Pennsylvania suppliers fight Laurel reversal

Struggling east coast fuel suppliers want Pennsylvania regulators to not cede a key state supply pipeline to out-of-state forces.

Pennsylvania's Public Utility Commission will determine whether it can or should block Buckeye Partners' proposed reversal of the western section of the Laurel Pipeline system. Changing flows to move eastward would give midcontinent suppliers cheap pipeline transportation to Pittsburgh and surrounding markets served today by Philadelphia and New York sources. The move could also shift authority over the pipeline from state to federal regulators.

A reversal provides Pittsburgh and western Pennsylvania with a less expensive, more flexible supply of fuel, Buckeye told the commission. Opponents counter that the reversal would reduce Pittsburgh's supply options and shutter Pennsylvania refineries, driving up fuel prices across the northeast. They fear approval gives Buckeye and the midcontinent an eventual direct path into Philadelphia.

The proposal drew concerned comment from Pennsylvania legislators and the Philadelphia-area refining hub since Buckeye filed for approval in November. Midcontinent refiners Marathon Petroleum and BP joined local heating oil suppliers filing in support of the reversal.

"It is a significant issue for people throughout the Commonwealth," opponent Monroe Energy general counsel and vice president Chris Ruggiero said.

The nearly 60-year-old Laurel Pipeline system moves products west from outside Philadelphia through terminals in central Pennsylvania and Pittsburgh to the state's western edge. Volumes across the system have fallen, particularly in winter, after Sunoco Logistics began service in 2015 on its 85,000 b/d Allegheny Access pipeline moving fuel across the Ohio and Pennsylvania border.

Buckeye did not consider the drop in volumes from the east "overly material" last August but was already pursuing its own 40,000 b/d midcontinent link into Pennsylvania.

The company last year found commitments for reversed service on the pipeline currently running from Altoona in central Pennsylvania to the state's western edge. Buckeye did not respond to a request for comment on this story, but in investor documents today reiterated that it planned the $200mn project to begin service at the end of next year. The company has not referenced the PUC process in earnings calls, securities filings or investor presentations.

Midcontinent refiners have cheaper access to North American crude and generally run more complex facilities. Marathon Petroleum, Husky and BP all operate refineries in that region capable of running cheaper, heavy Canadian crude, and all regional refiners have transportation advantages for lighter US crude. But the region lacks competitive export opportunities. Refiners instead crept in to traditional US Gulf coast and Atlantic coast markets.

Only PBF Energy operates heavy refining capacity on the Atlantic coast. Pennsylvania refiners depend on light, sweet feedstock, almost all of it now imported.

Buckeye filings to state regulators requesting approval for the reversal tout lower midcontinent wholesale fuel prices and falling shipments from the pipeline's current origin near Philadelphia.

"This change in direction of service will provide ongoing access to lower wholesale commodity prices for gasoline and other petroleum products to consumers in western and central Pennsylvania," the company wrote in its application. "Moreover, the change in service also will provide an additional [midcontinent] source of petroleum products in the event of a disruption of east coast supplies."

Pennsylvania PUC approval would also shift tariff review duties for the reversed section to the Federal Energy Regulatory Commission as an interstate pipeline. If the commission approves Buckeye's language, future pipeline segment reversals reaching into Philadelphia may skip a repeat of the current process.

Pennsylvania refiners Monroe Energy and Philadelphia Energy Solutions (PES) have fought the proposal along with fuel distributor Gulf Oil and retailer Sheetz.

PES, which operates the Atlantic coast's largest refinery, a 330,000 b/d complex in Philadelphia, said it moved 20pc of its total 2016 production through the Laurel system. The refiner cut benefits and laid off non-union workers last fall as it struggles with federal fuel regulations and deteriorating margins.

PES declined to comment on this story. But the refiner in commission filings argued the reversal, which would effectively switch the Pittsburgh market to midcontinent refiners in Ohio, Michigan and Illinois, would deprive in-state refiners of "markets which cannot be replaced at a similar margin, which would result in inducing northeast refinery capacity closures." This would potentially raise costs for local consumers, the company said.

Buckeye has proposed access for Pennsylvania refiners to upstate New York, a market PES and Monroe dismissed as a poor substitute in filings and conversations.

Sheetz argues that Western Pennsylvania already has pipeline access from the midcontinent, and the Laurel reversal would reduce supply flexibility for retailers in the area.

"Laurel has not provided sufficient evidence that independent fuel retailers in western Pennsylvania will continue to have viable options for purchasing fuel from east coast suppliers, including eastern Pennsylvania refineries," Sheetz said in its protest.

Administrative hearings on the proposal will continueinto November. Gulf Oil and PES, supported by Monroe, this week pushed an administrative law judge to consider how approval could lead to future reversals and federal governance administration of the line. A public hearing on the debate, expected within weeks, had not yet been set.