As the first quarter of 2013 draws to a close, I thought it would be a good time to take a step back and reflect on what's happened in the energy industry so far this year. It's been an eventful first quarter, with several themes continuing to emerge. However, three story lines are becoming what I believe to be the biggest stories in energy.
Buffett was right about the rails
When Warren Buffett's Berkshire Hathaway bought Burlington Northern Railroad, some thought he'd lost his mind. We all know that railroads ship coal, and that's not exactly a favorite fuel these days. However, as is so often the case, Buffett was right.
However, it's not coal that's driving profits at the rails; its oil. Because of pipeline constraints coming out of the Bakken and the Canadian Oil Sands, producers have turned to the rails to get the oil to market. Not only has that fueled profits at for railroads, but it's also really helped to pad the bottom lines of refiners.
Despite the higher shipping costs, refiners love rail because they can access cheaper North American crude oil. Phillips 66 is one of the biggest champions of crude oil by rail, recently signing several deals to have cheaper crude delivered to its East and West Coast refineries. It's using all means possible to get oil to its refineries, with rail being a key cog in the supply chain.
Expect this theme to continue to pick up steam in the coming years. It costs billions to build new pipeline infrastructure, and if the Keystone XL is any indication, it will take some major political maneuvering to get new pipeline routes approved. That just means more crude oil will be taking a ride on the rails.
The Bakken is still beautiful
One of the reasons the rails are doing so well is that the Bakken is producing more oil than our current pipeline system can handle. Top Bakken oil producer Continental Resources saw its production jump 58% in 2012. That's just the tip of the iceberg for the company, as it expects production to grow threefold by 2017. President and COO Rick Bott sums up the story pretty well:
"We've recently seen a significant improvement in Bakken oil price differentials, reflecting higher volumes being shipped by rail to the coasts and the anticipation of increased pipeline capacity. ... We now have excess transportation capacity in both pipe and rail, and, with additional infrastructure projects in the planning and construction stages, capacity should remain ahead of Bakken production growth."
This is good news for continued growth in the region, and Continental isn't the only one enjoying this growth. Smaller producers such as Kodiak Oil & Gas have seen triple-digit annual production growth since 2010. That's driving massive growth for the company, and wealth creation for its shareholders. Kodiak's shares are up more than 400% over the past five years.
Overall production in the Bakken has grown from 275,000 barrels of oil per day in January 2011 to 700,000 barrels of oil per day by the end of last year. The industry believes that it should be able to drill 30,000 more wells into the formation. Some think the Bakken could produce more oil on a daily basis than Texas' 2 million barrels of oil per day.
The deepwater has been delightful
As good as it was in the Bakken, last year was the best ever for deepwater discoveries. Even with that, 2013 is already shaping up to be quite a good year on its own, as just this month ConocoPhillips and its partners announced two major discoveries in the Gulf of Mexico. The industry finally appears to have moved past the devastation of the BP disaster, as the Gulf is one of the hottest growth areas for oil exploration.
Earlier this month, the U.S. Bureau of Ocean Energy Management auctioned off $1.2 billion worth of parcels in the Gulf of Mexico. According to U.S. Interior Secretary Ken Salazar, the "sale reflects strong, continuing interest in the Gulf of Mexico." In total, 52 companies submitted 407 bids on 320 tracts of land covering 1.7 million net acres. The top bid was an $81.8 million bid by Statoil for one single lease. Statoil won a total of 15 of the oil exploration leases, and the company now controls 340 oil leases in the Gulf. However, Statoil's big bet is but one example of the vast amounts of deepwater exploration growth around the world.
The Foolish bottom line
The energy industry is off to a great start in 2013. Look for these stories to continue to gain momentum throughout the year. At some point, this will all begin to trickle down and have a greater impact on the economy.
Right now, investors are feeling most of the benefits. Phillips 66 investors, for example, have seen their shares double in value since the company was spun off from ConocoPhillips less than a year ago. That being said, we're still in the early innings of the oil and gas boom, so there's still time to profit from this revolution.
One of the great stories is Kodiak Oil & Gas. This dynamic growth story offers great opportunities, but with those opportunities come great risks. If you're curious to hear more of the story and to find out whether Kodiak is currently a buy or a sell, you're invited to check out The Motley Fool's premium research report on the company, which comes with a full year of updates and analysis as key news breaks. To get started, simply click here now.
The article The 3 Biggest Energy Story Lines of 2013 originally appeared on Fool.com.Fool contributor Matt DiLallo owns shares of Phillips 66 and ConocoPhillips. He also has long January 2014 $70 calls and short June 2013 $92.5 calls on Berkshire Hathaway. The Motley Fool recommends and owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.
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