If you're paying much attention to the energy industry you're likely well aware that we're producing more oil than we have in years. You also are probably well versed in the fact that we're actually producing more than our current pipeline and refining infrastructure can handle. That's caused quite a disconnection between the price of domestically produced oil and the globally priced benchmark of Brent crude oil.
Of course, producers and their customers are not taking this lying down. We know they've been increasingly turning to shipping crude by rail. With the release of a new report from the U.S. Energy Information Administration we now know just how big an effect that's had on the railroad industry.
According to the report, crude oil and petroleum product shipments were up 46.3% over 2011, or by 171,000 carloads, to 540,563 in total. That's the largest percentage increase of shipments among all commodities. Despite this, coal still remained tops in total shipments at 41% of all commodity shipments, however, coal shipments did drop 11% from 2011. With that as a backdrop, who's profiting from this growth?
Of course it goes without saying that the railroads are benefiting from the rise of oil transports. Topping the list is Warren Buffett's Berkshire Hathaway (NYSE:BRK-B). The company's subsidiary Burlington Northern Santa Fe is the largest operator of rail lines in the North Dakota region where the Bakken is in play. The company plans to be shipping 700,000 barrels a day by the end of the year.
While Buffett has the Bakken under wraps, a similar bottleneck in pipeline takeaway capacity has hit crude prices from the Canadian oil sands, which also has Buffett smiling. Canadian National Railway (NYSE:CNI) has seen its share of crude coming along for a ride. The company sees its own crude oil shipping business doubling this year to 60,000 carloads, and its building a new terminal in the Gulf region to serve the Gulf Coast refining market.
Speaking of that refining market, those refiners are chomping at the bit to get their hands on this cheaper crude oil. Take Phillips 66 (NYSE:PSX): the company just signed a five-year deal to have Bakken crude oil shipped to one of its refineries in New Jersey. Here's the kicker: That deal adds between $10 and $15 per barrel in transportation costs.
That might sound like a lot, unless of course you consider that the spread between Brent crude and West Texas Intermediate is near $20 a barrel, with Bakken crude fetching a deeper discount. This is giving refiners important access to crude oil that's simply not possible to access given the current pipeline infrastructure. This increased access is juicing margins and increasing the flow of profits. It is making both winners and losers out of companies operating in the midstream space.
The mixed bag for midstream operators
Despite the lack of pipeline takeaway capacity, the success of crude by rail as well as oil glut at Cushing has been having a significant impact on pipeline operators. Enbridge's pipeline system coming out of the Bakken has been underutilized for the past three months. This has caused ONEOK Partners (NYSE:OKS) to put the brakes on its plans to build the Bakken Crude Express after it did not receive sufficient commitments from shippers to proceed. It's estimated that 52% of crude out of the Bakken is moved by rail, and pipeline operators pick up just 38% of shipments.
Of course not all midstream operators are being squeezed. Plains All American Pipelines (NYSE:PAA) has been bulking up its rail business, and late last year it completed the acquisition of several additional crude oil rail terminals. The company now possesses loading terminals in the Bakken, and also unloading terminals on both coasts as well as in the Gulf. Few midstream operators are better positioned to benefit from the rise of crude oil transportation by rail than Plains.
The key Foolish takeaways
Despite shipping costs that can be twice those of pipelines, it appears that crude oil shipments by rail are not just here to stay, but poised to keep growing. This is especially in light of the environmental issues that are raised when proposed large-scale pipeline projects like the Keystone XL reach the national stage. The continued delays of that project make it much less likely that we'll see crude oil pipeline projects out of the Bakken heading toward East or West Coast refineries being proposed any time soon.
That means that well-positioned midstream companies like Plains All American will continue to enjoy success. The rail operators are also likely to keep winning with Canadian National offering investors more of a pure play, especially on Canadian crude from the oil sands. Finally, refiners like Phillips 66 that have secured cheaper crude for refineries on both coasts will enjoy higher profits all thanks to the rails.
Fool contributor Matt DiLallo owns shares of Phillips 66 and has the following options: Long Jan 2014 $70 Calls on Berkshire Hathaway and Short Jun 2013 $92.5 Calls on Berkshire Hathaway. The Motley Fool recommends Berkshire Hathaway, Canadian National Railway, and ONEOK Partners, L.P. The Motley Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.