Steve Kean, the President and COO of Kinder Morgan, joins the Motley Fool's Taylor Muckerman to discuss the energy industry and his company's contribution to it as the largest midstream energy company in North America. The Kinder Morgan family includes Kinder Morgan, (NYSE:KMI), Kinder Morgan Energy Partners, L.P. (UNKNOWN:KMP.DL), Kinder Morgan Management, LLC (UNKNOWN:KMR.DL), and El Paso Pipeline Partners (UNKNOWN:EPB.DL).
In this video segment Kean discusses the circumstances under which oil may be transported by rail as opposed to pipelines, and the role each mode has to play in getting fuel where it is needed as flow patterns evolve across the United States. He agrees that rail does have a role to play, although pipelines are cheaper and safer in the long run. The full version of the interview can be seen here.
A full transcript follows the video.
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Taylor Muckerman: Addressing the onset or the growth in rail transportation of crude oil... I know natural gas and natural gas liquids seem to be the bulk of your business, but there is some oil transportation going on there.
I was just wondering if you see this as a threat, or maybe this is just stepping in while pipelines catch up to the growth in the Bakken and the oil sands in Canada.
Steve Kean: Yeah, all good points. We see it as an opportunity because we have rail terminalling facilities as well. We have several projects under development, including one larger one recently announced. There is a need, and we believe a fairly long-term need for some crude to move by rail.
Now pipelines are, in the long run ... well, in the short or the long run, they're safer, they're cheaper, and ultimately as flow patterns establish themselves, it will make more sense to move by pipeline.
For example, if you start to see a steady stream of oil movement from the Permian to, say, Southern California, as that flow establishes itself with enough permanence that people are willing to sign up for pipe capacity, you can take your $12 a barrel or $10 a barrel rail costs and turn it into a $5 a barrel tariff and move the product more reliably and right into your refinery, at pressure and all of those kinds of things that pipelines bring to bear.
We've got about $450 million worth of identified projects. That's not all in the backlog because we look at those as high probability projects, not just the ones we're working. We probably won't get all of that, but we have I think four active terminals today, two bigger projects -- one announced, one we think we'll still get to come -- so it's an opportunity for us for that short term opportunity, and we believe our pipeline options will be the most competitive in the long term.
Again, just to elaborate on that a little bit, one of our projects is a crude by rail terminal in Edmonton. Well, our big pipeline expansion that I mentioned -- the Trans Mountain expansion for $5.4 billion, expanding that pipeline from 300,000 barrels to 890,000 barrels -- well, that rail option is a good option between now and 2017 to those, call it Northwest Washington refineries, until that pipeline comes online, and it might continue to be a good option as an origin for eastbound oil movements into the Northeast U.S., which aren't currently piped.
I think, in summary, what rail brings is you can pay for the capital with shorter-term commitments, and there's greater origin and destination flexibility. While there are big price differentials across the continent, those options give rail an edge on at least the new movements.
But over time, as patterns establish themselves, pipeline transportation is maybe 1/3 the cost, and significantly safer -- although rail is fairly safe too -- it's significantly safer, so in the long run pipelines provide the answer.
Muckerman: Yeah, you've already seen the spread between the U.S. price in WTI and international Brent collapse quite significantly. Are you hearing from refiners, any choice that they'd rather see rail or pipeline, or is it just whichever one is able to serve them quicker?
Kean: If you talk to West Coast refiners, what they want to see is the flexibility to get it from multiple locations because, again, those price differentials. You're right, they've come in some, but there's still enough that it justifies moving by rail, particularly when they're competing against a world oil price, or they're buying more based on a world oil price.
They're happy to see pipelines when they come, but not willing to commit until they see a little more steady flow, I think.
I think on the East Coast, that's likely to be a longer-term phenomenon in terms of rail serving it, because the pipelines are harder to get there. TransCanada (NYSE: TRP) has a project to get to Quebec and Ontario, maybe ultimately export as well, but it's a harder build. The infrastructure isn't there as strong today, so that might be more of a persistent rail market.