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Crude-by-Rail Adds Costs -- But Flexibility -- Over Pipes, Says Study

Crude-by-rail as a transportation option could reduce the regulatory and political push back to building pipelines for U.S.-produced oil, according to a study by University of Chicago (UC) researchers.

The study, published in the National Bureau of Economic Research, was done by UC Energy Policy Institute Chicago (EPIC) researchers, who used the controversial Dakota Access Pipeline (DAPL) as a hypothetical to compare rail's price impact on the 1,200-mile system’s maximum capacity.

EPIC researchers Ryan Kellogg and Thomas Covert analyzed the large upfront pipeline costs versus the flexibility in rail oil transportation to question whether the railroads ultimately could be more attractive.

Had rail in recent years been required to address various environmental impacts, a project like DAPL would have been at least larger by 59,000 b/d of capacity, according to the study. The authors applied work done at Carnegie Mellon and the University of Pittsburgh that showed reducing rail air pollution would have added $2/bbl to the cost of crude-by-rail transport.

However, rail offers some things that pipelines may not.

"Beyond shedding light on the economics driving one of the most significant developments in the U.S. crude oil industry in decades, our study also shows how a costly but flexible transportation option can impact incentives to invest in durable infrastructure that is cheaper but requires large upfront commitments," Covert said.

With pipelines' higher upfront costs, shippers must sign long-term contracts that require payments even when volumes are not being shipped. Conversely, rail allows oil to be shipped to and from various locations along various tracks, and shippers may change volumes shipped in response to price changes. This flexibility could reduce shippers' incentive to commit to pipelines, the authors noted.

Three years ago in North Dakota, most of the state's 1 million b/d-plus of production from the Bakken Shale was moving via rail, and state officials were gearing up for new safety and environmental checks for rail.

At about the same time three years ago, a study predicted that rail crude oil shipments would peak in 2015-2016 at about 1.5 million b/d but remain an important transportation option for years to come.

The UC researchers said U.S. crude rail transport grew from almost nothing in 2010 to 750,000 b/d by the end of 2014

Rather than assuming that crude-by-rail is only useful in accommodating unexpected surges in new production as happened in North Dakota, researchers said the flexibility inherent in rail oil transport "makes it a more attractive option despite the higher-per-bbl cost."

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