Space Oddity – Congestion On The Colonial Refined Products Pipeline

While recent analysis has raised concerns crude oil pipelines are running half empty the opposite is true for many of the nations’ refined product distribution pipes. Take the huge Colonial Pipeline system that delivers as much as 2.7 MMb/d of refined products from Gulf Coast refineries to destinations up the East Coast as far as New York. The southern stretch of the pipeline from Pasadena near Houston to Greensboro, NC has been running full since 2012 - meaning that shipper volumes are subject to rationing or apportionment. Today we start a two-part series explaining why the Colonial pipeline is so congested and how it operates.

We previously detailed the woes of East Coast refineries back in June of 2012 when plants had been shuttered due to poor refining margins (see Don’t Let The Sun Go Down On Me). Since then refinery fortunes in the region that the Energy Information Administration (EIA) calls Petroleum Administration for Defense District (PADD) I - have recovered somewhat – starting with the “rescue” purchase by Philadelphia Energy Solutions of a former Sunoco refinery in Philadelphia (see Beginning To See The Light). This refinery renaissance was in large part due to processing cheaper domestic crude railed from the Bakken instead of more expensive imports. In the case of two refineries in Delaware City and Paulsboro, NJ owned by PBF Energy – the revival formula also involved railing in heavy crude from Canada (see Masterpiece Refining). But despite the fact that refiners have done well in the shale era because of access to cheaper “advantaged” crudes (see Living With A Material Surge), East Coast refineries still don’t produce enough refined product to meet local demand – particularly heating oil during the peak winter season (see New York State of Contango) and gasoline in the summer. The shortfall is made up by a combination of shipments from the nation’s largest refining center – the Gulf Coast (PADD III - which hosts just over 50% of U.S. refinery capacity – 9.4 MMb/d) and imports, mostly from overseas.

The chart in Figure #1 shows EIA monthly data since 2011 for refined products delivered into PADD I by pipeline from PADD III (blue shaded area) by tanker and barge from PADD III (red shaded area) and net imports (green shaded area). The data shown is for all grades of gasoline and blending components as well as distillates (road diesel, heating oil and jet kero). Over the past 5-years waterborne shipments from PADD III have averaged about 0.5 MMb/d, pipeline movements from PADD III have grown from an average 2.5 MMb/d in 2011 to average 2.7 MMb/d in 2015 (January to September) and net imports have averaged about 0.9 MMb/d. Imports have a seasonal pattern with peaks for heating oil in the winter and gasoline in the summer. Based on EIA data for total consumption of gasoline and distillates in PADD I we can imply that local refineries provided about 3 MMb/d of supply over the same period. For our analysis today there are a couple of important things to note from the chart. First waterborne shipments into PADD I are small compared to pipeline movements. That is because the Jones Act regulates waterborne movements between two U.S. ports –requiring the use of more expensive U.S. flag vessels (see The Sea and Mr. Jones). As a result, typical refined product movements by tanker or barge from the Gulf Coast to the East Coast cost about 15 cnts/gal compared to equivalent pipeline tariffs of about 5 cnts/gal. Which leads to the second point to note - that domestic waterborne movements are typically more expensive than imports (e.g. across the “pond” from Europe) that use cheaper non-U.S. flag vessels. That explains why imports are on average double waterborne movements from PADD III and why they take up the slack by serving seasonal demand peaks for gasoline and diesel. But the biggest takeaway from the chart is that the cheapest and by far the most popular way for refined products to reach PADD I from Gulf Coast refineries is by pipeline. Most of that volume is shipped on the Colonial system.