Oil in Motion | Visibility into Crude Oil Transportation

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Strategy plays a sizable role in determining the most economically and logistically feasible method of crude oil transportation. After oil companies successfully extract oil products from the ground, they face a decision – depending on infrastructure, geography and cost implications – regarding what mode of transportation will move their products to minimize total transportation cost and maximize their bottom line.

Crude Oil Transportation

Oil and refined product transportation occurs twice throughout the crude oil supply chain, first upstream in the crude oil storage stage and then later downstream moving from refinery transformation to market. Distance from origin to destination is the most authoritative variable that drives strategic transportation decision making for oil transportation. Ranked cheapest to most expensive, oil products are transported via pipeline, waterborne vessel, rail, and truck. The chart below illustrates each transportation mode’s historic prevalence in the United States. Pipeline and ocean vessel have historically been the most common forms of oil transportation to refineries. Rail and truck movements, however, have gained traction in the past decade due to lacking pipeline infrastructure and operational constraints in certain geographies.

Crude Flows by Pipeline

Oil pipelines are the most common, safest, and cheapest of all modes of crude oil and refined product transport. Simply put, pipeline networks are built to transport crude oil from nearby oil wells to receipt tanks that later establish the origin of batch shipments for longer-distance movements to refineries and storage facilities. The pipeline infrastructure in North America is staggering in terms of geographical density, ultimately facilitating the seamless flow of oil products from region to region uninterrupted.

North American crude oil is either sent to a large storage hub in Cushing, Oklahoma and priced using the West Texas Intermediate (WTI) benchmark, or transported to a coastline to be priced on the international Brent benchmark. This was not always the case, however, as non-existent pipelines from Cushing, OK to the US gulf coast region challenged US and Canadian crude to flow to this market and compete with Brent prices. This ultimately created a massive surplus of oil in the Cushing, OK region as massive gains in domestic oil production led to an oversupply of crude oil and only one point of destination.

Booming domestic oil production  between 2012 and 2013 led to an oversupply of crude oil in Cushing. In turn, midcontinent US refiners reaped the benefit of low cost crude relative to the Gulf Coast and East Coast refiners who were buying Brent crude at higher prices. These discounted pricing fundamentals trickled northward to Canada, ultimately costing the Canadian oil industry billions of dollars in lost revenue due to the discounted rates for WTI crude. Because of the logistical and financial challenges stemming from the lack of pipeline infrastructure, TransCanada constructed the Keystone Gulf Coast pipeline system, later enabling the flow of crude oil to the US gulf coast refining region and giving oil producers the liberty of choosing where they wanted to sell their oil products based on the cost of transportation to reach their desired market.

The chart below shows the WTI-Brent price differential, calling out the price spread that prevented Canadian oil companies from obtaining maximum revenue due to pipeline constraints near Brent pricing regions.

Waterborne Movements by Vessel

Marine transport, largely via  barge or tanker, is the second cheapest mode of crude oil transportation leveraged by oil companies, especially those who export crude oil internationally. The world tanker fleet currently contains approximately 4,200 vessels, 85 percent of which are owned by independent tanker companies whose sole purpose is to transport oil products from border to border. Generally speaking, smaller vessels transport ”clean cargoes,”—refined products such as gasoline, diesel, and jet fuel. Large tankers, however, carry dirtier cargoes like crude oil and unrefined commodities. For perspective, a very large crude carrier (VLCC) that hauls dirty crude oil averages 2 million barrels of crude oil per movement.

The global vessel fleet faces operational constraints similar to the three alternative methods of crude oil. To satisfy global demand and facilitate an adequate flow of crude oil to appropriate markets, high traffic areas often experience chokepoints. Some of the key international marine chokepoints are highlighted in the map below, and ranked from largest to smallest based on their daily transit volume:

 

These key global chokepoints are shown in the chart below, in addition to their daily transit volumes from the most recent five years of available data. Risk associated with geopolitical activity impacts the flow of crude oil through these chokepoints, ultimately creating supply and price pressure in the destination regions.

Additionally, the most common crude oil trade lanes for marine vessels originate in the Arabian Gulf with destinations in the US Gulf, China, Japan, Singapore, and Europe. Movements also regularly route from Western Africa to the US Gulf and China, in addition to the predominant lane from the North Sea to Canada’s east coast. From a transportation cost perspective, crude oil spot freight rates ultimately determine the marine transportation cost in USD per barrel.

Oil Shipments by Rail

In reference to Figure 1 above, crude-by-rail movements substantially spiked in 2013, increasing roughly 31 percent compared to 2012 values. This was due in large to the domestic oil boom that flooded surplus oil into the US market creating insufficient pipeline capacity to transport total crude supply and opened the door for rail movements as the next best alternative for crude oil transportation. That said, crude-by-rail movements have decreased since 2015 as the WTI-Brent price spreads shown above narrow and pipeline capacity expands, making pipeline a more optimal crude oil transportation method for oil companies. Not all oil wells are accessible via pipeline, making rail the most financially feasible option for accessing land-locked oil wells that later feed the refining landscape. The sustained growth of US shale production has increased domestic production to record levels, again creating pipeline capacity concerns and increasing overall utilization of rail transit.

Over-the-Road Crude

Over-the-road transportation is the most expensive and inefficient means of crude oil transportation, as an average truck only has capacity to transport between 200-250 barrels of oil per movement, however at times it is necessary. This method is typically utilized only when wellhead locations are not accessible by pipeline or rail networks, or for the final-mile portions of the crude oil movement. Crude oil is either hauled directly to refineries if pipeline infrastructure is lacking, or to aggregation points that tap into pipeline networks that later service refineries. In short, crude-by-truck movements are a viable option for regions lacking pipeline infrastructure or are not near ports or rail terminals.

Minimizing total transportation cost for crude oil shipments is the top priority for oil companies and refiners. Infrastructure, capacity, cost implications, and geography ultimately influence the end-decision, though pipeline and waterborne vessel have historically been the most prevalent methods leveraged throughout the industry. In total, the evolution of the encompassing oil industry, both domestic and global, will continue to impact the flow of crude oil and petroleum products through different geographies that later satisfy global demand.

For further insight into how transportation of crude oil and refined products can impact upstream and downstream costs, contact the Applied Knowledge team directly.

 

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