Keystone pipeline won't stop railroads' oil, natural gas business, API economist says

By Julie Sneider, Assistant Editor

Construction of the Keystone XL oil pipeline proposed between Canada's Alberta oil fields and Texas refineries wouldn't end the railroad industry's growing business opportunities in the oil and gas industry, says John Felmy, chief economist at the American Petroleum Institute.

Felmy, who grew up around the New York Central Railroad while living in Pennsylvania's Pine Creek Valley, recently spoke to ProgressiveRailroading.com about comments he made to the Minnesota Regional Railroads Association (MRRA), which invited him to talk about the continuing business prospects for railroads as a result of the natural gas and crude oil boom in the United States.

Because drillers in the United States and Canada are producing oil faster than pipelines such as the Keystone can be built, railroads have picked up the slack to move more carloads of that oil to refineries than ever before. It's a course that North American railroads are expected to pursue for at least the next several years. Felmy says he doesn’t believe the business relationship between his industry — which backs the Keystone’s construction — and the railroads would stop if the Obama administration ultimately approves the pipeline.

"Clearly the Keystone pipeline will focus on shipping oil from Canada to North Dakota to the Gulf," he says. "But, our refineries are everywhere. We have refineries on the East Coast that are interested in using the high-quality Bakken crude oil. And the only way you will effectively get there is by rail for a while because there isn't a pipeline network. So, I think [railroading] will fit in well in terms of all of our shipping aspirations."

Felmy marvels at the rapid expansion of business ties between his industry and railroads in recent years, as the energy sector has ramped up exploration and drilling for natural gas and crude oil in U.S. shale plays and Canada's Alberta oil sands. He recalls having conversations with railroad executives not too long ago when the "only increase in business I saw was the shipping of ethanol," he says.

"Five years ago we [the United States] were talking about importing natural gas — not producing it here and potentially even exporting it — so, it's really been a game-changer in terms of how fast this [horizontal drilling and fracking] technology came on line," says Felmy.

The notion that North Dakota could jump from a relatively modest producer of crude oil to the No. 2 state behind Texas "is really a wonderful outcome," he adds.

"If you look forward, virtually all the folks who are forecasting in this area are saying this [trend] is going to continue and will potentially make the United States energy self-sufficient with Canada," Felmy says.

Asked whether last month's deadly crude-oil train derailment and explosion in Quebec would impact of the pace of that trend, Felmy believes that will depend on whether the accident investigators’ findings lead to new government regulations and, if so, what type.

But, he adds: "The need is clearly there to ship this product, so I expect that will continue."