EOG leases its own railcars though, and its loading and offloading facilities are company owned. Its first mover status and company owned infrastructure enhance net backs to EOG making the whole system more profitable. It’s also more flexible, since EOG can take oil to whatever market’s pricing best.
The company is starting to rail ship directly to east coast refineries and is working to expand its facilities out east. Rail allows EOG to bring its oil to whatever US market brings the highest price, bypassing as much of the midstream carriers as possible, meaning higher margins on its crude. ‘Got crude, will travel’ is EOG’s theme for the day.
It’s a unique advantage that EOG has over the competition. The only other producer currently rail shipping its own product is Hess Corp. (NYSE:HES), which opened its own loading terminal in Q1 of 2012. The new rail terminal has 120 MBbld capacity and will be a key component in Hess’ efforts to build out its expanding Bakken interest.
One question is how long can the rail story last? How long can the rails expect to ride the wave of demand? That’s unclear, but some oil producers like EOG and Hess seem to prefer the rail model and its flexibility.
In addition, unconventional shales pop up in out of the way places by their very nature. That’s the issue in the Bakken. The Williston Basin was not a strong basin prior to the Bakken and its infrastructure was too sparse to cope with the boom. Ditto for the Athabasca oil sands of Alberta. They just can’t find a way to move all the stuff that’s there.
Then there’s the east coast. Direct shipment of light sweet crude to east coast refiners could provide the greatest price spread. EOG sure thinks so, but building out midstream assets in the more densely populated east presents problems. The rail infrastructure needed is already in place and bypasses the need to procure costly easements and obtain regulatory approval.
These kinds of problems could be recurrent with new plays in the future. Rail’s flexibility is key. It’s worth noting that even midstreams have joined the party. NuStar Energy L.P.’s partnered up with EOG on its St. James, LA terminal and KinderMorgan is investing in Watco Industries, the largest closely-held short-line US railroad.
The jury’s still out. Even without the political and environmental resistance to the Keystone XL pipeline factored in, rail may prove to be the cheapest and most flexible solution to the midstream problem that the shale revolution has created. There are a lot of ways to play the trend, from producers that have leveraged the strategy, to the railroads and their suppliers. Next time you’re sifting through the oil patch for ideas, it may be worth your while to turn an eye to the rails.
The article To Market, To Market, To Fetch a Fat Spread originally appeared on Fool.com and is written by Peter Horn.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
