CASE6-2

RailVersusPipelineInvestment

Thelastseveralyearshasseenatremendousgrowthinrailshipmentsinto

andoutofNorthDakotaandsouthernCanada.Theseshipmentswereoil

outboundandwater,sand,andotheroperatingmaterialsinbound.This

growthwascausedbyOPEC'sdecisiontoholdsteadytheiroilproduction

volumes,whichmadeU.S.frackingandoilwelldevelopmentinthosetwo

areasveryprofitable.Thisgrowthinrailshipmentswasalsocausedbythe

lackofoilandgaspipelinecapacityoutboundfromthosetwoareastoU.S.

processingplants.Infact,thegrowthinvolumewassohighthatthe

railroadsservingthoseareasranoutofbothcarandtrackcapacity.With

volumesincreasingatasteadyrate,theobvioussolutionwouldbeforthe

railroadstobuildmoretrackandacquiremoreoperatingequipment.

However,investmentsinequipmentandtrackarelong-term,with

equipmentandtracklastingdecadeswithpropercare.Assuch,these

typesofinvestmentsrequireasteadyvolumeovertheirlife.Therailroads

servingtheseareaswerefacedwithadifficultdecision.Toadequately

meetdemandwouldrequirebillionsofdollarsofcapitalinvestmentbut,

shortterm,couldproducebillionsofdollarsinadditionalrevenue.However,

therailroadswerecautiousofOPEC'sinfluenceonthepriceofoil.OPEC

hadannouncedthatitsmemberswouldbeincreasingtheproductionof

crude,thusdrivingdowntheworldprice.Withthesmalloilandgas

operatorsinNorthDakotaandSouthernCanadahavingamuchhigher

marginaloperatingcostthantheOPECcountries,adecliningworldprice

forcrudecouldforcemanyofthemtoleavetheindustry.Thenegative

impactoftheseexitscouldbesubstantialfortherailroads.

CASEQUESTIONS

2.Couldtherebeashortertermsolutionfortherailroadsotherthan

acquiringmoreequipmentandbuildingmoretrackthatwouldallowthemto

generaterevenuewithoutmakingsignificantinvestments