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Pipeline Companies Struggle Against Rising Competition from Rail

By James Burgess | Fri, 18 October 2013 22:28 | 0

Despite the fact that new, stricter regulations on the transport of hazardous materials by rail, introduced following the derailment and explosion of a train carrying crude oil through Quebec in July, will see rail transport costs increase, the volume of crude travelling by rail across North America is expected to rise greatly in the coming year.

Delays associated with the development of pipelines, and the process of receiving permits, have seen more and more oil transported to refineries via rail roads in recent years, especially as the amount of oil being produced in North America has grown.

TransCanada believes that rail shipments of oil from Western Canada will increase by 400% from around 224,000 barrels a day before the end of next year, as new loading terminals are built to put more oil-sands onto railcars. Wood Mackenzie has also claimed that the amount of oil shipped to the east and west coasts from the Bakken fields will increase by a factor of four this year.

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Alex Pourbaix, the president of energy and oil pipelines at TransCanada, stated that the only reason railroads were becoming more popular, was because pipelines were taking too long to receive approval. The fact is that pipelines actually offer a safer, cheaper method of transporting oil, but due to the delays, demand for oil transportation has outgrown the capacity that pipelines can supply.

Oil by Rail

In the wake of the 6th of July derailing in Lac-Megantic, Quebec, which killed 47 people, Transport Canada introduced emergency directives to control the transport of hazardous materials, such as crude oil, by rail. The department is now considering even stricter rules for hazardous materials, and it is expected that such rules will force large capital investiture by rail companies, and therefor boost the cost of transporting by rail.

Jerry Swank, a managing partner at Swank Capital, explained to Bloomberg that “you’re going to see a massive flood of spending to get ahead of these government regulations,” as rail companies try and prepare for any tighter laws on safety.

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Harold Hamm, the chief executive at Continental Resources, has said that his company is now using rail cars to move 75% of its crude, mainly due to the lack of pipeline capacity.

“The good thing about it is it goes to the market faster and directly where you want it and it doesn’t have to go the pipeline route.”

The increasing competition from rail operators has actually made it difficult for several pipeline companies to secure long-term contracts from oil producers, forcing them to postpone, or cancel, projects for the construction of new pipes.

By. James Burgess of Oilprice.com

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