TransCanada Corporation (USA) (TRP), Enbridge Inc (USA) (ENB): Warren Buffett Doesn’t Care About Keystone XL

When TransCanada Corporation (USA) (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 Inc. (NYSE:BRK.B) 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 Corporation (USA) (NYSE:TRP) 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.