Obama Supporter Buffett Benefits from Keystone XL Denial

Surprise, surprise!  Obama supporter Warren Buffett is a huge beneficiary of the Obama denial of the Keystone XL Pipeline, which was to carry Alberta tar sands oil to Gulf Coast oil refineries and siphon off up to 65,000 barrels a day of oil from the Bakken oil shale formation in North Dakota.  The Burlington Northern Santa Fe Corporation which runs the BNSF Railway Company became a Berkshire Hathaway, Inc. subsidiary on 12 February 2010 in a huge purchase by Warren Buffett.  Between them, the BNSF Railway and the Canadian Pacific Railway are the biggest railway systems able to serve the Bakken Oil Shale Formation with both incoming supplies and moving oil to refineries or to other pipeline terminals.  The BNSF Railway through its connections with the Canadian Pacific and Canadian National Railways can also expect considerable business moving the Alberta tar sands oil to U.S. markets.  This may be a very lucrative case of crony mercantilism between Obama and one of his biggest supporters.

The map of the BNSF Railway system is shown below:

It is well situated to move crude oil from the Bakken oil shale formation to the Houston, Texas and Port Arthur, Texas area or to the Cushing, Oklahoma super-pipeline terminus.  Because it has extensive feedlines to the Canadian Pacific and Canadian National Railways along the North Dakota northern border, it is also well-positioned for considerable traffic from the Alberta tar sands which were the primary reason for the Keystone XL Pipeline.  Who knew the the many lines built to move North Dakota wheat to market would one day also be vital for moving oil to market?

Let us get a sense of the size of this business.  By the end of this year, there are plans to be drilling 1,800 new wells in the Bakken oil shale formation.  Each new well requires 23 rail-cars of drilling pipe, frac sand, clays, and other supplies.  At the end of 2010, the daily oil production was already 300,000 barrels and most of it has to be moved by truck to rail-head terminals and then by rail to markets or to pipeline terminals.  A 118 car unit train can move 68,000 barrels of oil.  It is thought that Bakken oil production may reach 700,000 barrels a day by 2013, so even just a delay on the go-ahead to build the Keystone XL Pipeline until after the 2012 election in 2013 will mean a huge increase in railroad business before the pipeline can be finished.  There are projections that Bakken may produce 1 million barrels of oil a day by 2015.  Whether the Keystone XL Pipeline is ever built or not, the Buffett-owned BNSF Railway will make good money from both the Bakken and the Alberta Athabasca oilsands.

BNSF Railway is constructing sidings and turnouts and improving its yards along the railways expecting increased Bakken oil shale formation traffic.  BNSF is investing $3.5 billion in 2011 to improve its infrastructure.  The expenditures are primarily focused on its mid-continent routes, which are the ones needed to move oil from North Dakota to the Gulf Coast.  They also move its profitable coal traffic.  It was already moving several unit trains a week from the Bakken to Stroud, Oklahoma (near the pipeline center of Cushing, Oklahoma), to Bakersfield, California, to St. James, Louisiana, to New Mexico and to Texas in early 2011.  They are spending $450 million to acquire 227 locomotives and another $350 million on freight car and other equipment.  Another $300 million will go to terminal, line and intermodal expansion and efficiency projects.

A new multi-user rail terminal is being built in Port Arthur, Texas to allow oil refineries there to be supplied by heavy rail traffic.  It is to be opened in the second quarter of 2012 with generous crude-oil storage tank capacity.  Oil may also be moved to Corpus Christi, Texas refineries as well.  One thing rail transport does is allow more flexibility of destination for oil shipments compared to pipelines.  The railroads cost more to move the oil than do pipelines, but they can offer more options to get the oil to where the demand is greatest.  They can also ramp up delivery capability much faster than pipelines can because they do not have the long environmental delays!  One could say the environmentalists groups are the allies of the railroads.  It is also easier to tune the delivery of oil from a field depending upon the cost of production there and the cost of oil on the world market.  This is important because Bakken shale oil costs more to extract than say much of the Saudi Arabian oil, so it is conceivable Saudi Arabia might sometime flood the market with cheap oil, so that production of Bakken oil should be cut back.  For now, however, Bakken oil is much cheaper than oil on the world market.

The expansion of the railroads is a good thing, but it is not right if one of the considerations in denying the Keystone XL Pipeline construction permits was that the pipeline would hurt Obama's friend Warren Buffett.  Given the extent of crony mercantilism in the Obama administration, it is hard not be suspicious.