Colonial Pipeline plan to cut off dirty
jet fuel could hit airlines
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[November 02, 2016]
By Devika Krishna Kumar and Liz Hampton
NEW YORK/HOUSTON (Reuters) - Major airlines
including Delta, United and American could face higher fuel costs if
U.S. regulators allow Colonial Pipeline Co to stop shipping a dirtier
blend of jet fuel by 2018.
The Colonial system carries most of the jet fuel that is delivered via
pipeline to the East Coast and used by busy airports serving New York,
Washington, D.C. and Atlanta, along with U.S. military bases.
The pipeline company said earlier this month it would ask the Federal
Energy Regulatory Commission for permission to halt shipments of
high-sulfur jet fuel and diesel.
Preliminary estimates indicate that jet fuel prices could rise
significantly if Colonial wins approval, said John Heimlich, chief
economist for the industry trade group Airlines for America (A4A).
Rising fuel prices could make certain flights unprofitable, forcing
airlines to cut service and sell fewer seats - likely at higher prices.
It would take jet fuel price increases of 30 to 50 cents per gallon to
have a big impact on pricing or flight availability, said Robert Mann,
an industry consultant and former executive at American and other
airlines. Jet fuel in the New York Harbor traded at about $1.44 per
gallon as of Tuesday.
A Colonial spokeswoman said the pipeline company was discussing its
regulatory proposal with affected airlines but declined further comment
to Reuters.
The move would allow Colonial, which daily ships more than 3 million
barrels of petroleum products, to more efficiently move more low-sulfur
products through its pipeline. Cutting down on dirtier fuels would
reduce so-called "transmix," which occurs when high-sulfur and
low-sulfur products are combined. The resulting mixture has to be
refined or blended again.
Colonial has not specified what it intends to ship in place of
high-sulfur fuels. But the pipeline has been full for about four years,
and Colonial would likely see strong demand for any open space.
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The company shut its gasoline pipeline for the second time in less than
two months on Monday after an explosion in Alabama killed one worker and
injured five others. It briefly shut the distillates line as well, which
transports jet fuel.
American Airlines Group Inc, United Continental Holdings Inc and JetBlue
Airways Corp declined to comment on Colonial's regulatory proposal,
referring questions to A4A. A spokeswoman for Southwest Airlines Co
declined to comment, saying the airline is still evaluating the plan.
Delta Air Lines Inc may be more insulated from fuel price shocks than
others because the company operates a refinery in the northeast U.S.
that is heavily geared toward jet fuel production. Delta did not respond
to requests for comment.
SHIFTING REGULATIONS, DEMAND
Colonial's plan is driven largely by waning demand for high-sulfur
fuels. Railroad and marine transportation companies, for instance, are
using less high-sulfur diesel fuel in response to environmental
regulations.
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Sulfur levels in jet fuel are not currently regulated, however, and
the industry still uses high-sulfur fuels widely, in part because
they have better lubricating qualities for airplane engines.
Airlines can and do use a range of cleaner fuels, Heimlich said,
which Colonial would continue to ship under its proposal. But
airlines are concerned that many refiners could take years to make
upgrades required to produce jet fuel to Colonial's proposed
low-sulfur standard.
Some refiners would need to invest in desulfurization units known as
hydrotreaters, said David Hackett, president of the energy
consultancy Stillwater Associates. Or they could update their
facilities to process sweet crude instead of high-sulfur sour crude.
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Either way, refinery costs would go up, and the transition would
take time, raising the prospect of airline fuel shortages.
"Three years is minimum," Hackett said.
POLITICAL, LOGISTICAL CHALLENGES
Colonial needs permission from the energy commission to stop
shipments of high-sulfur fuel, and the airlines can exert influence
on that process.
A commission spokeswoman declined to comment, noting that Colonial's
proposal has not been formally filed with the agency.
At stake is a large portion of the about 400,000 barrels per day
(bpd) of jet fuel that moves from the U.S. Gulf to the East Coast
via pipeline, according to U.S. Energy Department data. About
two-thirds of East Coast jet fuel demand is currently met by
pipeline flows from the Gulf Coast, according to analysts at Energy
Aspects.
If Colonial wins approval, airports in the southeastern U.S. may
turn to Kinder Morgan's 700,000 barrel-per-day Plantation Pipeline,
which has less than a third of Colonial's capacity. Kinder Morgan,
in a statement, said it is "evaluating the changing market
conditions" before considering any expansion of shipping high-sulfur
jet fuel.
If Plantation and other interstate pipelines followed Colonial's
lead, it could make supplying airports even more challenging.
Trucking fuel to major airports is not feasible due to the sheer
volume of fuel needed.
Waterborne shipments could be expensive, in part due to the Jones
Act, a maritime policy which requires goods transported by water
between U.S. ports to be carried on U.S.-flagged ships. That may
make it cheaper to import jet fuel, particularly from Europe.
(Reporting by Devika Krishna Kumar in New York and Liz Hampton in
Houston; additional reporting by Jeffrey Dastin in New York; Editing
by David Gaffen and Brian Thevenot)
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