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TransCanada Corporation (TRP), Canadian National Railway (USA) (CNI): How to Profit From Pipeline Gridlock

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“Hey! Hey! Ho! Ho! The Keystone pipeline got’s to go!”

That was a protest chant from a march outside Washington D.C. where environmentalists called on President Obama to reject TransCanada Corporation (NYSE:TRP)’s Keystone XL pipeline earlier this year.

While North America is in the midst of an energy boom, politics is preventing the construction of desperately needed pipelines to move crude from well head to market.

And that’s creating a massive opportunity for these companies.

TransCanada Corporation

The opportunity

Rapidly growing energy production from the Alberta oil sands and the North Dakota Bakken is overloading current pipeline capacity and surpassing the price of Canadian crude.

Several proposals have been given to alleviate this problem. Most notably is TransCanada Corporation (NYSE:TRP)’s Keystone XL pipeline. If given the okay, Keystone XL would add 830,000 b/d of new capacity and allow Canadian oil producers the ability to access Gulf coast refiners.

But the project is in political limbo with critics pushing back on environmental concerns. While TransCanada Corporation (NYSE:TRP)’s new route proposal was approved by the state of Nebraska, the project is still waiting approval from the U.S. State Department.

Other projects have been proposed to move Canadian crude west and access Asian markets such as Enbridge’s Northern Gateway and Kinder Morgan’s Trans Mountain pipelines. But these too face objections due to environmental risks.

So address this problem, energy producers are increasingly turning to rail to move product.

According to Stats Canada, 12,970 rail cars were loaded in February transporting fuel oil and crude petroleum. That’s more than double the number of carloads just two years earlier and that figure is projected to double again in 2013.

The rail advantage

Historically, shipping crude by rail was too expensive to compete with pipelines. But railroads have several emerging competitive advantages:

Infrastructure: Extensive rail infrastructure is already in place allowing producers to reach any market on the continent that has a unloading facility. That means fewer political obstacles to add transport capacity.

Convenient: Shipping heavy bitumen by rail requires less diluent which represents a big cost savings for producers. Rails also allow for higher sulfur content than pipelines.

Quality: Refiners have greater certainty regarding the quality of oil received as there’s less mixing with other batches during transport.

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