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Crude-by-Rail Here to Stay, IHS Energy Report Says

Crude oil shipments by railroads are expected to peak at about 1.5 million b/d in 2015-2016 and remain an important part of the transportation options for years to come, according to a report by IHS Energy, "Crude by Rail: The New Logistics of Tight Oil and Oil Sands Growth."

Ultimately, what happens to a number of pending oil pipeline projects in North America will determine how much oil rail shipping there is longer term, but in any scenario, IHS envisions rail continuing to play a significant role in the transport of crude.

At its anticipated peak, more than 10% of North American production is expected to get to market by rail, IHS said. In 2013, more than 9% (950,000 b/d) of North American production was transported by rail.

This year, IHS projected, transport of crude by rail is expected to average 1.1 million b/d, with the majority of it coming from the Bakken Shale in North Dakota where oil production jumped from 170,000 b/d in 2009 to more than 1 million b/d this year. Rail shipments most recently have been nearly 800,000 b/d in the state.

"Rail transport of crude oil has become an enabler of growth in North America, playing a crucial role as pipeline capacity has struggled to keep pace with the rapid rise of North American oil production since 2008," said Kevin Birn, IHS energy director. "Despite recent price volatility, crude by rail is here to stay."

Rail will continue to be an option for pipeline-deprived producers and refiners that need it to connect supplies and markets, Birn said. His report said rail shipment of crude from western Canada is just beginning, "finding its way onto the rails, although the volume is modest compared with the United States.

"Although rail provides producers the flexibility to alter markets from day to day to achieve a higher price for their output, cost and reliability continue to provide pipelines with an economic advantage over rail," the report said. "Given the option, producers would generally prefer to ship their crude by pipeline."

The typical difference is about $8/bbl more for rail shipments, compared to pipelines, IHS said, adding that the future of rail is "going where pipelines do not or cannot go."

Portions of the report dealt with the oil boom in the Bakken being a driver for increased rail crude shipments, with various safety considerations bidding to impact the rail operations and rail tank cars, and with the merging of stiffer oversight in both Canada and the United States.

While train accidents generally have dropped by 40% during the past decade, accidents involving crude oil have grown along the lines of the growth in oil shipments, the report said.

New policy proposals in Canada and the United States, including lower train speeds, heavier tank cars and phasing out of the old (DOT-111) tank cars, are "aimed at enhancing the safety of crude-by-rail but may also lead to more carloads or traffic for the same volume of crude," the report said.

Birn said uncertainty surrounds some of the safety proposals regarding whether "more traffic could result or whether enough cars would be available under certain policies being contemplated. All of this will affect the cost and ability of railroads to deliver crude and ethanol to market."

"Ultimately, the impact [of the pending new regulations] depends on the final rules enacted and the railroads' ability to increase efficiency," IHS said.

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