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If It Has to be Shipped, Use Rail

December 13, 2012 By Will Nissen, Fellow

A healthy U.S. economy depends on a healthy American rail system that effectively and efficiently moves freight nationwide. But that system, particularly in the Upper Midwest, is experiencing an important shift in its role of transporting energy resources.

As our energy generation infrastructure gradually moves away from coal-fired power plants, and as oil and natural gas production skyrockets, railroad companies in the U.S. are quickly adjusting to these shifts through changes in investment, shipping and routing choices.

Recently, Canadian Pacific Railway announced that it will forego plans to build new track in northeast Wyoming and southeast Montana intended to expand access to the coal-rich Powder River Basin deposit, taking a $180 million loss. The company cited decreasing demand for coal as the primary reason for the move, but Canadian Pacific is also undergoing significant restructuring as it plans to layoff about 4,500 of its 19,500 employees by 2016. Minneapolis is home to Canadian Pacific’s U.S. headquarters and the company currently employs roughly 1,600 people in Minnesota.

This move is indicative of a broader trend in the rail industry. Coal shipments by rail in the U.S. have dropped 10.5% since the beginning of this year, while traffic for petroleum products has risen 45.2% in the same time. In absolute numbers, the country still ships over 11 times the amount of coal than petroleum products, but this trend is significant and reinforced by actions at other rail companies.

In September of this year, BNSF Railway announced that it expanded its capacity in western North Dakota and eastern Montana to ship one million barrels of oil per day from the Williston Basin. The basin is home to the huge oil boom happening in the Upper Midwest, and BNSF has seen the volume of oil shipped from the area increase from 1.3 million barrels in 2008 to 88.9 million barrels in 2012.

One major catalyst for this increase in rail shipping in the region is a shortage of other methods of transportation, namely pipelines. Once built, pipelines can be an inexpensive and efficient way to transport oil across distances. But they have limited capacity, are inflexible to changes in demand markets, take years to build, and often need decades of production to finance construction costs. A $1.8 billion project to pipe oil from North Dakota to refineries in Oklahoma was recently scrapped and in general there is not a “mad rush yet to build new pipelines” according to one industry analyst.

Meanwhile, the oil keeps gushing in North Dakota and rail companies have jumped at the opportunity to provide the main means of getting that oil to market. BNSF has invested almost $200 million this year and has hired over 560 new employees to improve its track and increase shipping capacity.

So, is rail a better means of transporting oil and gas than pipelines? Ultimately, reducing our demand for these products is the optimal solution so we can invest our country’s resources into more sustainable enterprises. But if that oil is coming out of the ground, rail offers a more fuel and cost-effective transportation method than trucking and allows for more destination flexibility than fixed pipelines.

Although it looks like the Williston Basin will produce large amounts of oil and natural gas for some time, the fluctuating markets demanding that oil and gas will change continually over time. This will require the flexibility in shipping varying volumes to the West Coast, Gulf area and East Coast that rail can provide over pipelines.

Rail also carries an extremely diverse range of products throughout the country, and investments made in our rail infrastructure to ship oil and gas can benefit the effectiveness and efficiency of shipping other products. For example, Minnesota shipped over 65 million tons of iron ore and farm products by rail throughout the state and beyond in 2010, roughly 75% of total freight shipped, and has over 4,000 freight railroad employees. Improvements made to Minnesota’s rail system to ship North Dakota oil and gas to rejuvenated refineries on the East Coast can benefit these industries.

In the long term, we need to build a future where we no longer need to extract oil and natural gas for our energy needs. Constructing pipelines that financially and structurally commit us to that endeavor for decades is not the right move forward. Moving those products via rail gives us the flexibility to better control our energy future.

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