Discovering Warren Buffett likes Pipelines

If you’ve spent any time in the professional investor universe—you know—the landscape is chock-a-block with liars. Professional investors speak to other professional investors about companies they like, when they don’t own a single share of that company. They claim to be building a position, when really, they’ve just dumped their entire position. They say they’re short something when they’re actually long, long when they’re short; they own at-the-money options when they wouldn’t even put up money for the tails. They think Japanese Yen is undervalued, but they’re still selling. The bond wears an attractive coupon, but they’d never touch it. It goes on and on. The lies. The subterfuge. The dialectic angling.

Enter the exception: Warren Buffett.

Is it the investing track record that makes the man? Is it the fact that he spends all day reading quietly, by himself, in a room? Is it the five 12-ounce cans of Coke-a-cola he drinks a day? Regular Coke at work. Cherry Coke at home? Anyone who has read the books and watched the documentaries on Warren Buffett knows he’s an unusual bird. Why is he unusual?

Warren Buffett is unusual because he tells the truth.

By the way: how do you know when someone is telling the truth? I submit: you read what they’ve written. You read everything they’ve written. It’s easy to lie when speaking to a TV camera. It’s easy to lie when speaking to a crowd. It’s easy to lie in a conference room, when it’s clear the meeting will be over sooner, the goal will be achieved, if the expedient thing is uttered. It’s harder, actually, it’s impossible, to write your thoughts down on paper for 56 years (1970-2025) and do anything other than tell the truth. Let me explain.

Warren Buffett writes an annual letter. These annual letters detail his thoughts and his actions over the course of his career. You can audit these thoughts and actions, but you don’t need to, because unlike 99.9% of the world, he does it for you. Buffett is famous for admitting mistakes. The most fun part of reading his annual letters is phrases like this one, from the 2011 annual letter. “I’ve run out of good news. Here are some developments that hurt us…. I spent about $2 billion buying several bond issues of Energy Future Holdings, an electric utility operation serving portions of Texas. That was a mistake – a big mistake…. The company’s prospects were tied to the price of natural gas, which tanked shortly after our purchase and remains depressed.” Or, “Last year I told you that a housing recovery will probably begin within a year or so. I was dead wrong.”

The man was dead wrong.

Warren Buffett, arguably the most successful investor of all time, tells you when he’s dead wrong. In fact, he makes a practice of admitting his mistakes. And if you read enough of his work, it’s patently clear he’s not writing for you per se. He’s writing for himself. He’s writing as a way to continue a thought thread, a chain of logic, that he’s been working on for nearly a century. Does it matter what the chain of logic is? What it touches? That it stems from Benjamin Graham’s Intelligent Investor? Or could it be anything? Could it be about trees? Or the sky? Or about bombs over Iraq? Or about the zebra longwing butterfly, which has black and white strips and a wingspan of 3.9 inches?

This summer, I’ll be spending more time in Warren Buffett’s annual letters. By the way, the nugget that led me here was pipelines. Oddly, I was looking to see which pipelines Warren Buffett has owned over the years when I noticed something. Buffett doesn’t just “like” pipelines as an investment proposition (he’s compared them to owning railroads); he likes them so much that upon retirement last year, he picked as his successor a man who began his career at CalEnergy, which then became MidAmerican Energy Holdings, which was then acquired by Berkshire Energy. Buffett is entrusting his life’s work, his beloved Berkshire Hathaway, to a man from a pipeline company. As Kurt Vonnegut would say, so it goes.

The Secret Pipeline and the Business of Enemies

It’s always interesting when two nations who are sworn enemies engage in commerce that benefits both. It’s the cornerstone of Capitalist peace theory; trade between nations precludes bloodshed. And it might be true. It might work, for a time. Like picking fleas from a massive wild snarling dog, we can point to the flitting things and say, “This theory is alive. Trade between nations works. It creates peace and prevents them from going to war.” Time and the snarling dog sprint forward. A disagreement erupts, and the peace evaporates. Then we’re left to wonder about our theory.

Israel. Iran. The Eilat-Ashkelon pipeline.

This is the famous secret pipeline that runs through Israel, transporting crude oil from the Red Sea to the Mediterranean. Why is it called the Secret Pipeline? Well, let’s go back to the 1950s when Israel was struggling to exist and needed resources, more than anything, to stay alive. What resources? Oil, of course. Israel had plenty of friends (I won’t name them here) to negotiate supply from Iran. What it didn’t have was a way to transport the oil from port to desert and back again; so first a channel was built, then storage tanks were built, then a 16-inch pipeline, then a booster station followed by a 42-inch pipeline and more storage tanks, and so on and so on, until the Eilat-Ashkelon pipeline was miracle-in-the-making. This pipeline was miraculous for many reasons, not the least of which is: it carried Iranian oil across Israel.

Also, it was owned 50:50 by Iran and Israel.  

To avoid embarrassing Iran in the eyes of the Muslim world, the corporate structure was kept secret. Then, as now, there were ways to do this involving shell companies formed in special economic zones like Liechtenstein, Canada, Panama, etc. If anyone went digging to see who owned the Secret Pipeline, they’d run into a mess of legal documents that pointed to nothing. Those in the know (anyone in the oil business) knew that Iran was the “silent partner” in a 49-year franchise established under the Oil Pipeline Franchise Law of 1968, exempting the partnership from income tax, municipal rates, lease fees and from the requirement to hold public tenders.

So, the two nations were cooperating. Kind of.

1970 was a banner year; at peak, the pipeline transported 10 million barrels of Iranian oil through Israel. Things might have continued this way; the wheels of commerce might have kept spinning, had it not been for the Iranian revolution. The revolution severed Israel-Iran relations entirely. The first drop in oil supply sent Israel into a tailspin; it needed to find other suppliers quickly. Fortunately, men like Marc Rich (who I have written about extensively, who I will discuss in a follow-up post) were able to broker new deals for Israel. Compensatory infrastructure was built. While the Eilat-Ashkelon pipeline existed, the trust, the relationship between buyer and seller, was fractured. This began a legal battle that spans decades, that continues today, about who owns this pipeline really and what international court is willing (or able) to enforce the law.

If you want to bore yourself to tears, study the history of arbitration (Israel’s claims versus Iran’s claims) on the Eilat-Ashkelon pipeline. The media prefers to ignore this dispute between two nations, which, unlike the other disputes, is rooted in law, papered by legal documents, and doesn’t take us into a religious spiritual war that can’t be won by either side.

Decades later, the pipeline remains a “secret.”

In 2014, when workers were moving a section of the pipeline running through the desert in Israel’s southern tip, where it meets Egypt and Jordan at the Red Sea, the pipe ruptured and oil began to gush. After 5,000 cubic meters of crude oil was spilled onto Route 90 and fumes from the oil wafted into Jordan (at which point Jordan deployed soldiers to the border, fearing chemical attack) when the full extent of the disaster was clear—when a nature preserve with gazelles and centuries-old acacia groves became slick rivers of oil—when Israeli citizens began demanding accountability, demanding answers, filing lawsuits, they found themselves running headfirst into a wall. A stone wall. “Everything about the pipeline is secret, even the direction the oil is flowing,” said an Israeli lawyer representing an environmental group, the plaintiff. Why? The Eilat-Ashkelon pipeline has operated since its founding under a blanket decree that shrouds its affairs in secrecy for reasons related to national security. Then, as now, the important thing to understand about national security is that it eclipses the possibility of anything else. Including a pipeline that connects two nations, that benefits both.     

Divers with a vendetta, and two weeks to train

Here’s the craziest part of The Nord Stream Conspiracy. In great detail, we are told how a group of regular men and women—expert at diving, but nothing else—are taught to blow up underwater infrastructure.

Initially, it was thought, they would need dive to the bottom of the Baltic Sea with prohibitively large explosive charges. Nord Stream was, after all, a powerfully built pipeline. This was a mistake in thinking; it was a mistake made by many experts after the explosions had taken place. The insanely devastating effect the blasts had on the pipelines was not caused by large explosives, but rather, tiny ones. Let’s call them bottle rockets. An old, wizened, explosives engineer, a Ukrainian in a wheelchair (a great character for a TV show) was hired to advise these divers on the operation. He noted the pipelines were highly pressurized. Punching even a tiny hole in a pressurized pipeline at the bottom of the sea would unleash a reaction that would rip the pipes wide open, not unlike piercing a balloon. “Make a small incision in the shell, and the pressure will do all the work,” he told them.

The plan was so simple, they didn’t believe him at first. He advised them to fill a diver’s bottle with octogen and hexagon, stable and easily handled explosives. He told them to attach the bottle to the joints in the pipeline, where the structure is weakest. Use a small piece of reinforced metal to direct the blast. He added, if a silicon cushion is inserted between pipeline surface and bottle, the impact will be bigger. The bottle should wear a timer. It should be detonated remotely. The goal, to direct the energy of the blast narrowly, enough to crack the pipe, can be accomplished with a bottle weighing just over 60 pounds. This was so unbelievable, they needed to test it.

Because the Baltic Sea is the most heavily-surveilled ocean in the world (who knew) they took their device to a granite quarry outside Kieve, Ukraine. The old engineer promised them, depth makes no difference for explosive effect. They could test their bottle rocket near the surface of the water. After several attempts, they got it right. They were able to achieve nice, big geysers. The tricker part of the operation, they knew, was submerging to 330 feet and placing the mines in the correct location. This would require practice, and practicing in the right conditions. They needed a body of water that mimicked the Baltic; low salinity, low visibility, and freezing near the bottom. They found another quarry to do the testing. For two weeks, that’s all they did. They tied a buoy to an anchor, and attached a string between the two. The male and female divers used the shot line to guide their descent, carrying 60-pound steel bottles filled with explosives to the bottom, placing them, and returning to the surface. They practiced in pairs, and often made the training more difficult by choosing spots where compasses didn’t work, or removing the heating device from their diving suits. At night, they got drunk. In the morning, they’d practice again. This went on until the group was ready to do the incredible. What can be learned from an explosives engineer in a wheelchair, what can be learned by people with a thirst for destruction… well, it’s more than incredible. They caused a 2.3 Richter scale tremor. The power of the blast equaled the thermal output of a major nuclear reactor. In Germany, where gas is more expensive than America, the leaked gas was worth $2 billion. The amount lost could power two million German households for a whole year. All this, from a group of divers with a vendetta. And two weeks to train. 

Why all the fuss over a simple pipeline?

The Chicago Times ran this cartoon in 1982. The cartoonist, Bill Maldin, captured the enormity of the debate (by depicting it as a joke).

The Reagan administration firmly opposed the massive West Siberian pipeline project, which was designed to bring natural gas from the Urengoy gas field to Western Europe. France and Germany supported it. The critical takeaway is: this debate has been raging for decades. There’s nothing new under the sun in 21st-century politics. Western Europe needs energy. Russia has it. It is natural and reasonable that Russia would recycle that revenue into its military, and the mystery is why we don’t use diplomatic channels to do the hard work of keeping the peace.   

The Mystery of the Nord Stream Pipeline Explosion

Life is short and it’s a sin to waste your time. That’s a direct rip from the notebooks of Albert Camus (1913-1960) which I’ve been reading, and heeding, this first week of July. I’m working on a TV project about pipelines—oil and gas pipelines—and my research has brought me to a book called The Nord Stream Conspiracy by Wall Street Journal reporter Bojan Pancevski. It’s an interesting book. It’s not particularly well-written, but it is packed with information on Ukrainian spies who have until this moment not appeared (not really) in the Western press’s coverage of this war. Why that is is anyone’s guess. If you don’t know what the Nord Stream explosion is, you’d be forgiven for not knowing. It’s been called a “conspiracy” from the beginning, despite the fact, there’s nothing conspiratorial about the outcome; in September 2022, seismologists detected an undersea earthquake near the Danish island of Bornholm, which turned out to be a series of detonations along a $20 billion pipeline transporting Russian gas to Germany under the Baltic Sea. Within a minute, Nord Stream 2 natural gas pipeline ruptured and when Danish fighter jets were sent to survey the scene, pilots saw geysers three thousand feet in diameter, spewing methane into the ocean. They guessed, immediately, the underwater blasts were an act of sabotage. But who had done it? They didn’t know. In the days following the explosion, five hundred thousand metric tons of methane—the largest ever human-caused gas release—spread over the Baltic and killed more marine life than anyone can measure. When you read this book, the mystery isn’t “who did this” but rather, “who didn’t stop them?” It is abundantly clear the Russians did not blow up their own pipeline. Any 3rd grade child would guess the Ukrainians or the Americans (probably both) worked to achieve this outcome, and this is all to say, have we not learned this lesson? War is absurd. War is inflationary. To destroy things that were already built, to need to rebuild them is—if nothing else—an inflationary event. Vonnegut taught us this in Slaughterhouse Five, Camus’ entire philosophy is built on this idea. War is absurd. Stop doing it. If your ally or enemy is about to do something absurd, something inflationary, tell them to take a hike. Literally. Go into the mountains and take a twenty or thirty or forty-mile hike alone. At some point during that walk, they will exhaust themselves of stupid notions. Then we can return to some better, earlier, version of how to live with each other. On this earth.