An Oil Pipeline Opportunity Wasted

For Californians, a pipeline that supplements available fuel supply would be worthwhile.

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FILE - In this Nov. 10, 2010 file photo, petrochemical plants and refineries are shown in this aerial view, in Deer Park, Texas. Three commissioners appointed by Gov. Rick Perry may grant some of the nation's largest refineries a tax refund of more than $135 million.

Kinder Morgan Energy Partners is in the news a lot lately. The Houston-based company is one of the leading pipeline and energy storage companies in the U.S. It reportedly has a combined enterprise value of about $115 billion and owns an interest in or operates approximately 80,000 miles of pipelines and 180 terminals. Understandably, many analysts follow it closely. They're curious to see where this company is going, both figuratively and literally.

In April, Kinder Morgan proposed a 277,000 barrel per day "Freedom" pipeline that would transport light sweet crude from the West Texas Permian Basin to refiners supplying Los Angeles and southern California. But, it had no takers. Downstreamtoday.com reported that refiners such as Valero Energy Corp., Tesoro Corp and Phillips 66 declined to sign contracts with Kinder Morgan, and instead will continue to rely on rail cars and barges to deliver the oil from North Dakota, Canada and Texas to the refineries.

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The refiners say that relying on train shipments allows them access to crude from different regions at different prices, and that flexibility is not always present in long-term pipeline contracts. An effective bluff, perhaps?

According to the Wall Street Journal, refiners in California have the highest operating costs in the U.S. because of a geography that keeps them isolated from the larger U.S. market, and also because of the state's air-quality regulations.

So for now the competition from other markets may serve the refineries well. But as encouraging as it may be to have cheaper fuel arriving by rail, one cannot ignore the inherent risks associated by oil traveling on trains. It's a great delivery system until it isn't. Until something happens. Perhaps the inherent security of that pipeline has been overlooked?

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In time it may be inevitable that California refineries regret their decision that shelved the Freedom pipeline. Kinder Morgan said that it would "not move forward without customer support." It doesn't operate on a "build it and they will come" philosophy. So is it simply a matter of time before that 277,000 barrels per day option entices the refiners?

For Californians, a pipeline that further supplements available fuel supply would certainly be worthwhile. Would it impact retail pricing favorably for consumers? That may be too much to ask.

Gregg Laskoski is a senior petroleum analyst with GasBuddy.com.

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