CHICAGO When it comes to new shale oil plays, rail is increasingly moving in on territory long dominated by pipelines.
While most industry observers say that pipelines are in no danger of losing market share to rail over the long term, some question whether economic or political factors have caused the current lull in pipeline development.
"North Dakota is the poster child of (rail being used to move oil)," said Kurt Minnich, editor of Pipe Logix, published by Spears & Associates Inc., Tulsa, Okla. "The gas products need to go in a pipeline or be flared. And thats what you see in some of North Dakota. They just flare it so they can ship out the oil."
Natural gas is often found in conjunction with oil and so it must be flaredburned offif it is not going to be brought to market.
Rail and pipelines are almost always competitors when it comes to moving liquids, Minnich said. But they serve slightly different markets, with rail often moving product first before pipeline infrastructure can catch up.
For an energy company in a hurry to pay off the cost of bringing a well into production, rail offers a fast way to move oil to market, Minnich said.
"Pipelines are warranted to more safely and efficiently move resources out of North Dakota," he said. "The bottom line is, I think (pipelines) are just a matter of time. Im just not sure how much time."
The question of time is no small matter for the energy-transmission sector, especially with billions of dollars at stake.
Tulsa-based Oneok Partners LPs proposed $1.8-billion, 1,300-mile pipeline, dubbed the Bakken Crude Express, was expected to serve the Williston Basin of the Bakken shale, a burgeoning oil play largely centered in North Dakota. The line also was positioned to serve the Niobrara shale, which underlies parts of Colorado, Kansas, Nebraska and Wyoming (amm.com, April 10).
The energy transmission storage and processing firm expected to begin construction of the pipeline in late 2013 or early 2014, but before the year had ended the company announced that it had cancelled the project, citing a lack of interest from potential customers (amm.com, Nov. 28).
Some market sources question whether the company scuttled the project purely on economic grounds, or whether politics might have played a role as well, given the controversy surrounding Calgary, Alberta-based TransCanada Corp.s plans to build a massive, multi-billion-dollar pipeline, the Keystone XL, to move crude oil from Alberta to the Gulf Coast. The project, which requires a special presidential permit because it crosses an international border, was officially put on hold because of concerns about environmentally sensitive wetlands in Nebraska (amm.com, May 4).
Echoing other industry sources, Paul Vivian, principal of St. Louis-based steel tube and pipe research firm Preston Publishing Co., said the manner in which the issue was handled threw a cloud of uncertainty over the pipeline permitting and construction process. He contended that the Keystone XL and other pipelines are economically viable. "The XL is a profitable entity, and the XL is all political," Vivian said. "This is not the first time we have put a pipeline in the ground."
Pipelines face potential speed bumps not only at the federal level but also in every state through which they might pass, Vivian said. That uncertainty makes financing more difficult to obtain, or at least to lock down under favorable terms, he said.
Vivian said he thinks more might have been in play in Oneoks decision to drop the Bakken Crude Express project besides a lack of shipper interest. "There wasnt enough shipper interest? Thats just the most politically correct answer they could give to the withdrawal. ... Theyve seen (what happened) with the Keystone XL," he said.
Meanwhile, rail lines into the Bakken shale region are experiencing bottlenecks, with companies often forced to truck supplies for wells because tracks are clogged by crude coming out, Minnich said.
One distributor said he didnt have the time to waste talking pipeline policy. "Leave politics out of business," he said. "If we say our business is doing well or not because of the government, then our business is starting to fail. Economically, you do what you have to do to generate revenue ... whether its truck, rail or pipeline."
The Bakken shale is still a relatively new and developing play in inhospitable terrain, the distributor said. "Its not west Texas. The pipelines are not in place. But they will be. ... And if there is enough return on investment, it can happen quickly."