The development and growth of US shale oil production from 2008 to 2014 has revolutionized the oil industry. And though it could be said that the industry has been a victim of its own success – with massive increases in production helping accelerate the decline of global oil prices – there is little doubt that the last decade has seen a transformation in the US energy markets unlike any seen before…and will likely never see again. (Learn more in "The Need for ETRM Software in US Energy Markets.")
Collapsing Oil Prices and the Impact to Oil Transportation
As production grew at near exponential rates from 2010 to 2014, companies all along the oil value chain were challenged in dealing with a proverbial "flood" of oil emerging from fields from North Dakota to Texas. Countless miles of gathering lines were installed and thousands of tank batteries and storage facilities were built to hold the produced oil prior to moving to market, or more succinctly, to the refineries that transformed the crude into consumable products.
The Multiple Modes of Oil Transportation
Crude pipelines, particularly in the 48 contiguous states, have historically been the primary vehicle for moving crude from field and storage to refineries. According to the US Energy Information Administration (EIA), these pipelines accounted for as much as 84% of the US domestic crude (or 1.8 billion barrels) delivered to refineries in 2010. Tankers (primarily moving Alaskan crude to refineries in Alaska, California, and Washington) accounted for an additional 10%, or about 211 million barrels, in the same year. Trucks delivered about 72 million barrels (about 3%) to the refineries, and barges moved about 46 million barrels (approximately 2%). Rail cars accounted for only 4 million barrels, or one third of one percent of the oil transported to refineries in 2010.
However, with the massive and rapid development of shale oil production in the interior of the US in areas that had limited or no pipeline capacity and no access to waterways, producers and marketers had to turn to alternative means to move their crude to the refining markets along the coasts. Given that the process of pipeline construction (from design to financing, permitting, right of way acquisition, construction, and commissioning) is complex and faces long lead times measured in years, these producers and mid-stream operators were forced to increasingly rely on trucks and rail cars to get their growing volumes of oil to market while waiting for new pipes to be built. As a result, with US crude production increasing some 3.5 billion barrels in 2014 versus 2010, truck movement of crude to refineries (which does not including local trucking of crude from fields to storage or pipeline terminals) more than doubled to 152 million barrels and rail transport increased more than 30-fold, reaching more than 133 million barrels by the end of 2014, or more than 4% of all domestic crude delivered to refineries.
When Pipelines Aren't Approved
Though rail and truck were considered by many to be short-term alternatives until sufficient pipeline capacity could be installed, crude is now trading below $40/bbl, drilling is at a near standstill, and production is now falling. With this declining production, market interest in new pipeline development is waning. Further, with increasing resistance to new construction from regulators and environmentalists (as evidenced by the recent denial of permits for the Keystone XL pipeline), it’s clear that investments in crude pipeline capacity will continue to fall. For example, Enterprise Products Partners announced earlier this year that they would shelve plans for a new crude line from North Dakota to Oklahoma, citing lack of interest from the market.
The Need for Managing Multiple Modes of Transportation
For many producers, marketers, and first purchasers that have relied on truck and rail as stopgaps pending new pipeline capacity, it’s becoming apparent that those "temporary" fixes will become long-term, if not permanent, methods for getting their crude to market. For these companies, the ability to manage and optimize multi-modal transportation with effective supply chain solutions has become more critical than ever; despite lower oil prices, transportation costs are largely fixed and, as a result, are taking a larger bite of profits on a per barrel basis. In this environment, crude oil producers and mid-stream operators need energy trading and risk management software with analytics that can help them ensure that they’re maximizing the value of each barrel of oil that they move.
Manage the Flood of Data
Those that are struggling with these difficult transportation challenges need a next-generation ETRM software platform to manage the entire lifecycle of crude and refined products including purchase, refining, blending, storage, transportation, sales, distribution, and trading. Using oil trading and risk software, marketers, refiners, and exploration and production (E&P) companies gain real-time, advanced systems to manage physical movements and mitigate risk. In today's changing environment with multiple elements to consider and massive amounts of data, it is also important for these companies to have advanced analytics to make the best decisions.
