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As energy companies continue to invest in shale resources, transportation companies rush to keep crude flowing out

August 23, 2012

Oil and gas producers show no signs of slowing down drilling activity in shale formations across the country. However, without pipeline infrastructure in place to quickly transport those resources to refineries, companies have turned to a more traditional mode of transportation — rail.

Most of the country’s shale plays are located in remote areas, including the Eagle Ford Shale in South Texas and theBakken Shale in North Dakota. Therefore, there are fewer options for transporting the oil and gas.

Instead of building expensive new pipelines, which take a long time to construct, many companies are opting to truck oil and gas to existing rail lines, but are finding that they need to build new rail terminals and purchase new rail cars. Rail companies also need to invest in new resources to accommodate the increase in traffic.

Multiple Houston-based energy companies, including Enbridge Energy Partners LP (NYSE: EEP), Kinder Morgan Energy Partners LP (NYSE: KMP) and Musket Corp., have already spent millions in rail terminal investments to move oil and gas from trucks to rail. Rail lines, such as Union Pacific Corp. (NYSE: UNP), in turn are investing across Texas to make their railways more efficient.

Phillips 66 (NYSE: PSX) CEO Greg Garland said during a June energy conference that the company is considering purchasing up to 2,000 new rail cars to move Bakken crude oil east and west, since the company is currently transporting about 100,000 barrels a day, and it expects this number to continue to increase.

“Rail projects can go in quicker than pipeline projects, and right now there is a shortage of pipeline infrastructure out of (the shale plays),” said Mike Moeller, director of Enbridge Pipelines in North Dakota, where the company is investing about $160 million in rail projects.