Pipeline Delay Kills, Benefits Railroads

| About: TransCanada Corporation (TRP)

The southern part of Keystone XL started flowing on January 22nd. At full capacity, it will transport 700,000 barrels of oil per day from Cushing, Oklahoma to the Gulf Coast, and is owned by Trans Canada (NYSE:TRP). It already has led to a reduced spread between WTI and Brent / LLS prices.

The commencement of the southern leg of Keystone XL has drawn renewed attention to the delayed northern portion of Keystone XL, which had been planned to deliver 830,000 barrels of oil per day from Canada to the Gulf Coast. That project has been delayed for years by the White House for "environmental review".

There are several aspects of this delay that are worth considering. First, the alternative to pipeline shipping is train transportation. This obviously has been a huge benefit to railroads and owners of railroads. The biggest beneficiaries have been Canada Pacific (NYSE:CP), CSX Corp (NYSE:CSX) and Burlington Northern, which is owned by Berkshire Hathaway (NYSE:BRK.B). Below I will review the financial impact from shipping oil, which has generated billions of dollars of incremental revenue for these companies.

Next, it is important to realize that there is a human cost to this delay. Dozens of people have been killed (42 in just one crash). Recent articles discussing the costs and benefits by such esteemed publications as The Economist focus on "environmental" tradeoffs and ignore the people dying from train crashes.

And of course, there is the ostensible reason the Keystone pipeline was delayed, a review of the environmental impact of the project. As discussed here, the State Department's "Final Supplemental Environmental Impact Statement" said there would be no material environmental impact from the pipeline.

So what it seems like it comes down to is a tradeoff between incremental billions of dollars of profits to railroads and their owners (including influential owner of Burlington Northern, Warren Buffett's Berkshire Hathaway), and the potential for dozens or more lives to be lost in future oil-transportation train crashes.

And now for some of the quantitative impact. Looking at Berkshire's 2012 annual report, one can see that Burlington Northern was one of the top contributing subsidiaries to Berkshire. Digging deeper, Burlington's largest growth segment by far (up 13%) was "industrial products," and according to the annual report: "industrial products volume increased primarily as a result of increased shipments of petroleum." Shipment of oil by rail has been driven almost entirely by the constrained capacity on existing pipelines, and thus the Keystone pipeline delay.

Burlington's revenue grew substantially from 2010 to 2012, and the largest growth area was the segment that transports oil, and earnings were up by about $1 billion per year. Similar impact was felt by the other railroads like CP and CSX that are transporting oil from fields / resource areas like the Bakken and the Canadian Oil Sands.

These revenues and profits are at risk if the Keystone pipeline is approved. Obviously the railroads and their owners, such as Mr Buffett, have a powerful incentive to continue to lobby for the delay, despite what Canada's prime minister calls a "no brainer" decision. It may be a no-brainer decision to approve the pipeline, but not just because of the absence of environmental impact: it could save lives. Dozens have died already, while railroads make billions.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.