Berkshire Hathaway 2013 Annual Meeting Audience Question # 20

How declining demand for trains to carry coal and oil would affect BNSF

Warren Buffett:

Jonathan?

Jonathan Brandt:

I have a…

I have a couple questions about Burlington Northern’s two energy franchises, coal and crude.

Warren Buffett:

Uh-huh.

Jonathan Brandt:

Given that coal-fired generation is in gradual structural decline, can you discuss whether the tracks, locomotives, and other assets used to deliver coal can be redeployed, equally profitable, serving other customers? Are those assets fungible?

Can you also discuss whether crude by rail can continue to grow even as pipelines are built to serve the Bakken, and as the currently large geographic spreads in crude prices potentially narrow?

You’ve talked about the flexibility of crude by rail on TV. Can you elaborate on that, please?

Warren Buffett:

Yeah. If there was no coal moving, we would not find a lot of use for some of the tracks we have, there’s no question about that.

So, the… I think what you’re talking about would be very gradual over time. But, I mean, the outlook for coal is not the same as the outlook for oil.

A lot of the coal, in terms of the year-by-year fluctuations, may depend on the price of natural gas because some of the generating capacity can go in either direction.

In terms of oil, I think the view a few years ago was that there might just be a little blip in terms of rail transportation. But I’ve talked to some oil producers, the largest up there in the Bakken, and I think there will be a lot of rail usage for a long time, in fact, increased rail usage.

Oil moves a whole lot faster, incidentally, by rail than it does by pipeline. Most people have sort of a visual conception that the oil is flowing at terrific speeds through pipelines and that the rail cars are sitting on the sidelines someplace.

But it’s just the opposite. You can move oil a lot faster.

And with change… with different market prices and different refinery situations and all that… there’s a lot of flexibility in the oil transportation by rail.

Matt Rose is right up front here, and if somebody would give him a microphone, I think he can probably tell you a lot more about moving coal and oil than I can. Matt?

We got a spotlight someplace that can focus right on here?

Matt Rose:

Yes. So, Warren, the two franchises are really different. That’s just the way the geographic is laid out.

We expect the coal franchise to basically stay about where it is today, depending on natural gas prices as well as what happens with the EPA.

Our crude by rail, right now we have about 10 loading stations in the Bakken with about 30 destination stations. We’re currently in negotiation, looking at about another 30 destination stations.

So it’s really an exciting time right now. We’re handling about 650,000 barrels of crude a day.

We think we’ll be at 750 by the end of this year, and we see a pathway to a million-two to a million-four.

Warren Buffett:

When you think of the whole country producing 5 million barrels a day not long ago, that is a lot of oil.

And of course, it isn’t just the Bakken. You know, the shale developments, they can open up a lot of things over time.

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