The Keystone XL pipeline has been one of the most controversial political topics in recent years. Those hoping that Republicans gaining control of both houses of Congress would lead to the project's approval got a reality check earlier this week, when President Barack Obama vetoed a bill that would have authorized construction of the 1,179-mile pipeline that would carry oil from Canada's oil sands to refineries in Oklahoma and the Gulf Coast.
Obama's veto was not a final rejection of the project, just an assertion that the legislation "cuts short thorough consideration of issues that could bear on our national interest -- including our security, safety, and environment." For years now, the president has been waiting for reviews to be completed by the State Department and environmental agencies before making a decision, and he continues to wait. In the meantime, the veto carries consequences, both politically and for the business world.
TransCanada (NYSE:TRP), the company seeking to build the pipeline, is the most direct loser from Obama's decision, but the veto also impacts dozens of producers, including energy majors such as ExxonMobil and Chevron, that would benefit from a cheaper way to send Canadian oil to refineries.
However, there are also some surprising beneficiaries from the administration's refusal to allow the pipeline to be built. The shale boom in North Dakota and other parts of the country has led to a shortage of pipeline capacity, which is part of the reason that TransCanada wants to build Keystone XL. In lieu of adequate pipeline infrastructure, oil companies have had to use alternative methods for shipping crude, including trucks, freight trains, and barges. In fact, more oil is moving by freight transit now than at any time since record-keeping began in 1981. From 2011 to 2012, U.S. rail deliveries of crude quadrupled. In North Dakota, which would have some usage of the Keystone XL, rail is used to carry 69% of production.
BNSF is the largest carrier of oil from North Dakota's Bakken shale formation, and construction of the Keystone XL pipeline could put a dent in BNSF's $22 billion annual revenue stream. In 2013, $5.7 billion of that came from industrial products, of which a major component is oil. Sales from that segment increased 14%, or $700 million, in 2013 due to "significantly higher petroleum products volumes." Canadian National Railway and Canadian Pacific Railway have also been big beneficiaries of the political red tape, as they are the major shippers on the Canadian side.
Berkshire also benefits from the Keystone XL standoff via another subsidiary, Union Tank Car, which makes freight cars designed to haul crude oil. That company has been operating at full capacity in recent years, producing 6,240 cars annually amid excess industry demand from the shale boom. Buffett also said in his letter to shareholders last year that BNSF would add 5,000 tank cars to its fleet, evidence that demand is still growing for crude rail shipments.
Don't overpoliticize it
It might be tempting to accuse Buffett of wielding his political influence to block Keystone XL -- after all, he is a major Obama donor -- but that's not what is happening here. Buffett has repeatedly endorsed the pipeline, calling it "probably ... a good idea for the country." He has said it would not be "that big of a competitor" to BNSF since it would move crude down from Canada, whereas BNSF's oil business mainly involves crude from the Bakken shale.
However, 12% of Keystone XL's total capacity of 830,000 barrels per day, or about 100,000 bpd, has been set aside for Bakken crude. But with production in the Bakken now at 1.3 million barrels a day, adding 100,000 in capacity is unlikely to make a huge difference. Matt Rose, BNSF's executive chairman, went a step further last year, saying there wouldn't be any negative impact from Keystone XL, and that it would only slow the growth of crude shipments by rail. Rose also noted that BNSF carries 800,000 of the 1 million barrels per day that are shipped via railroad.
So it seems then that the Keystone XL would relieve some of the demand for rail cars carrying oil out of the Bakken, but only a small portion of it. Even if Keystone XL did take money away from BNSF and other railroads, its impact on Berkshire as a whole would likely be nothing more than a rounding error. Buffett's conglomerate is worth more than $350 billion, with revenue close to $200 billion. The company also owns GEICO insurance and several other subsidiaries, and holds multibillion-dollar investments in blue chips such as Coca-Cola and Wells Fargo. It isn't dependent on any single revenue stream.
No one knows if or when Keystone XL will be approved, but the economic consequences are more nuanced than the political debate generally makes them appear. With oil rigs shutting down as prices for the commodity fall, the debate may be losing some of its relevance, as shuttering rigs would pose a much bigger threat to the railroads than passage of Keystone XL.
Assuming the oil boom persists, rail will likely prosper in one way or another, as rail cars are needed for pipeline construction and ancillary shipments to complement pipelines as well.
It's not a surprise, then, that Buffett is smiling over his purchase of BNSF just a few years ago. The unit was Berkshire's most profitable stand-alone business in 2013, with pre-tax earnings near $6 billion. And with high barriers to entry and tailwinds from the improving economy and the shale boom, that number should only grow no matter what happens with Keystone XL.