancellations, that has not proved to be the case for the Oil & Gas Midstream Industry. Specifically, pipeline projects, by and large, are scheduled to move forward on time, with few cancellations and some delays.

Part of this situation is due to pipelines' place between wellhead and refinery. The effects of the price drop are felt most strongly at the wellhead before moving downstream. The other part of pipelines' continued viability in these economic circumstances is their competition: trucks, railcars and barges. Compared with these options, pipelines cost the least per barrel.

The pipelines closest to the wellhead are gathering pipelines. These carry gas or liquids from the wellhead to either a processing plant or a gathering station, respectively. According to the top-down model of oil price effect, these pipe projects should be among the first canceled. However, the circumstances in each shale play must be taken into account separately to understand how the price drop will affect projects in a certain area.

For example, in the Bakken Shale, drilling has outpaced pipeline infrastructure development from the beginning. As such, even with the low price of oil, pipeline owners are still playing catch-up to bring gathering pipe to as many wells as possible.

While much of the takeaway capacity from the Bakken Shale is made up of rail, transporting crude oil from the wellhead to the rail terminal is usually accomplished by short-haul trucks. This is where pipeline transportation can be most competitive. Short-haul trucking can add $2 per barrel to the final selling cost, but moving that crude over the same distance via pipeline adds only approximately $0.50 per barrel. With such significant savings, demand for gathering pipelines is still strong. In addition, pipelines are still proven to be the safest method of transporting crude oil, eliminating risk for both the producer and the shipper.

In the Canadian oil sands as well, pipeline remains the cheapest option by a fair margin for getting crude oil to market. Transporting crude oil by rail can add $12 per barrel, whereas pipe transportation only adds $5 to $6 per barrel, at least a 50% discount. With price differences like these, and the increased safety inherent in pipeline transportation, it is clear that even without the substantial cash backing of its owner company, even Canadian pipeline mega-projects, such as the Energy East pipeline project, owned and operated by TransCanada Corporation (NYSE:TRP) (Calgary, Alberta), are well-justified and will continue to find demand.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, three offices in North America and 10 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.