If you’re an investor looking for new venture territory, consider the rail industry—especially train companies that move oil.
The Wall Street Journal reports a monthly increase of 78,000 barrels per day coming from Western Canada—reaching a level of 5.7 million bpd by 2025. Even if mainline pipelines such as Keystone XL and Northern Gateway are constructed, there will be an overflow of 600,000 bpd within the next four years.
If the pipelines are not built—and so far there is indication that this may happen—oil transport overflow will increase from 600,000 to over 2 million bpd by 2018 and 3.5 million bpd by 2023.
Currently, Union Pacific Railroad (NYSE: UNP) is serving oil needs in North Dakota, and BNSF Railway Co. upgraded railway capacity to hold one million bpd, as reported by USA Today.
BNSF also ships oil to Chicago where CSX (NYSE: CSX) and Norfolk Southern (NYSE: NSC) deliver to refineries on the East Coast. More train companies may get involved in the oil sector as demand increases.
Since 2009, the railroad oil sector has grown from 10,000 shipments a year to an estmated 200,000 a year in 2012, USA Today reports.
Because oil output is surpassing infrastructure capacity, the need for rail transport will become much higher. Oil from Western Canada, the Bakken Shale, and the American Rockies are some areas that are fueling the need for railway transportation in the next ten years, according to Businessweek. It is cheaper for oil companies to ship via pipeline as opposed to railway, but the current political situation prevents major pipelines from being constructed, and expanded pipeline capacity takes time and money.
Private property, environmental concerns, and government regulation are among many factors preventing major pipelines from being in place. When it comes to oil, rail is currently the best method of connecting the East and West Coasts of America and Canada and the United States.
Western Canadian oil is expected to put Canada on the map as the fourth largest oil extractor by 2025—behind the United States, Saudi Arabia, and Russia—moving up from sixth place, as reported by Businessweek.
The Canadians are itching to connect to the United States and the rest of the world in the oil market, which is why the Keystone XL pipeline, proposed by TransCanada Corp. (NYSE: TRP), is getting so much attention. President Obama is expected to make a final decision on the project later this year.
The project is also facing tremendous hurdles from the environmental community, which believes such a massive pipeline would disrupt wildlife and contaminate wetlands. Republicans in the United States are overwhelmingly supportive of the pipeline, with many Democrats skeptical of the project.
The same applies to Canada. Canada’s conservative government, led by Stephen Harper, is in full support of the pipeline, so much so that the Canadian government sent its own officials to Washington D.C., New York, and Chicago to lobby the Obama Administration in getting behind the pipeline, according to The Guardian.
However, opposition leader and head of the New Democratic Party, Thomas Mulcair, vehemently opposes Keystone on the basis of Canadian job losses, higher energy prices, and harmful environmental impacts.
Mulcair insists on expanding from west to east, within Canadian borders, instead of extending from north to south. Shipping oil to Eastern Canadian ports would keep jobs in Canada—roughly 40,000, to be exact.
However, if Obama approves, not even the opposition leader would be able to stop the majority party from initiating the pipeline process.
Enbridge’s (NYSE: EEP) Northern Gateway is more of a Canadian issue, according to UPI, but the pipeline faces the same opponents and problems from Keystone. And let’s not forget indigenous rights.
An article by Reuters talked about Canadian treaties going back to the 18th and 19 centuries—giving native Canadians a say in what happens in their territories. The same can be said with the United States and the American reservations.
Numerous Indian groups from America and Canada have set up blockades against any kind of pipeline construction. This could also play a role in diverting pipeline plans, and it could take months, or even years, to build around protected lands.
This is all good news for the train industry.
Regardless of what will become of national pipeline constructs, years of legal arguments and stalling are likely for a number of projects as the Canadian and American governments deal with a variety of political footballs.
Frankly, the fate of national pipelines is irrelevant; the oil industry will need to rely on railway transportation regardless of infrastructure. If the pipelines are approved, railway companies can expect less revenue but a stable stream of domestic crude needed for transport. If the pipelines are rejected, or further delayed, the railway sector will undergo a boom from the oil industry.
It is a win-win for investors and railway companies.
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Rail transport may be the safest bet at the moment, but there are risks in using locomotives. According to USA Today, one rail car spill could waste anywhere from 20,000 to 30,000 gallons of oil. And let’s not even get into the amount wasted should an oil train derail.
The environmental and safety consequences would be enormous if a train accident occurred. While oil is not a lethal chemical, it is extremely flammable—something that would prove disastrous if flames became involved in a train accident.
Also, railway oil transportation is not entirely safe from some environmental advocates.
Sierra Club spokesman of North Dakota Wayde Schafer described rail transportation as a “greater of two evils,” according to USA Today, when comparing with pipeline movement.
Wayde, and advocates like him, believe trains that carry oil would endanger nearby towns, water supplies, and wetlands. Schafer even gave subtle support of a national pipeline as possibly being built around environmentally sensitive areas.
As more priority is placed on train transport, there is a higher likelihood of accidents, and this is the case with every industry.
Will the railroad industry have the upgrades and preparations necessary when the oil rail market reaches its peak in the coming years? BNSF has already poured $197 million dollars into upgrades for Montana and North Dakota railways, which is a promising sign.
USA Today also mentioned a study conducted by the Manhattan Institute, which concluded that trains carrying oil are 34 times more likely to cause accidents as opposed to pipeline transports. Though the Association of American Railroads disputes such a finding, they are willing to concede that railway accidents are twice as likely to occur when compared to pipeline transportation.
There are obstacles within the railway industry, but there is time to prepare for the impending rise in demand. Despite potential problems, transporting by train is a quicker solution; oil ports can be set up within a few months. On average, it takes 3-5 years to set up a pipeline because of government oversight and construction.
The train is one of the last bastions of the Industrial Revolution, but it will always be a stable industry, since many companies need their goods transported cross-country.
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