Oil by Rail Eases Logistical Bottlenecks
As North American crude oil production increases, rail offers efficiency in logistics and an effective alternative in an environment challenged by pipeline constraints. EY's report released recently, Rolling with the revolution: rail's role in the new oil and gas era, addresses how the crude-by-rail (CBR) business model continues to increase as a strategic source of feedstock diversification while offering producers the ability to capitalize on regional pricing disparities and providing added flexibility for refiners.
The strong growth in production from the Canadian oil sands, combined with the surge in U.S. unconventional oil production as a result of the advances in drilling and completion technologies, has significantly stressed the North American oil transportation infrastructure and caused unprecedented quality dislocations and price disparities for the benchmark crudes.
The resulting supply/demand imbalances and logistical bottlenecks point to a need for better long-term pipeline solutions and a more efficient pipeline network. In the meantime, these imbalances have created opportunities for both oil producers and refiners to take advantage of these imbalances and bottlenecks by using rail transportation. And as a result, the industry is witnessing a fundamental change in crude logistics.
“CBR is more than just a short-term solution and/or opportunity. While it is not going to be a complete replacement for pipelines, it is positioned to grow and will remain a long-term strategic complement or supplement to pipelines,” says Dale Nijoka, EY’s Global Oil & Gas Sector leader.
Rail transportation is moving from niche volumes to base-load for a number of refiners, allowing them access to previously inaccessible crudes or in some cases to capture price differentials as pipeline capacity additions lag production gains in many regions. Rail has also allowed producers to link inland prices to a broader set of benchmarks than just West Texas Intermediate (WTI), at a time when pricing is very dynamic. Additionally, given the optionality on destinations that rail has created, producers are, in many cases, reluctant to commit volumes to new pipelines.
Although pipelines generally are the least expensive crude transport option, the benefits of rail – speed to market, extensive geographic coverage, faster transit times, fewer permitting/regulatory hurdles – imply that that the industry will continue to utilize both modes. Landlocked or logistically-constrained crude will generally trade at a discount to other comparable crudes, creating opportunities and incentives for both upstream producers and downstream refiners.
Nijoka adds, “Where pipelines are not an option, oil and gas companies that have a crude-by-rail strategy with an integrated operational plan that includes tracking and analysis, along with a clear inbound and outbound logistical scheme, will be most successful in getting their crude to market or their feedstock sourced in the most cost-effective manner.”
CBR presents a relatively efficient solution for producers to transport crudes to markets with higher potential netbacks, or for refiners to have access to cheaper, advantaged crude. In both cases, CBR provides enormous flexibility and the ability to respond to rapidly changing and unforeseeable market conditions; this is a tremendous asset that should ensure the industry’s long-term sustainability in the unconventional revolution.
Ofwat allows retailers to raise prices from April
Retailers can recover a portion of excess bad debt by temporarily increasing prices from April 2022, according to an Ofwat statement.
The regulator confirmed its view that levels of bad debt costs across the business retail market are exceeding 2% of non-household revenue, thereby allowing "a temporary increase" in the maximum prices. Adjustments to price caps will apply for a minimum of two years to reduce the step changes in price that customers might experience.
Measures introduced since March 2020 to contain the spread of Covid-19 could lead to retailers facing higher levels of customer bad debt. Retailers’ abilities to respond to this are expected to be constrained by Ofwat strengthening protections for non-household customers during Covid-19 and the presence of price caps.
In April last year, Ofwat committed to provide additional regulatory protection if bad debt costs across the market exceeded 2% of non-household revenue.
Georgina Mills, Business Retail Market Director at Ofwat said: “These decisions aim to protect the interests of non-household customers in the short and longer term, including from the risk of systemic Retailer failure as the business retail market continues to feel the impacts of COVID-19. By implementing market-wide adjustments to price caps, we aim to minimise any additional costs for customers in the shorter term by promoting efficiency and supporting competition.”
There are also three areas where Ofwat has not reached definitive conclusions and is seeking further evidence and views from stakeholders:
- Pooling excess bad debt costs – Ofwat proposes that the recovery of excess bad debt costs is pooled across all non-household customers, via a uniform uplift to price caps.
- Keeping open the option of not pursuing a true up – For example if outturn bad debt costs are not materially higher than the 2% threshold.
- Undertaking the true up – If a 'true up' is required, Ofwat has set out how it expects this to work in practice.
Further consultation on the proposed adjustments to REC price caps can be expected by December.
"While it’s great that regulators are helping the industry deal with bad debt in the wake of the pandemic, raising prices only treats the symptoms. Instead, water companies should head upstream, using customer data to identify and rectify the causes of bad debt, stop it at source and help prevent it from occurring in the first place," she said.
"While recouping costs is a must, water companies shouldn’t just rely on the regulator. Data can help companies segment customers, identify and assist customers that are struggling financially, avoiding penalising the entire customer in tackling the cause of the issue."
United Utilities picks up pipeline award
A race-against-time plumbing job to connect four huge water pipes into the large Haweswater Aqueduct in Cumbria saw United Utilities awarded Utility Project of the Year by Pipeline Industries Guild.
The Hallbank project, near Kendal, was completed within a tight eight-day deadline, in a storm and during the second COVID lockdown last November – and with three hours to spare. Principal construction manager John Dawson said the project helped boost the resilience of water supplies across the North West.
“I think what made us stand out was the scale, the use of future technology and the fact that we were really just one team, working collaboratively for a common goal," he said.
Camus Energy secures $16m funding
Camus Energy, which provides advanced grid management technology, has secured $16 million in a Series A round, led by Park West Asset Management and joined by Congruent Ventures, Wave Capital and other investors, including an investor-owned utility. Camus will leverage the operating capital to expand its grid management software platform to meet growing demand from utilities across North America.
As local utilities look to save money and increase their use of clean energy by tapping into low-cost and low-carbon local resources, Camus' grid management platform provides connectivity between the utility's operations team, its grid-connected equipment and customer devices.