Nixed pipeline could have eased gas crunch

Colonial had approval but not financial support for third line to Atlanta.

Colonial Pipeline Co.

Headquarters: Alpharetta

What it does: Operates a 5,500-mile pipeline network from Houston to New York that ships gasoline, diesel, jet fuel, heating oil and other refined oil products.

2015 volume: 38 billion gallons (equivalent to 9 tanker ships a day)

History: Originally founded in 1961 as Suwannee Pipe Line Co. by eight oil companies. Changed to Colonial Pipeline in 1962. Completed its first main pipeline in 1964.

2015 revenue: $1.3 billion

Leadership: Tim Felt, president and CEO

Employees: About 700

Colonial Pipeline’s profits and dividends

Year, Profit, Dividends to owners

2008: $193.1 million, $171.4 million

2009: $277.1 million,$288.8 million

2010: $272.9 million,$299.0 million

2011: $310.5 million,$305.5 million

2012: $343.1 million,$341.1 million

2013: $314.5 million,$307.9 million

2014: $322.3 million,$319.4 million

2015: $315.5 million,$351.8 million

Source: Company filings to the Federal Energy Regulatory Commission

On page 1: Alabama spill Colonial's worst

Colonial Pipeline planned a decade ago to build another fuel pipeline to Atlanta. It would have helped minimize last week’s gasoline shortages after one of the largest leaks in the Alpharetta company’s history crimped the region’s supply.

But that additional pipeline, originally slated to be completed in 2010, doesn’t exist.

Neither Colonial nor its fuel-shipping customers have been willing to pay for the expansion the company proposed a decade ago. The $1 billion project would have added a third pipeline stretching 500 miles from Gulf Coast refineries to Atlanta, its largest shipping point.

The pipeline would have increased Colonial’s overall capacity by 30 percent and provided “an additional measure of protection from disruptions,” according to filings to the Federal Energy Regulatory Commission, which oversees interstate pipelines.

That’s important. Colonial, until last week little-known outside its own industry, operates the largest fuel-shipping pipeline in the nation in terms of volume. Its system handles 40 percent of gasoline used on the East Coast.

It was originally founded in 1961 as a partnership of eight oil companies, but most have departed over the years. Colonial is now owned by six partners, mostly pensions and financial firms. They include a unit owned by the billionaire Koch brothers, private equity firm KKR & Co., South Korea’s national pension service, a Quebec pension fund, and two units of the Royal Dutch Shell oil company.

Officials at Colonial and FERC declined a reporter’s requests for interviews, but Colonial answered some emailed questions.

The company predicted a decade ago that its 5,500-mile fuel pipeline system would become increasingly overburdened and vulnerable to “spot outages” unless it built the extra pipeline.

Indeed, Colonial’s system has been slam-full for the past three years, according to industry experts and company filings. As a result, refineries, airlines and other customers have been scrabbling over limited space to ship their gasoline, diesel and other fuels to Atlanta, New York and other markets.

“They’ve been running flat out all the time for three years,” said Matthew Kohlman, S&P Global Platts’ senior managing editor for refined products. As a result, shippers often have to buy space on the pipelines in costly side deals. “It’s like a ticket scalper’s market in a way,” he said.

Two main Colonial pipelines serve the Atlanta area. Line 1 carries gasoline to distribution points where trucks fill up for deliveries to retailers. Line 2 carries other types of fuel.

On Sept. 9 a Colonial inspector found a leak in a section of Line 1 outside Birmingham, Ala. The leak forced a shutdown of the line and, while some gasoline was still shipped through Line 2 or by other means, led within days to spot outages and higher prices that had metro Atlanta drivers hunting for working pumps.

If the third pipeline had been in place, “there would have been far less shortages because there would have been available capacity,” said Andy Lipow, head of Lipow Oil Associates, a petroleum industry consulting firm in Houston.

But Colonial has been very slow to build new pipelines over the past decade, interviews with industry experts and an examination by the Atlanta Journal-Constitution of company filings and decisions by FERC indicate.

The proposed $1 billion pipeline got FERC approval in 2006, including Colonial’s plan to tack on a surcharge to customers’ rates to help finance it.

Suspended by recession

Colonial suspended the project in 2009 after the financial crisis and Great Recession. The company also shelved a 2013 plan to expand its main pipeline from North Carolina to New York.

A Colonial spokesman said the 2006 project “was no longer viable” after expected costs rose more than 300 percent and projections pointed to falling fuel demand.

For Colonial to build a pipeline, “our customers must support it and be willing to commit to shipping sufficient volumes on a new line; regulators must support it; and it must be buildable and economically viable,” the Colonial spokesman said in an email.

The company opted for cheaper projects to boost capacity slightly by adding more powerful pumps to push fuel through existing pipelines faster, at higher pressure. Last week, Colonial spokesman Steve Baker said the higher pressure “wouldn’t have added any kind of risk.”

Industry experts say new pipelines are increasingly difficult to build because of public opposition, tougher regulation, and sometimes customer resistance to rate increases to pay for the expansions.

Earlier this year, owners of the Palmetto Pipeline suspended the project after public outcry prompted state officials in Georgia to temporarily ban pipeline companies from using eminent domain to condemn private property. The fuel pipeline was to run across Georgia from near Augusta to Jacksonville, Fla.

Colonial probably would have faced less public opposition, because it planned to build its third pipeline mostly on its existing right-of-way.

A question of cash

But it appears the biggest barrier may have been a lack of support from customers. Also, Colonial faces a steady drain of hefty dividends paid each year to its owners.

Colonial has generated more than $2.3 billion in profits over the past eight years — or about 25 cents on every dollar that it collects from shippers — according to its annual financial reports filed with FERC. But for at least the last several years, the company has pumped all those profits, and then some, to its owners. Dividends total nearly $2.4 billion in those eight years.

Meanwhile, Colonial has had trouble rounding up backing for its expansion plans from customers, according to industry watchers and Colonial.

Kohlman said Colonial’s plans for a third big pipe running 500 miles from Baton Rouge to Atlanta became “less economic” during the Great Recession, as consumers drove less and oil companies retreated from heavy spending.

Fuel shipments have hit record levels since then, he said. Colonial’s pipes are full, thanks to the economic recovery, a glut of refined oil products from the fracking boom, and refinery expansions along the Gulf Coast.

But so far, that hasn’t translated into solid support for new pipelines, said Lipow.

Pipeline companies “don’t just build a 1,500-mile pipeline hoping people will show up,” said Lipow. “In order to spend all those billions, they wanted shippers to commit” to enough future volume to justify the new pipes. But they didn’t, he said.

“If the shippers aren’t willing to commit, why should you build it?” he said.