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Keystone XL analysis

Pipeline projects are not stopping yet, rail…that is another story

January 2015 Overview from our North America Logistics Review Service – Multiple developments in the crude logistics arena confirm that, even though the industry has been shaken by the drop in crude prices, significant new pipeline capacity will likely come on line in the next two years although the outlook for further rail expansion looks more clouded.

Open seasons and acquisitions

Two crude oil pipeline projects have announced open season extensions; the Saddlehorn Pipeline (Northeast Colorado to Cushing) and Monarch Oil Pipeline (Hemphill and Lipscomb Counties, Texas to Reydon Station located in Roger Mills County, Oklahoma). The Saddlehorn open season extension appears to relate to accommodating a high level of commitments.

At the same time, Big Spring Gateway Pipeline System (BSG System) will go through with an expansion that will support growth in the Permian Basin. This system offers connections from multiple counties in West Texas into the BridgeTex pipeline and Sunoco operated pipelines near Colorado City, TX. This system will provide West Texas producers with a path to Colorado City and into Texas Gulf Coast and Mid-Continent markets. In the same area, the Delaware Basin Extension project had a successful open season. This project will deliver crude from the Delaware Basin Area in New Mexico and West Texas into Midland TX.

Separately, Wolverine Pipe Line Company and Buckeye Pipe Line Transportation LLC are each embarking on open seasons for new product pipeline capacity in and near Detroit.

Kinder Morgan recently announced the acquisition of Hiland Partners. With this move, Kinder Morgan adds assets that consist of crude oil gathering and transportation pipelines and gas gathering and processing systems. Hiland serves the Bakken region in North Dakota and Montana bringing mostly fee based assets to Kinder Morgan not to mention some of the most successful Bakken producers as customers.

Environmental factors

Just as low crude prices are now a factor in new projects, so environmental pressures continue to bring an extra layer of complexity for projects to be approved. Such is the case with the Sandpiper Pipeline project, (Beaver Lodge ND, to Superior WI via Clearbrook MN), which is under scrutiny because of its route that touches lakes and wetlands in northern Minnesota. Proponents of the project argue the pipeline will be safer than transporting crude via rail cars, opponents of the project argue that the risk of a pipeline spill is too high and that the crude should stay in the ground.

In the same vein, Environmental Impact Statements (EIS) are no longer studies that pertain only to pipeline projects. Now, rail projects may have to present them as well as BNSF is being requested to do for its planned track expansion through La Crosse, Wis., and along the La Crosse River Marsh. U.S. Rep. Ron Kind (D-Wis.) and U.S. Sen. Tammy Baldwin (D-Wis.) sent a letter to the U.S. Army Corps of Engineers to request this EIS arguing that the full effects of the project on water quality, vegetation, flood drainage and waterway navigation need to be understood before a permit is granted. This latest demand echoes others for various recent west coast rail terminal projects.

Keystone XL saga update

The Senate and House have both passed bills to approve the Keystone XL pipeline project but still the votes were short of the threshold needed to override a Presidential veto. While the next steps there are not clear, it is not surprising that environmental factors continue to weigh on the Keystone XL pipeline project. Federal government agencies were due to provide their comments at the beginning of February to the Department of State as part of the process to determine whether Keystone XL is in the national interest. In a letter to the Department of State, the EPA again emphasized the possible impacts of Keystone XL on GHG emissions and called for an updated market study to reflect lower oil prices. Part of the EPA’s argument appears to be that, at a $65-$75/bbl crude oil price range, the high costs of rail would have a much more telling impact on the economics (and volume) of oil sands production.

Trains leaving the station

Media reports, however, indicate that the economics of crude by rail may be changing. Rates for leasing tank cars are reported to have dropped more than 50% in the last month. Companies in the tank car market have gone from not having cars available to possibly parking them in their yards until rates recover. Rail car manufacturers are finding their order back-logs dropping. All these changes indicate of market forces may be finding a new equilibrium with a slowing or even a halt in the rapid growth rate of crude by rail.

Tank car regulations that are still in the works are another factor hovering over the ability of crude by rail to keep growing as a long run transportation solution for producers. The U.S. Department of Transportation (USDOT) and the Pipeline and Hazardous Materials Safety Administration (PHMSA) keep delaying the publication of a final ruling that now is not anticipated until May 12th, the delay and result of the final ruling add uncertainty to tank car buyers, users and producers.

In addition, under the current low crude price conditions, transportation by rail may become less appealing to producers since discounted price strategies are harder to implement. A combination of lower absolute crude prices and adequate transport infrastructure has dramatically narrowed WTI-Brent and other domestic – foreign crude price differentials in recent months. West African cargoes are reported now reappearing at East Coast ports as the global market re-equilibrates.

Still the logistics system is a dynamic structure still trying to keep up with developments making crude by rail a viable option where pipelines do not exist. As an example, Canadian Pacific announced that oil shipments from North Dakota and Canada rose 22% in 2014 and that it is expecting a further increase this year. Reports also indicate that Exxon Mobil is bringing heavy crude from Canada via rail. The latest announcements show that, with rail terminals in Bruderheim and Hardisty in Alberta now operating, ExxonMobil is about to begin bringing in heavy Canadian crude to its refineries in Louisiana and Illinois via rail.

EnSys North America Logistics Review current database has more than 200 pipeline projects and more than 150 rail terminal projects.

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