Rail will be a lasting competitor to oil pipelines

Fuel Fix - The transport of crude by rail will become a permanent option for moving domestic oil to coastal refineries, even as pipeline construction catches up with the U.S. oil boom, according to an EY Oil & Gas report released this week.

“Rail is here to stay,” said Foster Mellen, a senior oil and gas analyst with EY. “You can reroute a train and move it to places where you can’t have a pipeline. The economics of pipelines are almost always going to be superior to rail, but to move that crude from the Bakken to Washington State’s Cherry Point refinery, you don’t have viable options.”

Several refiners, including Valero Energy Corp. and Phillips 66, have purchased or leased rail cars to move crude to their refineries.

Whether it makes sense to move crude by rail depends on both the price and availability of pipeline infrastructure for a given play. Transport between the Bakken Shale in North Dakota and the Gulf Coast is available via pipeline, but is about $6 more expensive per barrel than rail. In 2012, the price difference made rail transport a better deal than pipelines for Gulf Coast refineries, helping further spur its growth.

“Rail is very much a viable and strategic complement to pipelines,” Mellen said, noting that rail reaches nearly every refinery in the United States. “It allows producers and refiners alternatives that did not exist before and they can work this to their advantage.”

However, rail transport also has its risks, grimly illustrated by a recent train derailment disaster in Quebec, which killed dozens as its crude oil cars ignited in the town of Lac-Megantic.