Warren Buffett's Railway Co. to Make a Killing from XL Rejection

Posted by Mike Tirone - Tuesday, January 24th, 2012

“Whatever people bring us, we're ready to haul,” Krista York-Wooley, spokeswoman for Burlington Northern, said in an interview.

It looks like Warren Buffett is once again two steps ahead of the game — almost as if he knew that the Obama administration was going reject the $7 billion Keystone XL Pipeline deal.

The very public rejection of the Keystone XL on January 18th has come with some serious critics. But one of the happiest people in regards to the news has been the Oracle of Omaha.

Burlington Northern Santa Fe LLC is a unit of the billionaire investor's Berkshire Hathaway Inc. (BRK/A). They are now in the running to handle the shipping of oil produced in Western Canada.

Significant expansion will need to happen for Burlington's railroads to handle all of the oil hauling, but as York-Wooley said, if Keystone XL doesn't happen, “we're here to haul.”

After the rejection of the Keystone Pipeline that would stretch from Canada to the Gulf of Mexico, Calgary-based TransCanada said it intends to re-apply with a route that avoids the environmentally-sensitive regions of Nebraska that were under scrutiny. The Obama administration encouraged this plan.

But if nothing comes of the new pipeline project, the rail option — although much costlier — would lessen the environmental impact the XL Pipeline poses dramatically, including a loss of wetlands and agricultural productivity.

The one environmental downside of the railway would be more greenhouse gas emissions.

But some are skeptical and holding onto the Pipeline pipe dream. From Bloomberg:

Investors such as John Stephenson, who helps manage $2.7 billion for First Asset Management Inc. in Toronto said he anticipated the [XL] project would move forward next year. Pipeline shipping costs remain lower than rail, and a lack of readily available tanker cars may create a bottleneck.

According to independent railroad analyst Tony Hatch, rail cars are “a pretty hot commodity,” as a result of demand from oil producers North Dakota.

That said, the availability of tank cars could create a temporary headache in transport capacity.

The production of rail cars is already at a three-year high as manufacturers expand to meet demand for sand used in oil and gas exploration. Two companies that are experiencing these drastic highs are American Railcar Industries Inc. (ARII) and Greenbrier Cos Inc. (GBX).

Shipping oil using tank cars on rail costs about $3 more a barrel than pipeline transport, citing prices in North Dakota.

The State Department has said that the differential in price is “unlikely” to slow the development of oil sands crude if no pipeline is built.

As for Burlington Northern, the railcar company carries close to 25% of the oil from the Bakken formation in North Dakota, and can carry higher volumes from North Dakota and Alberta, according to York-Wooley...

Canadian Pacific Railway Ltd. (CP)’s shipments from North Dakota climbed to more than 13,000 carloads last year from about 500 in 2009, Ed Greenberg, a spokesman, said in an email. The Calgary-based company has a similar plan in western Canada.

“With an extensive rail network and proven expertise in moving energy, CP offers a flexible option for transporting crude oil and other energy-related products to and from key locations in North America,” Vice President Tracy Robinson said in an email. “Rail is scalable, allowing CP to effectively keep pace with the shipping needs of producers.”


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