Pipeline Dispute Is a Case Study
California’s largest pipeline operator has for months spurned a distributor’s request for a connection that would make it easier to import badly needed gasoline.
The dispute between Kinder Morgan Energy Partners and Chemoil Corp. is in many ways a run-of-the-mill conflict between business rivals. But it offers a rare glimpse into the kinds of bottlenecks and market control matters that help make California’s unique blend of cleaner-burning gasoline so expensive.
What’s more, it shows how difficult these troubles are to fix.
“I’m painfully aware of this project,” James Boyd, a state energy commissioner, said during a hearing in June on the state’s petroleum market problems. Boyd voiced concern that Kinder Morgan, whose pipelines have benefited from access to public rights of way, “seems to be able to block ... the addition of a facility that would address our needs here in California.”
What Chemoil wants is a direct tie-in to a Kinder Morgan pipeline so it can send gasoline and diesel from its storage tanks in Carson to a fuel terminal -- operated by Kinder Morgan -- that is a major hub for distributing fuel to Southern California, Phoenix and Las Vegas.
A spokesman for Houston-based Kinder Morgan said negotiations with Chemoil stalled over the summer. “It was like any other business transaction,” said Rick Rainey, Kinder Morgan’s corporate communications manager. “Sometimes an agreement can’t be reached.”
The tussle started after both companies diversified from their traditional businesses into California’s lucrative and chronically undersupplied fuel market.
Kinder Morgan is best known as one of the nation’s largest “common carrier” pipeline operators, a business that involves collecting fees in return for carrying gasoline, diesel and jet fuel from refineries and ports to the fueling terminals where tanker trucks load up. It owns all the major fuel pipelines in California and is required to serve all customers equally, charging rates set by the federal government.
In recent years, Kinder Morgan has been buying terminals, private pipelines and other assets so it can import and store fuel on its own. That gives Kinder Morgan the ability to charge fuel customers fees all along the way, from dock to storage and through pipelines and terminals.
The pipeline segment in dispute is a private feeder line and not part of Kinder Morgan’s common carrier network.
San Francisco-based Chemoil, a $3.5-billion, worldwide supplier of heavy marine fuel oils, created a subsidiary in 2004 to crack the gasoline market.
To make way for the fuel business in Southern California, Chemoil upgraded at least one port-side storage tank in Long Beach to hold fuels like gasoline instead of heavy fuel oils. The company also built a pipeline to carry the imports to Carson, where the company converted enough storage capacity to hold more than 500,000 barrels of gasoline, diesel, jet fuel or their key ingredients, Chemoil manager Barry Hamberg said at the state oil-market hearing.
Then Chemoil sought a direct connection to Kinder Morgan’s system, assuming it would be granted without much fuss, because most of the region’s refiners have just such a connection from their own tank farms to the pipeline at issue.
It didn’t turn out that way. Kinder Morgan is awaiting approval to build 19 massive new fuel storage tanks at its Carson facility -- which would compete with Chemoil’s Carson storage facility for customers.
“Kinder Morgan had a great deal of control on the pipeline infrastructure, distribution infrastructure, in California,” Hamberg testified. “And it’s one of the areas that we’ve struggled with.”
For now, Chemoil is distributing its fuel by a more costly route: detouring through a BP terminal that is connected to the Kinder Morgan pipe, and routing fuel from Chemoil tanks to Kinder Morgan tanks and then into the pipeline, Hamberg said. He declined to elaborate on his testimony.
When Kinder Morgan balked at the request for a tie-in, Chemoil sought intervention from the Federal Energy Regulatory Commission, the California Energy Commission and the state Public Utilities Commission. All three agencies concluded the pipeline wasn’t within their jurisdiction -- and that they couldn’t force Kinder Morgan to accommodate Chemoil, said Boyd, the energy commissioner.
California is increasingly dependent on outside sources of gasoline and could benefit if new players like Chemoil invest in facilities, bring in supplies and inject more competition into the state’s fuel market. At current consumption rates, California will need to more than double gasoline and diesel imports to 10.1 million gallons a day by 2010, state officials say.
Accommodating that growth will require substantial expansion of port facilities, storage tanks, terminals and pipelines and significant investment by companies like Chemoil.
“Here’s an example of the type of infrastructure solutions that we’d like to see, and it’s being frustrated,” Boyd said in an interview. “We did not directly accuse Kinder Morgan of exercising market power ... but these people have [Chemoil] over a barrel.”
Industry consultant Tim Hamilton, a frequent critic of major oil companies, said the pipeline spat was indicative of a market tightly controlled by a group of players -- an oligopoly -- in which each incumbent member benefits from keeping new competitors out of the nation’s most profitable gasoline market.
In this case, Hamilton said, “Kinder’s basically creating an economic barrier to entry.”
Kinder Morgan spokesman Rainey was unapologetic.
“I understand the public good that’s involved, but if we don’t think it’s fair or in the best interest of our shareholders, we’re not going to do it,” Rainey said. “You’re talking about a competitor who wants to use our terminal to further their business.”
The oil industry has consistently maintained that California’s high gasoline prices result from the tight balance between supply and demand for fuel that meets the state’s strict air quality standards. The market’s structure, in which only five or six companies control most of the refineries and gasoline stations, has been blessed by federal regulators through their approval of numerous corporate mergers, the energy companies say.
In addition, few companies are interested in building new refineries, pipelines or other infrastructure because of California’s lengthy permitting process and the state’s goal of reducing petroleum consumption by 15%, said Joe Sparano, president of the Western States Petroleum Assn., which counts Kinder Morgan among its members.
“Many investigations have shown that there is no evidence of market power” by the oil industry, Sparano said. “Disputes often are marked by one side saying that the other party’s not cooperating. If it’s a private line, I’m not sure how someone could make a big deal about it.”
