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The equivalent of hundreds of thousands of barrels of oil a day will soon be moving from western Canada into the U.S.—even if the controversial Keystone XL Pipeline is never built. The energy industry is moving full steam ahead to move crude on rail cars—a fast growing business, booming along with increased North American oil production and already responsible for moving most of the oil out of the Bakken region in North Dakota.

Canada's railroads, Canadian Pacific Railway Ltd and larger Canadian National Railway Co both report expanded oil shipments this year and both expect demand to continue to grow. Canadian Pacific told investors it expects shipments of 85,000 to 90,000 car loads by the end of the year. A spokesman for Canadian National said the railroad expects to see 60,000 carloads this year, double last year's level.

As the U.S. contemplates the merit of the stalled Keystone pipeline project, which would take Canadian oil to U.S. Gulf Coast refineries, rail companies in Canada have been moving quickly to add capacity in five major projects. By the end of next year, rail loading capacity could grow enough to handle 700,000 barrels of crude a day from the oil sands region in western Canada, according to IHS data. Trains currently carry just 150,000 barrels from there, and more than 450,000 barrels a day could be riding the rails by the end of next year.

"It's important because access to the Gulf Coast is really critical for oil sands producers, but there are other options to get there. The supply will come on at a similar rate in the longer-term because we think other pipeline options and/or rail will get the crude there," said Jackie Forrest, IHS director of global oil.

Keystone is designed to carry 830,000 barrels per day. If the pipeline is not built, IHS expects to see 700,000 barrels moving by rail by 2016. Rail transport could peak at 500,000 to 600,000 if TransCanada's Keystone and another Enbridge pipeline project, which does not need State Department approval, are put into operation, because of expected growth of oil sands production. Analysts say oil sands production has been slowed by the lack of transport but rail is helping to change that. "The pipelines that are out there have regularly been on allocation. It's like an over-subscription of oil, and we know the Canadian government has been trying to actively get a pipeline built to the west but they've so far been unable because there's resistance by Native groups," said John Kilduff of Again Capital. "Now, they're looking east—to a pipeline that would transport it to the East Coast." Analysts say rail faces fewer obstacles than pipelines, even with the safety concerns raised by the fatal accident last summer when an unattended oil train broke away, running into a small Quebec town, killing dozens in a night club. (Read more: The other Keystone battle: US landowners vs Canadian company) "There's already new regulations in Canada that you can't leave these trains unattended, and I expect there'll be more regulations, but I don't expect it to halt the growing use of shipping crude by rail," said Andrew Lipow, president of Lipow Oil Associates. The cost of shipping oil in the U.S. by rail is about $4 to $5 more expensive per barrel than by pipeline, and shipping oil by rail from the Canadian oil sands to the Gulf Coast would be $7 to $8 more expensive per barrel, Lipow said. But Lipow said the capacity for rail shipment out of western Canada is rising quickly and the numbers keep getting bigger. "My number is 550,000 barrels a day between now and the end of 2014," he said. In the U.S., rail traffic has also increased dramatically as a way to get land-locked crude out of production areas that have inadequate pipeline service. Lipow said in the second quarter of 2013, 109,000 car loads of crude were loaded by class one railroads in the U.S. In 2011, the second quarter shipments were 12,000 and in 2009, there were just 2,500 second quarter car loads.

Planned Rail Movements

Just last week, Exxon Mobil told analysts it is looking into the construction of a rail terminal in Edmonton to transport its oil sands output. Exxon is partnering with Imperial Oil Ltd on the Kearl project, currently producing 100,000 barrels per day and expected to grow to 220,000 by 2015 and max out at 345,000 barrels a day by 2020.

David Rosenthal, Exxon senior vice president of investor relations, said the company has been anticipating using pipelines including the Keystone to transport its crude. "But, as would be prudent, we are looking at other options, including evaluating a project to build a rail terminal in Edmonton and then move some of that crude out of there into the Lower 48 by rail. And we're in the process of evaluating that opportunity and we'll have more to say on that in the future," Rosenthal told analysts after the company reported earnings. "We're very fortunate in that we have a very good logistics optimization opportunity and network and a lot of avenues for us. But we are actively working on all of the alternatives that are available to us to move that crude into market and get the maximum value for those molecules."

Alan Jeffers, a spokesman for Exxon, said the company would like to see Keystone built. "It's important," he said, adding the company has enough transport for what is currently produced at Kearl but is looking to the future. Also last week, Suncor said it was reviving the Fort Hills joint venture in northern Alberta. The $13.5 billion bitumen project was put on hold during the financial crisis and is expected to add 180,000 barrels a day of production by the fourth quarter of 2017. (Read more: Conoco mulls exporting Alaskan oil to Asia) Oil by rail has grown so fast and become such an available alternative, despite its higher cost, that U.S. officials are now studying whether shipment by rail is a viable alternative to the Keystone Pipeline project, according to a report by Reuters. (Read more: )

The fate of the controversial pipeline lies at the State Department, which is determining whether the pipeline serves U.S. interests or hurts the environment. A final environmental study on climate change impact is awaited, and some industry officials expect it by spring. It would then go to eight other federal agencies for a 90-day comment period.

"We do not comment on any of our analysis while it is ongoing," said a State Department spokeswoman. "The department continues to conduct a rigorous, transparent and objective review." She also said there is no timeline for the study. The stretch of Keystone pipeline, which is opposed by environmentalists, would send oil from Alberta, through Montana, across South Dakota and Nebraska, to the Cushing extension in Kansas and then south into the southern leg of the Keystone and on to the Gulf Coast refining area.

"The State Department is trying to evaluate whether the Keystone XL Pipeline is going to materially affect greenhouse gas emissions. Now the pipeline by itself, running some pumps is not creating greenhouse gases," said Lipow, adding the same cannot be said for the train transport. Kilduff said the way that the heavy bitumen, produced from the oil sands, is processed with natural gas is a main objection for environmentalists. "That's the crude's carbon kicker," he said.

