North America's Railways as an Energy Solution

The American and Canadian energy industries have transformed so quickly that pipelines connecting producing regions with consumption centers are now overwhelmed. Bottlenecks have even led to discounted prices for benchmark crudes such as West Texas Intermediate and Western Canada Select, a prospect that could threaten future investment. (Benchmark crudes serve as a reference price for oil buyers and sellers.) With pipeline projects facing political scrutiny, oil producers have turned to North America's unrivaled railway network. In 2013 alone, rail transport rose by 70 percent. And even though it costs roughly $10 more per barrel to ship it that way than by pipeline, railways offer several advantages. First, they can adapt to increased production volumes because the infrastructure is already in place. Second, they can carry any type of crude, so they have fewer restrictions on where they can take their cargo. For example, light sweet crude extracted from North Dakota's Bakken formation frequently goes to refineries along the Atlantic Coast that operate most efficiently when using light sweet crude. However, there are no pipelines that can take Bakken oil east, so most Bakken oil is transported by rail.

Oil extracted from oil sands in Alberta province, located just northwest of North Dakota, faces similar problems. Only a few North American refineries have the requisite equipment to process large volumes of this type of oil. Several inland refineries in the U.S. Midwest also have the capability, but Canadian production is beginning to exceed demand there. (Unlike the United States, Canada is a net exporter of oil, and domestic oil consumption is unlikely to increase anytime soon. Though it is looking to diversify its client base, Canada currently only exports to the United States.) Logically, Canada's next options are the refineries along the Gulf of Mexico. But, as with Bakken oil, constraints in pipeline capacity preclude most of Canada's oil from reaching this region. With the U.S. government still deliberating the Keystone XL pipeline, Canada is building out its rail on-loading infrastructure in Alberta to move the oil by rail instead. The first terminal became operational in December 2013, and by 2015 it is projected to have a capacity of around 830,000 barrels per day -- roughly the same capacity as Keystone XL.

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