Posted on 07/02/2012 6:27:22 AM PDT by thackney
The nation’s energy transportation network is undergoing a multibillion-dollar overhaul, as oil and natural gas production surges in new regions of the country.
Across North America, pipelines and rail terminals are being built in areas where wells were once scarce. Companies are reversing pipe flows and adding stronger pumps to funnel more crude through their lines.
The changes are transforming the web that carries energy across the country.
“Where it used to be isn’t where it is now. Where it needs to go isn’t where it used to go,” said Terrance McGill, president of fuel carrier Enbridge Energy. “You’re seeing this fundamental shift of crude oil across the country.”
Historically, fossil fuels flowed north, from oil fields in Texas toward the nation’s big cities. But energy producers have charged into new areas with technology that can reach oil and natural gas trapped in shale and other tight rock formations.
Pipelines haven’t moved as quickly as drilling rigs, leaving pools of crude and gas stranded far from the Gulf Coast refineries and petrochemical plants that need them.
Now companies charged with moving those fuels are rushing to catch up. Pipeline company Enbridge Energy, a subsidiary of Canada’s Enbridge, made about $2.5 billion in capital expenditures and investments in 2011. This year, it expects to reach $3.6 billion, largely through investments in pipelines carrying liquid petroleum.
Houston-based fuel transport corporation Enterprise Products Partners has more than doubled its annual capital spending from $1.7 billion in 2009 to a projected $3.8 billion this year, according to financial statements. Plains All American Pipeline grew its capital expenditures and acquisition investments from about $770 million in 2009 to nearly $2 billion last year.
“We’re in a renaissance of pipeline construction,” said Andy Black, president and CEO of the Association of Oil Pipe Lines. “There is new North American supply in areas that don’t have a matching amount of pipeline takeaway capacity. So there’s a great demand for transportation of crude and natural gas.”
Pipeline shortages have created wide pricing gaps for petroleum products across regions. Coastal refiners are forced to buy higher-priced imported crude because of limited modes for carrying cheaper domestic oil from the Midwest. As a result, drivers in the center of the country fill their tanks for as much as a dollar per gallon less than those on the coasts.
Adding by acquisition
Besides construction, major pipeline companies also have expanded their reach with pricey acquisitions. Last year, pipeline king Kinder Morgan shelled out $21 billion to absorb competitor El Paso in one of the largest business deals of the year. In April, Dallas-based natural gas hauler Energy Transfer Partners announced it would buy Sunoco and its network for $5.3 billion.
“Over $200 billion of midstream infrastructure is going to be needed in the next few years to handle North America, including that coming out of Canada,” said Roger Ihne, a portfolio leader in the energy practice for consulting firm Deloitte. “The whole dynamic and economics of established pipelines are changing.”
Still, the nation’s web of pipes isn’t keeping up with the billions of barrels pumped from the ground each year. It can take years for a pipeline to go from concept to construction. It can require many permits and lengthy negotiations with landowners and environmentalists.
And that is prompting more energy companies to move their loads by rail.
Phillips 66 is considering buying 2,000 more rail cars, CEO Greg Garland said recently. He pinned the refining company’s profit growth to its ability to access North America’s burgeoning crude production.
The new cars would allow Phillips 66, which can refine about 2.2 million barrels of crude per day, to carry an additional 150,000 barrels a day from shale regions to its refineries across the country.
“That’s a pipeline on wheels,” Garland said during an energy conference in June. “It can shift as the opportunity shifts around the country.”
Enbridge is building a rail system in North Dakota to move about 80,000 barrels per day. Already, the company has expanded the capacity of its North Dakota pipeline system to 210,000 barrels per day, compared with 30,000 barrels in the late 1990s, said Mark Maki, president of Enbridge Energy Management.
Bigger rail loads
Railroads are responding to the demand. Loads coming in and out of shale regions have grown 400 percent since 2009 for Union Pacific, one of the largest railroads in North America, spokeswoman Raquel Espinoza said.
The company has added 785 Texas employees this year, largely to respond to the booming Eagle Ford Shale in South Texas. And it is funneling millions to expandrail terminals in oil-pumping regions.
In West Texas, Union Pacific is investing more than $68 million to add tracks and expand rail yards servicing the oil-rich Permian Basin, Espinoza said. Near the Eagle Ford Shale in South Texas, the company has reopened a dormant rail yard that was being used for storage.
In a report last month, RBC Capital Markets analysts noted that rail shipments of petroleum products have jumped 36 percent nationwide compared with last year.
Some drawbacks
But carrying crude by rail has drawbacks, including potential for spills. Further, compared to pipelines, hauling on tracks often takes longer and costs more, Enbridge’s McGill said.
“You can do rail for a while. You can do trucks for a very little bit,” McGill said. “But at the end of the day, pipelines are going to be your most cost-effective, safest, most reliable way of transportation.”
Before long, the EPA will require individuals to have a government issued license to own an internal combustion engine.
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