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Oil, Rail, Steel

A renewed American industrial economy is a reminder of the economic security free markets provide.

To hear Rodney Cohen’s story reminds one of the opening chapters of Atlas Shrugged, when innovation has the potential to further catapult America in its greatness. At the time of the writing, 1957, the scientific premise of the work was farfetched but upon which Rand played out a clash of communism and capitalism, a strange business anti-Darwinism—survival of the least fit.

In the more than 50 years since it was published, one premise has, in fact, become reality: production of oil from shale. Of course, the Ellis Wyatt character’s breakthrough may have been of oil from true shale—oil that has to be produced with mining or thermal assistance—unlike that from the Bakken, for example, which is from rock that sits between shale barriers.

However, the need to get all of this new oil to market brings the railroad into play and exactly what has developed from the more than 700,000 barrels of new Bakken oil that is now being made a day from North Dakota and Montana.

And, that brings steel into play, like the Hank Rearden character’s Rearden Steel. Factories across America are fast at work today, building thousands of new railcars for transporting Bakken and other new North American oil to refineries that were to be shuttered if not for this new, lower-priced feedstock. BNSF expects to be railing some 700,000 barrels a day of American oil to refiners by year-end. That’s up from some 150,000 barrels a day at year-end 2011.

Meanwhile, steel-making itself has become more economic as well by newly abundant, low-priced U.S. natural gas—produced from shale.

But, who is Rodney Cohen? A few years ago, Cohen had three heads—at least, that’s how some folks looked at him when he put forth an idea of investigating whether low-priced Bakken oil feedstock, the existing rail system and low-priced natural gas could make profitable a refinery in Philadelphia that was destined for closing.

Curious, indeed.

The managing director of The Carlyle Group’s U.S. Equity Opportunities and his colleagues continued to gather information. “We were trying to understand what the real potential was,” Cohen told attendees at Hart Energy’s Marcellus-Utica Midstream conference in January. “At that point, (production) numbers were being thrown around in the Bakken that were all over the place. It was very hard to understand what the real potential was.”

Eventually, the potential and the reliability of supply became apparent. Last summer, Carlyle closed the acquisition of the Philadelphia plant, just a month shy of Sunoco Inc.’s planned shuttering of the 330,000-barrel-a-day refinery, which produces some 26% of the region’s fuel.

Meanwhile, Bud Brigham, who sold his Bakken-producing Brigham Exploration Co. in 2011 to Statoil ASA for $4.7 billion, says the new U.S. industrial revolution reminds him often of Rand’s story. An advocate of reading Rand’s work, Brigham is co-executive producer of Atlas Shrugged II: The Strike, which premiered in Washington this past fall.

“She wrote about what’s happening today over 50 years ago,” Brigham says. “Amazingly, she even wrote about Ellis Wyatt, an oil man who was rejuvenating the Rockies because he figured out how to get oil out of shale…That stimulated the rail business…, and steel…in an otherwise struggling economy. The parallels are remarkable.

“Clearly, this is huge for the country today, particularly the lower cost structures, improved trade balance and less dependency on foreign energy supplies.”

Dan Pickering, a multi-decade energy analyst and chief investment officer for TPH Asset Management, agrees that the revolution is the real deal. “Shale is translating to lower commodity prices, which is creating an input-cost advantage for U.S. manufacturing. Users are getting more comfortable with supply availability, which is going to translate to more demand.

“I am optimistic on the renaissance. That doesn’t mean it is great for stocks at all points, but it is good for consumers, industrials and the American populace.”

Brigham hopes the rest of the novel doesn’t play out, though—government controls that result in a new Dark Age, “a brief flare of hope that will be snuffed out by collectivism…Though it’s not pleasant to think about, that is my biggest concern.”

Government and labor did well by the Philadelphia project, from the mayor, governor and members of Congress to concessions by trade unions, however. Cohen says, “We were in a moment of time when the U.S. government realized we may be left with no refiners in this PADD 1 area or maybe very few. And, what is the implication of that? I think that was a little scary to everyone.”

He concludes, “It’s incredibly exciting times…, when new ideas are developing every day…, game-changing ideas….”

Editor’s Note: Dr. Tara Smith, professor of philosophy at the University of Texas, where she currently holds the Anthem Foundation Fellowship for the Study of Objectivism, will present a lecture, “The Virtuous Egoist,” 7:30 p.m., March 25, 2013, in Houston at Rice University, Sewell Hall, Room 301. The program is free and open to the public. More details on this and more upcoming lectures are available at HoustonObjectivism.com.

-Nissa Darbonne, Editor-at-Large, Oil and Gas Investor, OilandGasInvestor.com, Oil and Gas Investor This Week, A&D Watch, A-Dcenter.comUGcenter.com. Contact Nissa at ndarbonne@hartenergy.com.


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