Climate

Would Saving A Livable Climate Destroy Buffett’s Fossil Fuel Empire?

CREDIT: Bruce Crummy, AP

BNSF oil train derailment in 2013.

Billionaire Warren Buffett has bet the future of his company Berkshire Hathaway on dirty energy. In recent years he has been building a vertically-integrated fossil fuel empire — one that develops, delivers, processes, and burns the most climate-destroying fuels.

The final part of this series on Buffett looks at how BNSF Railways is the engine of his carbon-intensive conglomerate, creating a massive risk for shareholders in this increasingly carbon-constrained world — a risk the “Oracle of Omaha” needs to be far more upfront about.

Is Warren Buffett “The Profiteer” of “Climate Killers”?

When Rolling Stone named Warren Buffett one of its 17 “Climate Killers” in 2010, they called him “The Profiteer.” They zeroed in on his recent purchase of “Burlington Northern Santa Fe railroad for $26 billion — the largest acquisition of Buffett’s sto­ried career.”

Why? BNSF is “the nation’s top haul­er of coal, shipping some 300 million tons a year.” That is especially convenient for Buffett because, as noted in Part 2, Berkshire Hathaway Energy has four major utilities that still rely on coal for over half their electricity generation.

CoalValueImage

CREDIT: BNSF

But BNSF is so much more than just the top hauler of coal. As their website proudly attests “BNSF is the largest transporter of crude oil in North America” — and we all know how well the whole crude-by-rail thing has been going.

2015 “has already been the costliest by far for crude train explosions,” BloombergBusiness reported in December. A “BNSF train that derailed and exploded in Illinois” last March “carrying highly explosive crude from North Dakota” created some $5.5 million in damage.

From 2010 through mid-2014, oil shipped by rail in the United States increased from about one million barrels of oil every month to 25 million! At the same time, Canadian imports increased 50-fold, as we’ve reported. BNSF was a driving force behind that explosion.

oil-overtime

CREDIT: EIA data

Also, last October we learned about “what is believed to be the largest frac sand unit train to date in North America.” You guessed it: “The 150-car unit train, operated by BNSF, carried 16,500 tons of frac sand used in hydraulic fracturing.”

Warren Buffett Bets Big On The Tar Sands

But wait, there’s more. You may recall from Part 1 that last year, the billionaire spent $240 million buying another chunk of Canadian tar sands giant Suncor, upping his overall bet on the climate-destroying liquid fuel to $1.1 billion — a fact Buffett does not share with shareholders in his list of Berkshire Hathaway’s climate risks.

On top of that, as BNSF’s website also proudly attests, the railroad “is positioned to act as a gateway to the Canadian oil sands.” Seriously.

Indeed several years ago, a BNSF employee magazine explained how invested the railway was in all aspects of tar sands (aka bitumen) development. The key point is that “Before bitumen can move through a pipeline to its destination, it must be blended with diluents (diluting agents),” lighter weight hydrocarbons like natural gasoline or butane:

BNSF has been moving single carloads of diluents from U.S. refineries to the Canadian border…. The inbounds are then interchanged with Canadian railroads, then moved to Edmonton, with the final move to the oil sands’ processing center via pipeline.

Last year, BNSF moved about 9,000 carloads of diluents for the project, with the majority of loads originating from the Gulf Coast, California, and Kansas. This year, about 12,000 carloads are anticipated to move.

There’s more: Beyond shipping diluents, “BNSF has also transported turbines, other large machinery and pipes for use at the drilling sites.”

There’s still more to this empire. In 2015, Buffett “nearly doubled Berkshire’s position in Phillips 66,” one of the country’s leading oil (and gas) refiners and processors. The company has 15 refineries which can refine a total of 2.2 million barrels of crude per day.

In January of this year alone, Buffett spent a staggering $832 million to buy yet more Phillips 66 stock. At more than $5 billion, it is his sixth-largest holding. He now owns 14 percent of the “Number 7” company on the Fortune 500 list.

Phillips 66 is a major co-owner of the Wood River Refinery in Illinois, which in recent years made investments “to expand the capacity to handle the bitumen from the Alberta oil sands by nearly 700%.” Also not coincidentally, for the last year, Phillips 66 has been trying to get California planning commissioners to let it build a 1.3-mile rail spur to its Santa Maria refinery. Why? As the Sierra Club explained last month, “The oil giant seeks to transport tar sands crude from Canada in mile-long trains — each laden with over 2 million gallons of dirty crude.”

Both A Livable Climate And Buffett’s Empire Cannot Thrive

Yes, the Oracle of Omaha has a thing for the Canadian tar sands. But more than that, over the last several years he has built a vertically-integrated fossil fuel empire — one that develops, delivers, processes, and even burns the most carbon-intensive fossil fuels. It would be a brilliant strategy except for two small details.

First, climate science makes clear we have to leave most fossil fuels — and virtually all of the most carbon-intensive — in the ground to avoid global catastrophic warming. Second, over the past 18 months, the leading nations of the world unanimously agreed on a plan whose goal is to do just that, and the overwhelming majority of them made detailed pledges to slow or reverse carbon-intensive growth and replace it with carbon-free growth.

The domestic and international coal market has already collapsed as a result of growing environmental concerns and low-cost alternatives including renewables. If the world follows through on its plans to keep total warming below 2°C — a big “if,” for sure — then coal is going to continue to be squeezed out of the market in the coming decades and oil will almost certainly follow the same fate, peaking in demand by 2030, as I discussed last month.

Now whether or not you believe the world is going to achieve the plan it unanimously embraced in Paris in December, surely Buffett ought to at least mention to his shareholders the risks to Berkshire Hathaway if the world does. Yet, his latest annual letter to shareholders dismisses the risk of climate change.

Here is all Buffett says about the coal risk: “To begin with an obvious threat, BNSF, along with other railroads, is certain to lose significant coal volume over the next decade.” But he quickly dismisses this as a problem that is not “crucial to Berkshire’s long-term well-being.”

Last summer, BNSF executive chairman Matthew K. Rose noted the decline in U.S. coal transport and consumption. He said of his company’s major investment to upgrade its rail service to and from the coal-rich Powder River Basin, “That leaves us with millions of dollars in investment in what will eventually be stranded assets.”

Certainly, from a short-term business perspective, investing in oil-by-rail and tar-sands-by-rail to replace coal-by-rail appears to make sense. But what are the risks those investments will eventually become stranded assets, too? Low oil prices aren’t good for crude-by-rail, as BloombergBusiness explained in December. And aggressive climate action, which could well give us peak demand within 15 years, is not bullish for oil prices.

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CREDIT: Bloomberg

Rather than informing shareholders about any of these risks, Buffett asserts the reverse: “Both BHE [Berkshire Hathaway energy] and BNSF have been leaders in pursuing planet-friendly technology.” Seriously?

I discussed in Part 2 how, despite BHE’s own investments in renewables, BHE is working to crush solar energy in Nevada and around the western United States. And it remains a huge user of coal. And as we’ve seen BNSF is a major deliverer of coal….

But here is how Buffett defends the fairly ludicrous claim that BNSF is somehow one of the “leaders in pursuing planet-friendly technology”:

BNSF, like other Class I railroads, uses only a single gallon of diesel fuel to move a ton of freight almost 500 miles. That makes the railroads four times as fuel-efficient as trucks!

Yes, BNSF is a very fuel-efficient way of delivering vast amounts of climate-destroying fuels to market.

Finally, is it only a coincidence that after outperforming the market for decades, the stock of Berkshire Hathaway has actually underperformed the S&P 500 over the last five years?

Again, if serious global climate action ultimately keeps oil prices low and renders much of the tar sands uneconomic, then Buffett’s carefully constructed fossil fuel empire is going to keep suffering — and deservedly so. After all, leading climate activists have been urging major investors to disinvest in fossil fuels for years. Buffett is doing the exact reverse!

BOTTOM LINE: Between Berkshire Hathaway and a livable climate, only one can thrive. That’s not a tough choice, is it?