Analysis: Crude-by-rail carves out long-term North American niche By Nicole Mordant VANCOUVER (Reuters) - In this era of pipelines spanning thousands of miles, the idea of shipping crude across North America in railway cars might seem a quaint throwback to the oil pioneering days of the West. Yet it's a booming business for North America's railroads, and should remain an important niche market for years to come. Shipments of crude by rail in the United States have surged from around 11,000 barrels per day in 2007 to an estimated 340,000 bpd in 2012, according to data from the Association of American Railroads. If rail shipments in Canada are added, the volume could top 400,000 bpd, more than 4 percent of North American crude production and equal to a new, large pipeline. Crude shipments are now the fastest-growing product for several big U.S. and Canadian Class 1 railroads after oil output expanded more quickly than pipeline capacity, particularly in the oil-rich Bakken area of North Dakota. Railroads allow producers to take advantage of a temporary oil price differential by moving crude from inland oil fields to coastal refineries that pay higher prices linked to Brent crude. Pipelines are either full, or don't reach these refineries. "We don't expect for the long term that you're going to see a 300 percent growth in crude oil trends," Union Pacific Corp's Jack Koraleski, chief executive of the biggest U.S. publicly traded railroad, said in an interview. We think we're going to continue to grow the oil business. The rate of growth will slow from its current over-excited pace, but we still think it will continue to be a good business for us. The planned expansions of pipelines like the mid-continent Seaway line in the first quarter of 2013 should displace some rail capacity, as pipelines are a cheaper option than rail. But experts say railways have proved that they can have a lasting role as crude shippers, especially when major pipeline projects such as Keystone XL and Northern Gateway are snarled in politics in the United States and Canada. "Even if the large growth that we have seen over the last few years does subside, rail will continue to be an important part of the total distribution capacity out there, particularly on a flex basis or a peaking capacity basis, because the model has been proven," said Steve Hansen, a transportation analyst with Raymond James in Vancouver. In the Bakken, where hydraulic fracturing has ignited an oil boom, more than half of the 700,000 bpd produced in August was railed, according to the North Dakota Pipeline Authority. BNSF Railway, owned by Warren Buffett's Berkshire Hathaway Inc, is by far the biggest rail shipper in the Bakken, transporting some 40-45 percent of each month's output, according to company estimates. BNSF expects to haul close to 90 million barrels of oil this year, and can maintain, or expand this over time, said John Lanigan, BNSF's chief marketing officer. The prospect of big pipeline expansions doesn't scare him. Over time they are not going to have a pipeline going to every segment of the Bakken... So we believe there is always going to be opportunity to rail as long as there is production in the Bakken," Lanigan said. The Bakken extends from North Dakota into Montana and across the Canadian border into southern Saskatchewan and Manitoba. Even if Bakken crude-by-rail cools, analysts see opportunities elsewhere -- the Eagle Ford Shale in South Texas, the Permian Basin in West Texas, the Utica shale of Ohio and the Canadian oil sands regions in Alberta. Canadian Pacific Railway, which also has tracks in the U.S. Bakken, in July moved up by a year to 2013 its forecast for reaching 70,000 carloads of crude, or 46 million barrels. Using North American railway tracks to ship oil is nothing new. Before 1900, in the days of John D. Rockefeller and his Standard Oil Company, railroads were the chief transport mode for oil before pipelines took over. You look at what pipelines can do in terms of their ability to carry large volumes over such long distances. There is really no alternative to that," said Philippe Reicher, a spokesman for the Canadian Energy Pipeline Association. Depending on the origin and destination of crude, shipping by rail can cost nearly four times as much as shipping by pipeline. For example, it will cost Southern Pacific Resource Corp, a small Alberta producer, $31 a barrel to move its Canadian oil sands-mined heavy crude by rail to the U.S. Gulf Coast, according to company estimates. The comparative pipeline cost would be around $8 a barrel. With the recent near-record premium of Brent prices over the U.S. benchmark West Texas Intermediate (WTI), it is worth it for producers such as Southern Pacific to use rail to ship crude to coastal refineries, while a dearth of pipeline capacity traps oil at the inland storage hub in Cushing, Oklahoma. Some analysts predict the Brent-WTI spread will narrow next year, from 2012 highs around $24, when the jointly-owned Enbridge Inc and Enterprise Product Partners LP Seaway pipeline triples capacity to 400,000 bpd. "It might close the differential to a point where we might not want a rail car," said Brian Ector, a spokesman for Calgary, Alberta-based oil producer and marketer Baytex Energy. Rail boosters also say that railroads can access more refineries than pipelines and adjust volumes more easily. Rail companies usually don't require commitments, while contractual payments are needed to guarantee pipeline capacity. Railroads are loathe to disclose their crude oil revenues, but it is still small, possibly 1-3 percent of total revenue. It is rising, however, and has helped to offset a slump in U.S. coal shipments. "We reached the point in the second half of 2012 where it is becoming material in dollars," Canadian National Railway Chief Marketing Officer Jean-Jacques Ruest said in an interview. Railways are also transporting oil-field materials such as frac sand, clays, rock and pipe, another strong growth area. The rail market is developing more slowly in Alberta than in the Bakken, but some believe the region, the world's third biggest crude deposit, could become the premier crude-by-rail market. "I think Canadian crudes are going to have a much more difficult time in getting to market than we may expect and that's because of the delays in (Northern) Gateway and Keystone," said Byron Lutes, president and chief executive of Southern Pacific, the small Alberta producer. Enbridge's Northern Gateway aims to move oil from the oil sands to the Pacific coast while TransCanada Corp's Keystone XL will link the oil sands to refineries in Texas. Both face stiff political and environmental opposition. Southern Pacific plans to rail its entire output from its northern Alberta-based McKay project to the Gulf Coast. Despite the hefty $31 a barrel transportation cost, Lutes said his company can make a decent return because of Brent-related prices and savings on diluent, which allow the oil sands' sticky, tar-like bitumen to flow in a pipeline. Rail cars can transport bitumen without added diluent. Southern Pacific also sees a new business opportunity sprouting from its choice of rail: it is exploring using the empty rail cars returning from the Gulf to haul diluent back to Alberta, which it could sell to other producers at a profit. Additional reporting by Susan Taylor in Toronto and Scott Malone in Boston; Editing by Janet Guttsman and Mary Milliken