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Shale Boom Riding the Rails to Find Markets

Unlike natural gas, oil can be carried in a bucket -- or in a rail car -- as is increasingly the case in the Bakken Shale, for instance, where the drill bit has gotten ahead of the pipeline, way ahead of the pipeline, in offering oil producers a route to market.

In the Bakken, Marathon Petroleum Corp. has seen its pricing improve in the Bakken "as rail has opened up additional outlets" to overcome some of the many bottlenecks in the pipeline system.

"We have increased our use of rail," Marathon CEO Clarence Cazalot said during a quarterly earnings conference call last Wednesday. "Going back to January last year, we only railed about 5% of our production, and now we're up to 40%. We'll continue to look at [rail] as a good opportunity certainly this year when we think the differential will support that kind of activity."

Cazalot said Marathon will refrain from making a long-term commitment to more rail until there is a "better sense of how overall infrastructure builds out and differentials are impacted." He said Marathon will be ready to ramp up both production and rail transportation when and if it "sees the right conditions" in the Bakken.

Marathon is not alone in riding the rails. "Many believed it was a flash-in-the-pan that would evaporate once new pipelines were built to relieve inland crude congestion," said Sandy Fielden of RBN Energy LLC, who recently wrote about the growing reliance on rail transport in a blog posting.

"However, the signs are that continued increase in crude production will sustain significant crude-by-rail traffic in coming years." In late 2012, 57% of the Bakken production was shipped to market by rail, compared to 33% going via pipeline, the North Dakota Pipeline Authority reported.

RBN has characterized the trend as the "rail express," adding that it has emerged as "one of the biggest U.S. energy developments" of last year.

Railroad transportation of petroleum and petroleum products increased by 46% last year, a sign of the times when shale plays are accelerating production faster than pipeline and other midstream infrastructure can be built to get the bonanza to market.

The Association of American Railroads reported that 200,000 carloads of oil (roughly 350,000 b/d) were moved last year by U.S. Class 1 railroads. "That's a 300% increase from 66,000 carloads (117,000 b/d) shipped by rail last year," Fielden said.

It's not necessarily a trend you can bank on long term, however. Some industry shippers also have pointed out that high price differentials due to the constrained shipping situation were spurring the use of rail, so it will only continue as long as the high differentials do

"Differentials have to remain high and be seen to be remaining high in order for rail to continue to be viable," Enbridge's Stephen John Wuori, president of the liquids pipeline business, commented last fall. "No one is building new track. You hear a lot about loading facilities and unloading facilities and rail cars being welded together, but nobody's building much new track (see Shale Daily,Oct. 5, 2012).

For now the differentials are holding. According to RBN's Fielden the boom in rail will continue this year with rail unloading capacity of about 1 million b/d being added. The capacity being added was characterized as three times the shipping levels at the beginning of 2013.

With the advent of more oil and natural gas liquids being shipped by rail, RBN Energy said it was starting a series of reports looking at the railroad sector this year.

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