WASHINGTON — The United States needs more pipelines and rail lines to move crude, natural gas liquids and other fuels to consumers nationwide, but regulatory delays and the decline in oil prices are making it tougher to build that essential infrastructure, energy industry representatives warned Congress on Tuesday.
“This may be the most difficult time ever to expand pipeline capacity,” conceded Andrew Black, CEO of the Association of Oil Pipe Lines.
“First, pipelines must secure long-term agreements with shippers to provide financial support for expansion projects,” Black told a House Transportation subcommittee. “Pipeline operators need prompt decisions from government agencies for environmental permits and approvals. Some states are slowing down their consideration of pipeline route issues.”
Lawmakers are looking at the issue as soaring domestic energy production strains the current network of pipelines to ferry oil and gas around the country. Without enough pipelines serving oil production centers, particularly in North Dakota, energy companies and refiners have increasingly turned to rail to move crude. But rail capacity is also strained, with shippers of grain complaining that their traffic has been delayed to accommodate crude cars.
“In this era of American energy abundance, we must think differently when it comes to how and where we invest in our nation’s infrastructure,” said Jack Gerard, head of the American Petroleum Institute. “In this era of energy abundance we need more of all.”
Crashing oil prices — which on Tuesday settled above $50 per barrel for just the third time in 2015 — could blunt some of the need, if production declines sharply as rigs are pulled out of service.
But that would only be in the short term, emphasized Jason Thomas, managing director of The Carlyle Group, a global asset manager.
“At this stage, even though development is slowing, the amount that’s actually anticipated to go through pipelines and rails over the next years is relatively unchanged,” Thomas said. “The development cycle is likely to be elongated, so the same amount of resources will ultimately be developed — it’s just going to be over a longer period of time at the current prices.”
Some of the biggest needs are in linking gas production in Pennsylvania with crackers and other facilities for breaking up natural gas liquids along the Gulf Coast. Thomas noted that natural gas liquids really cannot be transported over the existing natural gas infrastructure.
But the relatively long time to permit new pipelines or proposed expansions can dissuade some potential investors.
Thomas noted that for midstream energy transportation infrastructure, an additional year and a half spent on permitting reduces the internal rate of return for a typical project by 36 percent.
“So you can take projects that for a provider of discretionary risk capital look unite attractive and turn them into a project where the returns do not meet your investors’ expectations and as a consequence have to be passed on,” Thomas said. The additional time “can make the difference between attracting capital and building interest early in the process and actually not being able to identify capital providers.”
A major challenge facing rail transport of crude are lingering questions over the resilience of the DOT-111 tank cars that carry that flammable material. After the oil industry and Association of American Railroads asked the federal government to set a new standard for the tank cars four years ago, the Pipeline and Hazardous Materials Safety Administraton came out with a proposal last July.
But the Transportation Department still hasn’t finalized the standard, which goes beyond just tank car design to also address operational issues — including proposed speed limits for high-risk cargoes and a requirement to notify emergency response officials of planned routes.
Greg Saxton, senior vice president of railcar manufacturer The Greenbrier Companies, said the government’s long delays in imposing new requirements for tank cars that carry crude and other flammable materials is deterring changes that promise to make it safer to heave oil by rail.
“I’m aware of the manager of at least one major tank car leasing company who has been told by her lawyers two years ago not to spend any money to replace the DOT-111s until there is a final rule out of PHMSA,” said Ed Hamberger, president of the Association of American Railroads. “That lack of certainty has in fact reduced investment.”
Rep. Peter DeFazio, D-Ore., complained that by tethering tank car specifications with controversial operational rules, federal regulators have bogged down their proposal.
“They have managed to mangle the rule by merging it together with operational issues that are much more difficult,” he said.
DeFazio said the solution was for PHMSA to work on separate tracks — issuing one rule on tank car design and another on separate operational issues.