For all the debate over building the Keystone XL pipeline, the oil is moving without it.
Railroads such as Warren Buffett’s Burlington Northern Santa Fe LLC are the rolling alternative, keeping oil flowing from the Bakken in North Dakota to refineries along the Texas Gulf Coast, as the White House deliberates on the fate of TransCanada Corp. (TRP)’s petroleum artery.
They’re boosting employment in the process: Rail transportation payrolls have climbed by 9.1 percent, a pace more than twice as fast as total job growth, since the end of 2009.
“Its having a ripple effect that’s really creating jobs and wealth and investment opportunities,” said Charles Clowdis, the managing director for transportation advisory services at IHS Global Insight Inc. (2172) in Lexington, Massachusetts. “There’s so much crude being produced that can’t be piped. These guys are putting real dollars in the bank each week and railroads are making a darn good profit on hauling this in tank cars.”
Crude oil shipments by rail jumped 256 percent in 2012 to a record 233,811 carloads, or 167 million barrels, the Association of American Railroads said Feb. 21. That’s equivalent to more than 7 percent of U.S. production, up from 2.3 percent in 2011, according to AAR and Energy Department data compiled by Bloomberg.
The U.S. expanded oil production last year by 766,000 barrels a day last year, the biggest jump since the first commercial well was drilled in 1859 in Titusville, Pennsylvania, according to the Energy Department.
The oil boom on rails is driving returns for Buffett and other investors who bet on railroads as President Barack Obama considers whether to allow Calgary-based TransCanada’s $5.3 billion Keystone pipeline linking Alberta and Nebraska. It would allow for a final flow of 830,000 barrels of crude a day.
Railroad stocks have outpaced the broader market in the past year. The Standard and Poor’s Supercomposite Railroads Index, which consists of Union Pacific Corp. (UNP:US), CSX Corp (CSX:US), Norfolk Southern Corp. (NSC:US), Kansas City Southern and Genesee & Wyoming Inc. (GWR:US), has advanced about 24 percent in the past year, compared with a 13 percent gain in the S&P 500 Index. (SPX)
Earnings at railroads in the S&P 500 increased about three times as much as the broader gauge, according to data compiled by Bloomberg. Profits for companies in the rail index rose 16 percent in 2012 compared with 5.2 percent for the S&P 500.
“Rails provide the flexibility of being able to deliver the crude extracted from the shale to different locations,” said Ben Hartford, a transportation analyst at Robert W Baird & Co. in Milwaukee, Wisconsin, who recommends buying Union Pacific and CSX shares. “People are focusing on the Keystone pipeline and its development but there’s still receptivity to using rail.”
One reason is that oil from the Bakken costs about $17-per- barrel less than Brent crude, the international benchmark. The difference means companies will pay the extra $10 to have a barrel of cheaper domestic crude oil shipped via rail to their refinery, rather than take delivery of the international petroleum.
Among those with the most to gain are BNSF, the railroad Buffett’s Berkshire Hathaway Inc. (A:US) took over three years ago in a $26.5 billion deal, and Union Pacific, the largest U.S. railroad by sales. BNSF said in January it will boost crude shipments by 40 percent this year. John Ambler, a spokesman for BNSF, didn’t return a phone call seeking comment yesterday.
Fort Worth, Texas-based BNSF’s 40 percent market share for hauling petroleum products in the U.S. and Canada in 2013 is the largest among the seven largest railroads, according to data compiled by Bloomberg Industries. Canadian National Railway Co. (CNR) is second with 21 percent, followed by Union Pacific at 15 percent and Canadian Pacific Railway Ltd. (CP) at 12 percent, the data show. CSX, Norfolk Southern, and Kansas City Southern (KSU:US) handle less than 4 percent.
Buffett said in his annual letter to shareholders March 1 that Berkshire will gain from more oil production. He highlighted demand for rolling stock made by Berkshire’s Union Tank Car, which traces its roots to John D. Rockefeller’s Standard Oil Trust. Staffing for manufacturing has more than doubled since the lows of 2009 and 2010, company spokesman Bruce Winslow said.
Buffett said to watch for the UTLX logo.
“As a Berkshire shareholder, you own the cars with that insignia,” he wrote to investors in his Omaha, Nebraska-based company. “When you spot a UTLX car, puff out your chest a bit and enjoy the same satisfaction that John D. Rockefeller undoubtedly experienced as he viewed his fleet a century ago.”
Union Pacific said Jan. 24 that increased petroleum shipments helped boost fourth-quarter net income by 7.5 percent to $1.04 billion (UNP:US). The Omaha-based company said in a presentation that petroleum shipments jumped 69 percent last year from 2011. Oil and gas account for 29 percent of volume.
Union Pacific last year was able to assuage a 14 percent decline in the volume of coal deliveries with increased oil shipments, along with housing materials and autos.
“We saw significant growth in crude oil shipments, up over three-fold compared to 2011,” Union Pacific Chief Financial Officer Robert Knight said at a March 5 conference.
Canadian National, the Montreal-based railroad that’s the nation’s largest, has said it may move twice as many carloads of crude oil this year than last.
“A lot of it is going down to the Gulf Coast, so we’re adding infrastructure there,” Canadian National Chief Financial Officer Luc Jobin said on a Feb. 14 conference call. “And there’s no reason why this pace couldn’t be sustained for a couple of more years.”
The latest American oil rush was spurred by new technology that has made drilling faster, cheaper and better at unleashing oil from rock formations, called hydraulic fracturing, or fracking.
Fracking is transforming the U.S. northern plains states and Canada’s prairie provinces. The Bakken oil formation, part of a larger geologic region called the Williston Basin, has turned North Dakota into America’s second-largest crude producer, following Texas and ahead of Alaska. Output has more than tripled over the past three years to 769,000 barrels a day in December, according to Energy Department data.
Proponents of the Keystone XL pipeline, which would link Canadian oil sands to the U.S. Gulf Coast, say it will create jobs, while opponents say it would speed up oil-sands development and intensify global warming.
As the Obama administration considers approval, railroad employment has already been climbing. Since the end of 2009, rail transportation payrolls have climbed more than twice the 4.4 percent gain in overall job growth, according to Labor Department statistics.
The U.S. State Department, which has authority over the pipeline because it crosses the border, said in a March 1 environmental assessment report the pipeline would have little impact on the pace of oil-sands expansion, a sentiment echoed by TransCanada. Even if all the proposed pipelines were delayed, oil-sands development would continue because crude can move by rail, Alex Pourbaix, president of TransCanada’s energy and oil pipelines, said in an interview March 5.
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