Question
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
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.
CASEQUESTIONS1.Ifyouwerepresidentofoneoftheserailroads,what
decisionwouldyoumake?Maintaincurrentcapacityandforgoadditional
revenue?Maketheinvestmentinadditionalcapacitywiththeassumption
thatvolumewillcontinuetoincrease?Explainyouranswer.
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Managing Information Technology
Authors: Carol Brown, Daniel DeHayes, Jeffrey Hoffer, Wainright Marti
7th Edition
