Pennsylvania pipeline fight could upend international oil flows

[June 02, 2017]  By Jarrett Renshaw and Jessica Resnick-Ault

NEW YORK (Reuters) - Refiners from the Midwest United States are fighting for access to a vital Pennsylvania pipeline – a move that could cripple their East Coast competitors and redraw the map for international flows of crude and fuel into coveted coastal markets.

The regulatory dispute centers on a proposal by pipeline operator Buckeye Partners’ to that state's Public Utilities Commission. The plan would reverse the flow of fuels on a section of Buckeye’s 350-mile Laurel Pipeline, which currently flows from the East Coast to Pittsburgh.

Because pipelines only flow in one direction, the change would effectively block five East Coast refineries from serving Pittsburgh – with Midwest refiners picking up their market share.

The commission will decide on whether to allow Buckeye to reverse the flow from Pittsburgh, near the state’s western border, to Altoona, a small city about a hundred miles to the east.

For a map detailing the proposal, see: http://tmsnrt.rs/2qk72Ep

Initially, such a reversal would cost East Coast refiners about $10 million annually, according to a study gasoline marketer Gulf Operating commissioned to include in its objections to the Buckeye proposal. Piping gasoline to Pittsburgh yields some of their highest per-barrel profits.

But opponents, including East Coast refiners and some state lawmakers, are far more worried that such a decision would presage a reversal of the entire pipeline. That would take Midwest fuels all the way to Philadelphia on the state's eastern border, where it connects to distribution networks serving the entire eastern seaboard.

For Buckeye, the move represents a bet that surging Midwest refiners will be better customers - keeping its pipeline full to capacity - than their struggling East Coast counterparts.

The stakes are much higher for the refiners involved. Midwest refiners could gain a huge market opportunity to pipe fuels into the East Coast, the largest U.S. gasoline market.

Their products could also make their way to the New York Harbor, a major gasoline trading hub, where they would likely displace imports from Europe that currently account for about 23 percent of the fuel consumed in the region.

For East Coast refiners, access to the Laurel pipeline is a matter of survival.

"I have terrible anxiety, to say the least, when I see this proposal," said Anthony Gallagher, business manager for the local Philadelphia pipefitters union, speaking at a recent hearing on the proposal in Harrisburg, the state’s capital. “It will totally choke off these refiners, and they will have to start laying people off. Then, they will shut down.”

Buckeye’s proposal has also drawn formal objections from state lawmakers and two refiners from the Philadelphia region, Philadelphia Energy Solutions (PES) and Monroe Energy, a subsidiary of Delta Airlines. Together, they employ about 1,000 people.

The two other firms operating East Coast refineries - PBF Energy and Phillips 66 - also own Midwest refineries, which gives them conflicting economic interests in the outcome.

PBF Energy and Phillips 66 did not respond to Reuters’ requests for comment, and neither has filed comments with the commission.

PES and Monroe declined to comment to Reuters but filed formal written objections to the commission.

Monroe argued that approving Buckeye’s plan would require East Coast refiners to “reduce output or sell petroleum products at drastically reduced prices” into an already oversupplied market.

A delegation of Philadelphia-area lawmakers sent a letter warning the commission of “devastating economic effects.”

Buckeye’s attorney David MacGregor countered that consumers will reap the economic benefits.

Midwest refiners, he said at a recent commission hearing, could lower gas prices throughout Pennsylvania and lessen the region’s reliance on imported oil.

Pipes emerge from the ground at the Buckeye Partners' Laurel Pipeline terminal in Pittsburgh, Pennsylvania, U.S. May 1, 2017. REUTERS/Jason Cohn

A decision on the reversal is not likely until the fall and rests with the five-member state board. The five board members declined to comment through a commission spokeswoman.

SURVIVAL STRUGGLE

East Coast refiners have already closed plants because of their precarious competitive position.

The region's refineries currently meet about one-fifth of gasoline demand on the East Coast, according to the U.S. Energy Information Administration. The rest comes from Gulf Coast refiners, via the Colonial and Plantation pipelines, and imports from Europe and Canada.

Currently, Pittsburgh can access fuels from either the Midwest – through other pipelines owned by Buckeye - or the East Coast, whichever is cheaper at the time.

Losing that market would be a blow to the East Coast plants, but the impact would be far more dire if Buckeye ultimately seeks to reverse the flow of the Laurel line all the way to Philadelphia.

That’s why both Philadelphia refineries and other opponents have argued that regulators must consider Buckeye's broader intent - a possible reversal of flows along the entire pipeline - in deciding the current dispute over reversing a smaller section.

"It is imperative that there be a full investigation” of Buckeye’s long-term plans, Philadelphia Energy Solutions argued in a filing to the commission.

In an interview with Reuters, a Houston-based Buckeye executive would not rule out seeking future reversals that would extend Midwest refiners’ pipeline access to Philadelphia.

“We go where the market wants us to go,” said Bill Hollis, a Buckeye senior vice president.

THE COMPETITIVE EDGE: CHEAP CANADIAN CRUDE

The market is tilting in favor of Midwest refiners mostly because they can access cheaper crude than their East Coast counterparts.

Midwest refiners including Marathon Petroleum and Husky Energy and Phillips 66 have added nearly a half-million barrels of daily refining capacity in the last ten years, tailoring their systems to run crude out of Canada and North Dakota’s Bakken shale oil field.

Today, Midwest refiners process 80 percent of the crude that the U.S. imports from Canada, according to the U.S. Energy Information Administration (EIA), and crude from Western Canada can be purchased for $14 a barrel less than benchmark U.S. crude.

Midwest refiners can access Canada's crude via pipeline; East Coast refiners have to pay more to get it shipped on boats or trains.

Adding to their competitive advantage, Midwest refiners will soon be able to tap Bakken crude through the nearly completed Dakota Access Pipeline.

The East Coast refiners import most of the oil they turn into gasoline and diesel from West Africa and South America, and the region must import gasoline from Europe and Canada to meet local demand.

Buckeye’s proposal is a bet on the future of the Midwest refineries - and against those on the East Coast, Hollis said.

“You don’t have to have 35 years in the industry to know where the trend is going," he said.

(Editing by David Gaffen and Brian Thevenot)

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