Warren Buffett Doesn't Care About Keystone XL

When TransCanada  (NYSE: TRP  ) first announced its plan to construct the Keystone XL pipeline, I'm sure company executives never thought it would wind up as one of the most polarizing environmental symbols in recent memory. Nor could they have predicted that the approval process would take, well, forever.

The exceedingly long duration of that process has allowed the Keystone XL to grow from a large pipeline to a larger than life feedstock for environmental, political, and economic arguments, and even a conspiracy theory or two. Some have really taken to the notion, for example, that Warren Buffett has a hand in delaying the pipeline project in order to boost his railroad business. The theory is that Buffett is encouraging President Obama into stalling on his decision to approve or deny Keystone XL. If the President does deny Keystone XL, the thinking goes, that is only further proof of Buffett's hold on him. Some of us may think this is a ridiculous theory, but given the power of money in Washington, let's take a closer look anyway.

The theory
The crux of this argument is based on the assumption that if the Keystone XL is not passed, Canadian oil sands producers will have to ship their oil on Warren Buffett's trains. Buffett's Berkshire Hathaway (NYSE: BRK-A  ) became the outright owner of Burlington Northern Santa Fe railroad in 2009. At the time, Buffett said he was placing a bet on the economic future of the United States, implying that when the economy bounced back, rail would be there to profit. BNSF ships everything: coal, grain, chemicals, automobiles. It makes sense its business would improve when the economy did.

The move came after TransCanada had announced the Keystone project and before producers in North Dakota began favoring rail as a transportation method, a trend that didn't really take develop until late 2010, and didn't take off until last year, when carloads effectively tripled year over year.

The reality
A recent report by Reuters highlights the oil by rail phenomenon and the misconception that if Keystone XL is blocked, all of that Canadian oil will find its way into the U.S. on a train instead. The truth of the matter is that moving oil from North Dakota to the Gulf Coast is one thing, but adding 900 miles of rail time to that distance – the distance to Alberta's oil sands – and all of a sudden rail is not particularly economical. Estimates are that it would cost $10 per barrel to transport oil sands via Keystone, and $30 via railcar. This economic reality is probably why, desperate though they are, Canadian producers only moved 25,000 barrels per day by rail in January of this year.

Not only that, but 75% of Canadian crude is processed at Midwest refineries, not on the Gulf Coast, presumably because the shorter distance saves time and money.

More logistical realities
The market for railcars is extremely tight right now, and if you are lucky enough to have some, you'll want to pack as much crude into those special tankers as you can. Oil sands crude has to be diluted, and the reality is that one tank car can fit about 700 barrels of light oil, and only 550 barrels of oil sands.

As it happens, BNSF doesn't transport any significant quantity of oil sands. What it does transport is diluent used to thin the oil so it is less viscous and can travel through pipelines. So really, its diluents shipments would likely increase if Keystone were to get approved.

Foolish bottom line
If the Keystone XL pipeline is blocked, will Warren Buffett profit through his railroad? Maybe, but based on the fact that rail is a non-factor in oil sands transport right now, not nearly to the degree some are claiming. In fact, it is conceivable that BNSF would profit more if the pipeline is approved and shipments of diluents increase. We will have to wait and see, but for now, Warren Buffett is a non-issue when it comes to Keystone.

If you're looking for companies that will benefit from blocking Keystone, you are better off looking into either Enbridge (NYSE: ENB  ) or Kinder Morgan Energy Partners (UNKNOWN: KMP.DL  ) . These companies have plans to build east to west pipelines from Alberta to the coast of British Columbia, and though they are facing stiff opposition, if Keystone is blocked then the Canadian government may have to force one of those projects through to keep Canada's natural-resource-driven economy from collapsing.

More pipeline insight from the Motley Fool
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Comments from our Foolish Readers

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  • Report this Comment On May 30, 2013, at 2:42 PM, cdkeli wrote:

    Whatever the dubious value of this pipeline, isn't it at all alarming that the proponents of this project have been found to continually propogate half-truths and outright lies regarding its construction, number of jobs (34 permanent), effects on the economy, ecology, human habitation and health?? It this isn't a huge clue as to the glaring incompetence this pipeline currently suffers from and that it will only get worse as the management responsibility and pressures for the safe delivery and handling of 830,000 barrels/day of toxic filth increases increases 24x7?!

  • Report this Comment On June 01, 2013, at 2:40 AM, RobDekker wrote:

    The tar-sand industry propaganda campaign has tried to indict Warren Buffet for opposing the Keystone XL, but once again, as with all their prior arguments, their fact are not checking out. An insignificant amount of bitumen is transported by rail, and the reason is clear : it's simply not economical to do so.

    The facts are clear : The Canadian tar sand industry need the Keystone XL to reduce the cost of transporting their bitumen to "tide water" ports, so it can be exported, at world oil market price, while increasing the price of West Canadian Select to increase their profits and allow expansion of the largest industrial, and the most ecologically devastating, project on the planet.

    The only thing that our president has to decide is if this pipeline is in the national interest of the people of the US.

    And for that he only needs to look at the facts.

    Here are some of them :

    We already know that this pipeline will increase the price of West Canadian Select, which will lead to increased gasoline prices (10-20cts/gallon) in the Mid West.

    We already know that this pipeline will create an additional 500,000 ton PER DAY of toxic sludge be pumped into unlined "tailing ponds" the size of Washington DC, which leak toxins into the Athabasca river system, killing wildlife and is increasing cancer rates in down stream First Nation communities up to 10 times the Canadian average.

    We already know that this pipeline will enable a 50 % increase of the largest industrial project on the planet which is on track to turn pristine Boreal forest the size of Florida into bitumen extraction facilities and open pit mines.

    We already know that the Canadian government wants to triple tar sand development over the next 15 years, and has issued leases for 93,000 square kilometers of pristine Boreal forest to oil and gas companies without A SINGLE environmental impact study.

    And we already know that we currently EXPORT 3 mbpd in refined products, while we IMPORT only 2.8 mbpd from all OPEC countries combined, so we already know that we are ALREADY energy independent of OPEC, and any new imports will be EXPORTED.

    We already know that this pipeline will leak, and that the substance is diluted bitumen, which we already know from the Kalamazoo river spill is much harder to clean up, and much more toxic than regular crude, and that we have the benefit of having our essential aquifers contaminated with this stuff.

    We already know that a foreign corporation is using the argument of "eminent domain" to violate property right of US land owners.

    And we already know that this project will create only 35 permanent jobs for Americans, and not more than a few thousand temporary US jobs (about 0.002 % of the US work force for one year), and decidedly NOT the tens of thousands, hundreds of thousands, or even up to a million jobs that our politicians have been hand waving about.

    So, now that we know that right-wing politicians and the fossil fuel industry have deceived the American people in every possible way, can we take a step back and assess again :

    Exactly WHAT about the Keystone XL is in the "national interest" of our nation ?

  • Report this Comment On November 07, 2013, at 12:09 AM, fuzilojik wrote:

    It costs $3.00 more per barrel to ship oil. The real reason that Obama is blocking the XL Keystone Pipeline Expansion is so Warren Buffet's BNSF rail raod will not lose business to the pipeline. It is $3.00 more per barrel to ship the oil by rail than it is to transport it by pipeline. Warren Buffet needs that extra money like he needs a hole in his head. He would rather keep thousands of people from getting good paying jobs just to pad his enormous portfolio with a few billion more dollars.

  • Report this Comment On December 01, 2014, at 8:32 PM, oregonphotog wrote:

    "So, now that we know that right-wing politicians and the fossil fuel industry have deceived the American people in every possible way"... no, that would be Jonathan Gruber.

  • Report this Comment On February 24, 2015, at 4:50 PM, aja342 wrote:

    "tar-sand industry propaganda campaign"

    This is one of the dumbest things I have read in a long time.

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