Pipeline operators have zeroed in on another good investment—rail depots to transport North American oil and gas to refineries, cutting out the middle man in a new trend that is poising 2013 to become the year of industry mergers and acquisitions.
Here’s the food chain: Pipeline operators are buying up rail assets, while refiners are buying up pipelines and extending pipeline plans.
Pipelines, rail terminals and rail depots are the latest hot infrastructure must-haves as North American production—from Canadian tar sands and US shale—continues to rise.
It made sense when output was lower to rent rail capacity, but swelling output makes it more economically feasible to own these assets instead.
And rail terminals and depots will have a great year, especially since pipelines are a bursting capacity. Ask Warren Buffet. His Santa Fe LLC is the largest railroad in the US and it spent $400 million on terminals last year.
Producers and refiners are set to use rail more this year, especially to get Bakken product to the refineries.
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Analysts expect over 200,000 train cars of oil shipped in 2012—a record high since as far back as the 1940s (when a war was on). This will require a lot more rail (which will move along faster than pipeline expansion). The rail building flurry has already begun and hopes to be at a 1-million-barrel capacity this year. Rail may be technically more expensive than pipelines, but it has advantages such as urban access and a head-start—plus, as more rail is laid and more depots built, it will become cheaper.
For now, Buffet’s Burlington Northern rail—which he acquired through Berkshire Hathaway Inc. (NYSE: BRK/A) in 2010—is the biggest rail player, responsible for about 40% of US oil shipments and with recent investments that should boost its share this year and next.
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But a group of pipeline operators headed by Plain All American Pipeline LP (PAA) is poised to out-invest even Buffet with a planned $1 billion spending on rail depot projects to transport crude from onshore fields to coastal refineries.
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Right now, it’s a race to the finish between pipelines and rail—both scampering to take advantage of increasing output in time. Both will benefit in 2013, and these are the assets to buy up, especially for refiners. With pipeline operators themselves getting in the rail game, the year will see an interesting re-mapping of infrastructure assets.
By. Charles Kennedy of Oilprice.com
