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Smart U.S. Oil Money is on Rail

U.S. oil production is breaking records standing for more than 20 years. With the International Energy Agency suggesting the boom won't last, smart investors will get behind rail as the delivery tool of choice.

The U.S. Energy Information Administration expects domestic crude oil production by 2016 will be close to the 1970 record of 9.6 million barrels per day. In November, U.S. oil production of 8 million bpd was the highest monthly total in 25 years.

Similar trends are developing in Canada and there aren't enough pipelines in service to keep up with production gains. Energy companies instead are turning to rail to get their crude oil to market.

Related article: Canadian Arctic Port Presses Forward on Oil Exports

The Association of American Railroads said delivery of petroleum and petroleum products in the United States increased 18.6 percent for the week ending Dec. 7. That's about 1 million barrels of oil. For the year, 465 million barrels of petroleum and petroleum products moved on the U.S. rail system so far, a 32 percent increase from 2012.

By Wednesday, Dakota Plains Holding, an oil transit company working in the Williston basin of North Dakota, said it expects to have a new rail terminal up and running in the state's Mountrail County. Its Pioneer Terminal expansion project will feature 180,000 barrels of oil storage capacity and eventually have 8,000 bpd in takeaway capacity.

"With price spreads and throughput volumes at their current high levels, and with our newly expanded Pioneer Terminal soon allowing higher throughput volumes, we believe we will be well-positioned for profitability as we move forward," Chairman Craig McKenzie said in a statement.

And he's not alone. BNSF said it's invested $4.3 billion in its rail capacity in the United States this year. More than $200 million of that was allocated to the North Dakota rail system in August. Downstream, Philadelphia Energy Solutions said most of the Bakken crude oil processed at its Pennsylvania refinery comes by rail.

The North Dakota Industrial Commission said oil production in October, the last full month for which data is available, was 941,637 bpd, an all-time high. NDIC Director Lynn Helms said production would've been even higher, though autumn rains closed down some of the roads leading to work sites.

Related article: Is a final Decision on Keystone XL Close at Hand?

With a design capacity of 830,000 bpd, the Keystone XL pipeline is meant to help get some of the new North American crude oil to regional refineries. Facing widespread opposition and years of delays, however, one of the committed shippers is getting cold feet, saying the project isn't needed.

The IEA said last month North American oil production starts to decline in the 2020, suggesting any shipper commitments for pipelines, planned or otherwise, may be for naught over the long term horizon. For North Dakota, the No. 2 oil producer in the country, rail is enough.

"Crude oil take away capacity is expected to be adequate as long as rail deliveries to coastal refineries keep growing," the NDIC director said.

By. Daniel J. Graeber of Oilprice.com

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