By next year, railroads will be able to carry 50 percent more oil out of Canada than the controversial Keystone XL pipeline, a project stuck in regulatory limbo for more than five years.
Trains across the United States are increasingly laden with crude oil as drillers use the combination of horizontal drilling and hydraulic fracturing to unlock new petroleum reserves.
Domestic production has outstripped the nation’s pipeline capacity, especially in areas that are not historical hotbeds of oil and natural gas activity.
Companies like Oklahoma City-based Continental Resources Inc. had no choice but to turn to rail, as booming production in North Dakota’s Bakken Shale has exceeded the capacity of available pipelines.
Continental started moving oil by rail in 2008, said Jeff Hume, the company’s vice chairman of strategic growth initiatives. He said the Bakken produces good quality oil that is in demand by refiners.
“They’ve been doing unit intermodal transportation for years. You can see it from right here,” Hume said, looking down at the tracks visible from his office window at Continental’s downtown headquarters.
More than 300,000 carloads of petroleum products have been shipped by rail so far this year, according to the Association of American Railroads. That figure, which translates into almost 220,000 million barrels of crude, is up nearly 7 percent over the same period of last year.
The association reported that railroads transported about 11 percent of the country’s crude oil production during the first nine months of 2013, up from a negligible percentage just a few years ago.
Hume said railroads are part of the oil industry’s roots, since pipeline construction didn’t begin until after World War II. Now midstream companies are scrambling to build pipelines in areas that were not part of past oil booms.
“We’re virtually rebuilding the United States’ infrastructure,” he said.
Exxon Mobil Corp. CEO Rex Tillerson said crude-by-rail volumes are back at the same level as they were at when U.S. production peaked.
“The production is just coming on faster than we can build the infrastructure, so crude by rail will continue,” he said last month at the Oklahoma State University Energy Conference in Oklahoma City. “If we can’t get a pipeline built, we’re going to moved to the next alternative, which is either truck or rail.”
He also dismissed the hopes of activists who have campaigned against Keystone XL and other infrastructure projects, with an eye toward getting the country to move away from fossil fuels in favor of renewable energy.
“Crude’s not going to stay in the ground,” Tillerson said. “It’s just too valuable.”
Tillerson said rail will remain a common means of transporting crude oil because it can reach places pipelines can’t at this point.
“It’s going to continue to be an important part of the crude transportation infrastruture,” Tillerson said. “It’s going to grow right along with production growth.”
Although there are questions about the safety of transporting oil by rail after a number of accidents around North America, Hume said Continental has not had any issues.
“We’ve had zero incidents at any rail loading or unloading terminal,” he said.
The Association of American Railroads said the estimated spill rate for oil transported by rail between 2002 and 2012 was about a third of that for pipelines, even though there are more stringent reporting requirements for railroads.
The oil and rail industries have taken a number of steps to minimize the risks of transporting crude by rail because safety is one of their primary concerns.
“Safety is a big part of our lives and we measure ourselves on that,” Hume said.
Hume said 20 rail terminals have been built in North Dakota since 2009 to receive crude deliveries by pipe or truck.
Most oil trains have 90 to 100 cars, enough to transport up to 75,000 barrels of crude.
Hume said the oil industry is moving about 10 of those unit trains a day out of North Dakota. That equals about 1 million barrels a day, or as much as 80 percent of the oil produced there.
New pipelines are being built to handle North Dakota’s surging oil output, which state regulators expect to peak at 1.7 million barrels a day. Continental is predicting even more oil will come out of the state.
Hume said demand will govern future pipeline growth, which is slow because those developments are so expensive.
Pipeline companies want guaranteed income from those projects, but producers need to ensure they will find enough oil to fulfill their commitments.
“When the refiners step up, that’s when they’ll be built,” Hume said.
Pipeline giant Kinder Morgan scuttled a proposed crude oil pipeline to California last year due to a lack of interest. The Freedom pipeline would have carried up to 277,000 barrels of oil a day out of west Texas’ Permian Basin.
The company has since invested tens of millions of dollars in rail infrastructure in Texas, California and Canada.
San Antonio-based refiner Valero acknowledges it is getting more crude oil delivered by rail than in years past.
“That’s a result of the new North American production of crude oil in areas that aren’t yet served by pipelines,” spokesman Bill Day said.
The company has added rail facilities at its refineries in Quebec and the New Orleans area, with plans to build another such facility at its refinery in Benicia, Calif.
Day said Valero has been able to slash its use of imported oil thanks to its increased reliance on rail, barges and other means of delivering crude.
“We have, for instance, stopped importing foreign light sweet crude to our Gulf Coast refineries and by the end of this year our refinery in Quebec will process only North American crude,” he said.
Hume said rail offers oil producers access to markets on the east and west coasts, while most pipelines move oil to the Gulf Coast.
Hume said coastal refineries tend to rely on more expensive foreign oil, so refiners there can afford to pay more for domestic crude shipped by rail.
He said transportation, loading and unloading costs add about $3 a barrel to the cost of crude.
Hume said rail also provides more certainty because buyers know what is sealed in a tank car, while pipelines may carry a blend of different products.
“From a refiner, that’s a negative,” he said. “They want pure oil.”
Hume said rail offers producers more flexibility in getting their oil to market, while pipelines are a fixed asset going to one distribution point. Pipelines also require long-term commitments because they are so expensive to build.
He said rail contracts can be as short as one month, giving producers the ability to change the destination for their product.
Hume said rail cars can deliver crude anywhere in the United States in eight or nine days, which is faster than a pipeline.
“I cannot pump oil down a pipeline at 40 mph,” he said.