There are several problems with shipping oil by rail, and now this issue is rearing its ugly head in Albany, NY. Oil trains are backing up, residents are up in arms, and there's no solution in sight... or is there?
The problem
"One morning we woke up and all of a sudden there were all of these trains lined up in people's backyards," according to Vivian Kornegay, an Albany city council member said in a recent Bloomberg report describing how crude oil trains are piling up in Albany. The trains originate in the growing Bakken shale region in North Dakota and converge on Albany via either the CSX rail lines running south of the Great Lakes or the Canadian Pacific Railway to the north.
Courtesy Energy Information Administration
The trains are necessary because, as this map shows, there are virtually no crude oil pipelines from the producing regions to the East Coast. Once in Albany, the crude is loaded onto barges for the journey down the Hudson River to refineries in the New Jersey area. This, of course, is raising concerns about an oil spill in the river.
A major culprit behind this transport model is Global Partners, one of the largest terminal operators at the Port of Albany. Shipping by rail makes sense in some situations, as exemplified by Global's plan to ship Canadian heavy crude to Texas via rail. Global has built an entire business model around this practice, often referring to its "virtual pipeline" from places like the Bakken to the coasts.
In general, however, moving oil by pipeline is cheaper, safer, and less annoying for everyone than moving it by rail. Global will suffer from reductions in throughput if regulations slow down the trains, if the backups get worse, or if there are more accidents. This "virtual pipeline" model should be a workaround, not a permanent way of doing business.
The solution
Pilgrim Pipeline Holdings, a non-public company, is proposing a pipeline from Albany to the New Jersey refineries, but that's only a partial solution. A more radical fix would clearly be a pipeline from the Bakken area directly to the East Coast refineries, bypassing Albany altogether and cutting out the trains, the barges, and Global's "virtual pipeline."
One company with assets in place that could make this possible is the other big terminal operator in Albany, Buckeye Partners. Buckeye has a network of product pipelines carrying gasoline, jet fuel, diesel fuel, and other refined liquids outward from the New Jersey refinery area to consumers throughout the Northeast and Midwest.
Courtesy Buckeye Partners
As shown in the slide above, this network runs all the way to western Iowa. If Buckeye divested its Albany terminal assets and used the cash to lay crude pipeline along its existing product pipeline routes, it would be a coup. The company would only have to cover a couple of gaps in order to complete a route from the Bakken all the way to the East Coast.
The reality
Buckeye has more immediate problems, unfortunately, so it probably won't be considering such a radical move anytime soon. The company is too highly leveraged to take on such a major undertaking, and it's struggling to manage its finances as it is.
For the quarter ended March 31, Buckeye's revenues increased by 50% over the same quarter last year. However, it only managed to eke out a 1% increase in net income from that. Over the past few years, its distribution coverage ratio has hovered above and below 1.0, a warning sign for investors in such master limited partnerships. In short, this isn't a company that's going to step up and overturn the country's crude oil logistical system, no matter how flawed.
The Zen of Foolishness
Companies get into trouble for a variety of reasons. Some move along on inertia, continuing to follow a business model without seeing danger signs in the bigger picture. Global could become an example of this if its "virtual pipeline" model becomes a huge liability. Other companies, like Buckeye, put themselves into such tight financial positions that it's no longer possible to take advantage of strategic opportunities.
Investors can only hope that a company with better finances will buy Buckeye, sell the Albany terminal, and build an awesome crude pipeline alongside Buckeye's existing product pipelines. Not only would such a visionary company shake up Global's "virtual pipeline" paradigm, but it would save Albany.
