Rising Oil Output in North America Boosts Railroads

Big Oil is turning to Big Rail to transport their product in the boom times.

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The blossoming energy production industry in North America has boosted more than just the profits of Big Oil.

Thanks to anti-pipeline activism and delays in the approval process for various pipeline projects, business for railroads is booming as advances in drilling technology continue to unlock vast stores of the precious resource previously thought to be untappable.

Although oil has been traveling by rail for a century, it fell out of favor as the construction of pipeline networks made the rail option too expensive. Now with existing pipelines running at full capacity and various other projects, including the northern leg of the Keystone XL, held up by stalled permitting processes and protests, railroads have seen a sharp uptick in business with shipments of oil and petroleum products increasing almost 40 percent in the first half of the year, according to government statistics.

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BNSF, the biggest railway mover of crude in the United States, has seen an increase of 60 percent in carloads of crude oil and petroleum products over the same period. In the first week of November, the company reported a 46 percent jump in shipments compared to that same week a year ago.

"Rail is a more flexible and faster alternative to pipelines and is making it possible for oil and gas producers to ship new production to areas of greatest demand to the benefit of the U.S. economy and domestic energy independence," Krista York-Woolley, director of corporate communications at BNSF, wrote in an E-mail. "This number is likely to increase as crude shippers are increasingly seeing crude by rail as an attractive alternative to pipelines."

While pipelines still transport the vast majority of crude oil in North America, railways' piece of the pie is increasing rapidly, with several companies planning significant infrastructure investments to accommodate the uptick in oil production in North America. BNSF has committed more than $1 billion to buy equipment and nearly $200 million for various other projects including replacing aging track lines.

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Railways in oil-rich Canada are also reaping benefits from the boom. Canadian National Railway Co.—the country's No. 1 carrier—moved about 5,000 carloads of crude oil to various North American markets in 2011. CN projects that number to skyrocket to 30,000 carloads total in 2012, and expects to double business in crude oil transport in 2013. Like BNSF, CN has launched several projects over the past year to expand the capacity of its operations, including construction of loading and unloading terminals that will allow the company to more easily access Gulf Coast markets.

Though railways are expanding to meet the growing demands of oil producers, it's not a sign of impending doom for pipelines. Each method has its benefits and drawbacks, explains James Cairns, vice president of petroleum and chemicals at CN.

"It's not rail or pipe, it's rail and pipe—rail is not going to replace pipelines, rail is going to supplement them," Cairns says. "Given that, rail is going to be here to stay. Rail has the ability to get the producers to the right market at the right time for the maximum profit."

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That's because although it's more expensive to ship oil by rail in many cases, rail companies have more flexibility and can be quicker when it comes shipping product. While pipelines go to a limited number of specific locations, railways crisscross the continent, making it a viable option regardless of pipeline capacity.

"When you're carrying [product] on a pipeline, you put it in one place and you take it out at another place—it's always kind of a linear thing," Cairns explains. "If you ship by rail, you access the rail network and you can go virtually anywhere."

And that helps producers get the best price for their crude oil, which tends to be in coastal ports and overseas markets where the Brent price of oil is the standard instead of the U.S. benchmark West Texas Intermediate, which currently sells at a $20- to $25-per-barrel discount compared to Brent. Because pipelines can't access many of those same markets, producers in the recent oil hot spots of the Bakken Field in North Dakota and the Alberta oil sands in Canada are seeing rail transport as an increasingly attractive transport option, Cairns says.