In Moving US Oil, 'Flexible' Rail Bests Pipelines

Justin Sullivan | Getty Images

A Burlington Northern Santa Fe train sits idle at the Port of Oakland.

Efforts to build more energy pipelines in the United States, which is producing oil and gas at a breakneck speed, remain mired in fractious debates over politics and cost – none of which are likely to change anytime soon.

But given the efficiency of transporting crude by rail, the problems that ensnare pipeline development may not matter in the long run.

When shipping crude across the country, it's a common assumption that pipelines are quicker and more efficient than ground transport. Energy market experts, however, say the reverse is true: Rail moves crude at a faster pace than pipelines.

"Pipeline is the cheapest way" to transport oil, Charles Blanchard, fossil fuels analyst at Bloomberg New Energy Finance, said in a recent interview. However, "there's another argument that says rail is more flexible," which is important for the shale market, because shale formation output tends to drop off quickly. Those producers need to move their oil now, while their wells are still pumping big volume.

The Reach of Rail

According to data from BNSF Railway, crude travels at 15-20 miles per hour on a train, compared with 4-5 miles per hour via pipe.

But it's not the speed that matters to oil producers so much as the existing reach of rail networks. The U.S. has 566 freight railroads that traverse more than 138,000 miles, according to the Association of American Railroads data. Some experts argue that that sprawling infrastructure makes the industry better equipped than pipelines to reach far-flung regions like North Dakota's shale hotbed, the Bakken formation.

To be sure, rail comes with risks. Much like pipelines and tankers, trains can leak, creating environmental hazards. Rail cars are also prone to unexpected derailments, particularly when the weather is bad. Last month, a CSX train hauling a chemical payload hit a truck and ignited near Baltimore.

But because the U.S. railroad system is far more expansive–and less subject to the pitched political and regulatory battles that can hamstring pipelines–Blanchard says oil producers are more favorably disposed to the flexibility offered by rail.

With shale oil wells subject to sharp declines after the first year of production, "there is hesitance among producers to come to multi-year deals. That's what a pipeline guy wants," he said.

Meanwhile, delays in projects like the Keystone XL pipeline have forced energy producers to adapt to the immediacy of transporting U.S. crude by rail. This week, Cenovus Energy, a Canadian oil company with several U.S. refineries, announced that it would dramatically increase the amount of oil it ships via train, from 6,000 barrels to 30,000 by the end of 2014.

Pipes "have high barriers to entry, large commitments to make piplines grow, a short list of companies that can back them and a long lead time to construct them" said Richard Dembicki, Cenovus' director of crude oil marketing, in an interview.

By contrast, freight trains "are easier to contract usage and expand…and have the ability to target higher value markets," he said.

Still, both methods of transport have their uses, Dembicki added. "We think of rail as being very complimentary to pipe, that's why we're creating that expanded capability."

A modestly sized pipeline can transport 150,000 barrels per day, according to the Association of Oil Pipe Lines. That volume would require a minimum of 225 rail cars to transport, or 750 tanker trucks, the AOPL says on its website. The association also touts the "environmental and safety benefits" of pipelines – which carry more than 11.3 barrels of petroleum a year interstate – including less air pollution, lower spill rates, and lack of congestion on roads and rivers.

"Rail does have short-term benefits, which are flexibility to meet new production locations quickly and their existing rail network in the heartland," John Stoody, AOPL's director of government relations, in an email to CNBC.

"That said, the overall volumes on rail, while growing, are still a small percentage of pipelines," he added. Rail shipments from Canada to the US, Stoody said, are projected to be "only one fourth of the volume carried by a major pipeline like Keystone XL" -- a fraction of the 6.7 million barrels of Canadian oil per day expected by 2030, he added.

The "explosive growth" in U.S. energy production–and the relative attractiveness of rail–has allowed companies like Valero Energy to migrate from port-to-port oil tankers to trains instead, said Bill Day, a Valero spokesman.

"Rail is much more flexible getting supplies from one area to the other," he said. Although he cautioned that pipelines also are useful, Day cited their cost, and lashed out against the "horrific political questions" that hamstring projects like the Keystone XL pipeline.

"With all this new production of U.S. crude, we will need pipelines and rail deliveries," Day said.