Trains Leave Kinder Morgan Pipeline in Lurch (Wall Street Journal – by Ben LeFebvre)
Growing Use of Railroads to Ferry Crude Leads to Cool Reception for $2 Billion Project
A $2 billion pipeline project intended to ship oil from West Texas's booming oil fields to California has failed to pique the interest of several big refiners in the Golden State. The culprit: the growing popularity of railroads.
Kinder Morgan Energy Partners LP's KMP -0.82%277,000 barrel-a-day Freedom pipeline, proposed in April, would be the first to bring light, sweet oil produced in Texas's Permian Basin to the fuel-hungry Los Angeles market.
That would give refiners in California, which now partly complement the state's declining oil production with expensive crude imports from Alaska, Ecuador and other far-flung nations, a direct shot at the relatively cheap crude squeezed out of shale formations through hydraulic fracturing. Access to that bountiful crude has already boosted the profits of Midwestern and even some Gulf Coast refiners...
...Refiners have in the past preferred pipelines, which still are generally cheaper and safer than rail cars. Rail cars also have potential for major accidents: A March derailment caused 718 barrels of oil to spill in western Minnesota. On Tuesday a train operated by Canadian Pacific Railway Ltd. CP.T -2.09%derailed in Saskatchewan, spilling 575 barrels of crude, the third CP spill in three months.
But because the growing supply of North American crude is coming from various regions where prices can fluctuate for any number of reasons, larger refiners are able to use rail cars to make more opportunistic deals for their crude supply.
Those shifting advantages mean that the Freedom's access to West Texas oil isn't as inherently attractive as it might have once been, said RBN Energy analyst Sandy Fielden.
"The Freedom pipeline open season is probably causing some soul searching among Permian producers and California refiners," Mr. Fielden said in a recent client note.
