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North America's oil bonanza creates a railroad boom

Canada's two main railroads and the Burlington Northern Santa Fe have seen a huge traffic boost from transporting oil from shale and oil sands projects that aren't yet connected to pipelines. 

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Rangeland Energy, LLC/AP/File
This June photo shows the first train to leave Rangeland Energy's crude oil loading terminal near Epping, N.D. North Dakota's capacity to export oil by rail has jumped more than 50 percent in June with two new facilities built by Texas companies to move oil from the rich Bakken and Three Forks formations in western North Dakota's oil patch.

One of the consequences of the great boom in North American oil production is that infrastructure has not been able to keep up with production. The boom is happening in remote areas that are not near the historical centers of production like Oklahoma, California, or the Gulf Coast where most of the refineries and pipelines are.
 
Instead, the booming growth of crude production in the Bakken Shale, the Eagle Ford Shale, and the Alberta oil sands are far from the pipelines and refineries that are needed to bring it to market. This means that pipelines are being built, but in the meantime, there needs to be some way to bring the oil to markets.

Railroads have stepped into the breach, with the two major Canadian lines leading the way. In the last year, the volume of crude shipped by the two major Canadian rail lines, the Canadian Northern (CN) and the Canadian Pacific (CP), has increased from 11.4 million barrels in 2011 to an expected volume of 64 million barrels by the end of this year, a shocking 560 percent annual increase. In the US, Burlington Northern Santa Fe claims that it will ship 90 million barrels of oil from the Bakken this year.

The Keystone XL Pipeline, caught up in a political and regulatory morass, was meant to carry about 510,000 barrels per day of crude oil and diluted bitumen (dilbit) to markets in Cushing, OK and the Port Arthur, LA marine terminal. The CN operates trains all the way south to New Orleans. Simply replacing Keystone XL's volume of oil with train cars would require about 800 train cars per day to make the trip from Alberta to the Gulf Coast - meaning 4 to 5 full length (180 wagon, 2.25 mile long) trains making the trip every day. This is probably possible, but there are clear capacity constraints on rail.

Alternatively, with the Canadian government looking to break the monopoly that the U.S. has on buying their oil, they could reroute oil along the CN or the CP lines to the Pacific coast for shipping to Asia. As a recently released memo to PM Harper states , there are no regulatory hurdles to transporting crude by rail, but there are hurdles to building new marine export terminals or allowing new tanker traffic.

So long as pipelines are difficult to build, the railroads can act as a safety valve for more oil production. They are more flexible to changes in markets than pipelines, but more cost effective than tanker trucks. The railroads have seen significant drop-offs in coal transport over the last year. Transporting oil by rail is a lifeline for them - even if it only lasts as long as a delay of building new pipeline infrastructure.

– This article is a modified version of a story in Energy Trends Insider, a free subscriber-only newsletter that identifies and analyzes financial trends in the energy sector. It's published by Consumer Energy Report.  

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