Perfect World - Could All Sides Win in Pennsylvania's Laurel Pipeline Case?

For a few years now, Buckeye Partners’ plan to revise the current east-to-west refined products flow on its Laurel Pipeline across Pennsylvania has pitted Midwest refiners against their Philadelphia-area brethren — and gasoline and diesel marketers in western Pennsylvania. Each side has good arguments. Midwest refiners note that westbound volumes on Laurel have been declining through the 2010s, and assert that making the western part of the pipeline bidirectional would result in higher utilization of the line and enhance competition in central Pennsylvania, Maryland and eastern West Virginia. Pittsburgh-area marketers counter with the view that allowing refined products to flow east on a portion of Laurel would hurt competition in Pirates/Steelers/Penguins Country, while Philly refiners — their ranks now thinned by the planned closure of the fire-damaged Philadelphia Energy Solutions (PES) facility — say Buckeye’s plan would further threaten their economic viability. Amid all this, might there be a “perfect-world” solution? Today, we provide an update on this still-in-limbo project and discuss a few possible paths forward.

The repurposing, reversal and/or expansion of existing pipelines has been a frequent topic in the RBN blogosphere. In fact, a few projects of this sort have been a subject of a number of blogs, including our focus today. The contentiousness behind Buckeye’s Laurel Pipeline plan is really a battle between refineries in Petroleum Administration for Defense District (PADD) 1 (the East Coast) and PADD 2 (the Midwest). As we said in Back to Red, East Coast refineries, with a paltry 1.2 MMb/d of capacity, can supply only a small portion of PADD 1’s total demand for refined products. Also, for years they relied almost exclusively on waterborne imported crude for feedstock and therefore had little or no competitive advantage over their European refined products rivals. Then, for a few years in the mid-2010s, PADD 1 refineries benefited from the U.S. Shale Revolution by railing in steeply discounted light sweet crude from the Bakken. But they soon lost that leg-up when pipeline constraints from the Bakken to the Gulf Coast eased and the spread between Bakken and Brent prices narrowed — in essence, leaving many East Coast refiners back in the same leaky boat they were sailing pre-shale.

By contrast, it’s been a generally smooth ride this decade for PADD 2 refiners, which as a group has 3.9 MMb/d of refining capacity and produces considerably more gasoline and diesel than the Midwest demands. As we said in Born to Run Heavy, a number of these refineries have undergone major upgrades over the past few years to increase their coking capacity so they can process steeply discounted heavy crudes from Western Canada. (Most of the new coking capacity that came online was added to refineries in PADD 2’s Eastern District, which includes Indiana, Illinois, Kentucky, Tennessee, Michigan and Ohio.) That feedstock price advantage led many of the refineries west of Pittsburgh to believe they could out-compete their East Coast counterparts by providing cheaper refined products in their own backyard.

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