North Dakota surpassed Alaska this year as the number two oil-producing state. It's thanks to fracking—the extraction of oil from the state's Bakken Shale formation. But all that oil would be stuck in the Midwest without trains. (See related photos: "Bakken Shale Oil Boom Transforms North Dakota")
"Rail is cool again," said Rusty Braziel, an energy analyst at RBN Energy.
U.S. railroads have seen the number of cars filled with petroleum products jump 44 percent in the past year. A large share of that traffic starts in North Dakota, where more oil is being transported by rail than by pipeline. That might be expected until more pipelines can be built. More surprising is that shipping by rail, which is costlier than pipeline transport and raises new environmental concerns, may become a fixture of the industry and not just a temporary fix, analysts say.
And it's not just North Dakota that's becoming an oil-train hub. A new combination of drilling and extraction technologies has oil gushing from out-of-the-way fields from South Texas to Alberta, Canada. With few nearby pipelines, drillers flush with petroleum turned first to expensive trucks, then to trains as they sought to move their product to market.
Indeed, oil trains—a throwback to the earliest days of the petroleum industry—have become key to exploiting the North American oil boom, which has the U.S. on track to lead the world in oil production within five years. (Related: "U.S. to Overtake Saudi Arabia, Russia as World's Top Energy Producer")
Railroads helped John D. Rockefeller build his Standard Oil empire at the dawn of the petroleum age. But ever since the first successful oil pipeline was built in Pennsylvania in 1879—an effort by Rockefeller's competitors to break his monopoly—it became clear that pipes were a cheaper and quicker way to transport oil. Rockefeller soon gained a stake in that inaugural pipeline, and hastily built his own web of conduits from the nation's first oil region. When oil production shifted to Texas and Oklahoma, pipelines rapidly connected the new production hub to the rest of the country.
As oil development spread around the world, huge crude tanker ships became an integral part of the system for delivering petroleum. But the flourishing U.S. shale-oil prospects are far from the sea.
Pipelines would be the obvious choice for transporting oil from landlocked North Dakota. They remain the cheapest and easiest way to move oil over land, said Donald Broughton, a stock analyst at Avondale Partners. But pipelines are expensive to build and can require decades of production to justify their cost to financiers.
Meanwhile, it's unclear how long the new hydraulic-fracturing technology, known as fracking, will work on these new shale-oil fields, Broughton said. (Related Interactive: Breaking Fuel From Rock)
Some analysts are pessimistic, warning of a rapid decline after the initial gush of oil; others believe shale can be fractured repeatedly, with numerous close wells guaranteeing years of production. In any case, the petroleum industry doesn't have 100-plus years of experience to estimate the yield of these unconventional wells, as it does with traditional wells. "There is not a mad rush yet to build new pipelines," Broughton said.
As a result, companies have made massive investments in oil-related rail infrastructure in the past three years, including a dozen oil-loading terminals that serve the Bakken alone. They include the Bakken Oil Express, a complex of four long loops of rail. This allows 100-car trains, more than a mile in length and usually entirely dedicated to oil, to coil around compactly as they pass a loading station.
"These are very substantial investments. We expect rail to be a player for a long time," said Steve Magness, the terminal's general manager.
BNSF Railway ships the bulk of oil out of the Williston Basin, which holds the Bakken formation. Over five years, the railroad saw oil shipments soar 7,000 percent, to 88.9 million barrels, the company reported in September. Union Pacific (UP) and Canadian National Railway are other major beneficiaries.
"The hot sexy thing right now is the energy business in North America," Bob Noorigian, a vice president at Canadian National Railway, recently told analysts.
Nobody seems more surprised at the fast growth than the railroads themselves. "We went from people thinking, 'That can't be,' to 'Let's give it a try,' to 'This is real. Let's really focus,' " Canadian National CEO Claude Mongeau told analysts.
Losing Coal, Gaining Oil
Oil remains a relatively small part of the railroad business, perhaps 5 percent. But it is the fastest growing—and it happens to be lucrative.
Oil and oil-related products, in fact, are helping to save some railroads from the financial upheaval they otherwise might be experiencing because of another major development in the energy world. Coal has long been a mainstay of the American railroad business. But electric utilities are now shifting to cheap natural gas.
The change is hurting railroads in the East, but those with tracks that traverse the oil-prospecting Great Plains are benefiting. While Union Pacific's revenue from coal fell $100 million in the first three quarters of this year, that was more than offset by a $300 million increase from hauling chemicals, including oil.
UP's most recent quarterly report shows that average revenue from a carload of chemicals, a category that includes oil, is nearly 50 percent higher than the roughly $2,000 that's earned from a car of coal.
"Our energy-related car loads today are about the same as . . . before the recession—despite the sharp falloff in our coal volumes," said Chief Financial Officer Rob Knight of Union Pacific at an analysts' conference.
It's not just oil that's making money for the railroads. They're also seeing big shipments of drilling supplies, including steel pipe used in drilling and sand used to help dislodge oil from the new formations. Drillers pump the sand with water and chemicals to break up rock and free oil for pumping.
A New Spill Risk
Environmentalists have criticized the fracking technology that has brought the boom to North Dakota, citing potential groundwater pollution and other concerns. They also look warily at oil traveling on railroads. Pipelines can be built to avoid population centers and fragile ecosystems, while trains travel over routes where such concerns were not weighed, said Wayde Schafer, a North Dakota-based spokesman for the Sierra Club. "The trains travel through sensitive areas, and right through the middle of many towns," he said—including two blocks from his office in downtown Bismarck.
Railroad executives, however, say any spill from their trains would prove minor in contrast to a pipeline spill. "If you have one railcar that gets punctured, it is 600 barrels that might spill," Canadian National's Mongeau said, "nothing like what could happen if you have a spill with a pipeline."
But train accidents often do more than puncture a tank car. Ethanol train accidents, for example, have resulted in multiple car derailments that have sparked massive fireballs. In one of the worst cases, in Cherry Valley, Illinois, in 2009, a derailment of 13 ethanol cars and resulting fire killed one person at a rail crossing and injured seven others, led to the evacuation of 600 homes, and caused $8 million in damages.
Of course, tens of millions of gallons of ethanol move by rail each day without incident, but hauling the flammable grain alcohol by train is a necessity because there are so few pipelines to transport the alternative fuel. In any case, the increase in oil train shipments from the Midwest have state officials as far away as Maine reviewing their spill readiness plans.
But for the oil shippers, the benefits of railroads may outweigh any of the added costs. Some thicker oils, such as those from the Canadian tar sands, require diluting agents to keep moving through pipelines. There's no need for that when such oils are transported by train. So even while controversy continues to rage over the Keystone XL pipeline that would transport oil from Alberta through the United States to Texas, Canadian producers are boosting their oil shipments by train. (Related Photos: "Animals That Blocked The Path of the Keystone Pipeline") Canadian National's Mongeau predicts railroads will remain competitors even if new pipelines are built.
Rail also allows the oil producers to add and subtract shipping capacity—the number of train carloads—quickly, and to pick and choose the most lucrative markets.
This summer, for instance, North Dakota producers shipping by rail could send their crude directly to the East Coast or Gulf Coast, where it sold at higher prices than if it had been transported by pipeline. The price for oil shipped by pipeline in the Midwest is depressed because too much crude is flowing into Cushing, Oklahoma, where pipelines converge. "There's been a real logjam in Cushing," said Braziel, of RBN Energy. "The darn thing about pipelines is they only go from one place to another. Railroads go just about anywhere."
For those shipping from North Dakota, that happens to be true, because of tracks laid down in the late 1800s to move wheat from the bonanza fields of the Red River Valley. At the turn of the century, North Dakota had three times as many railroad miles per capita as did the rest of the country. The state now has about 3,700 miles (5,955 kilometers) of track, down about 30 percent from the rail system's peak in 1920. But around the state, long-abandoned tracks are being refurbished by the oil industry. Those tracks, built to deliver grain to a growing nation, now feed the nation's far-flung demand for fuel.
The East Coast oil-refinery business, nearly driven into oblivion by the high cost of importing foreign oil by tanker, has found a new lease on life buying North Dakota oil at far lower prices. (Related: "With Gas Prices High, U.S. Refinery Closures Hit Workers and Drivers") In South Philadelphia, the oldest continuously operating refinery in the United States is now beefing up rail yards that accepted oil shipments in Rockefeller's day. A private equity fund, the Carlyle Group, plans the refinery's revival around crude from booming shale fields 1,800 miles away—at least two trainloads a day.