Kinder Morgan Energy Partners LP said Friday it has cancelled plans for the $2 billion Freedom pipeline, a conduit that would have brought a direct stream of West Texas crude to refiners on the U.S. West Coast.
The cancellation underscores the growing difficulty pipeline companies are having in selling new large-scale projects as oil producers and refiners increasingly rely on railroads to ship crude around. Once seen as temporary necessities to deliver oil from emerging oil-producing regions in Alberta, Texas and North Dakota, railcars have become a permanent fixture of the North American energy landscape because they allow refiners more diversity of supply.
This trend means that pipeline giants like Kinder Morgan will have to focus on smaller pipeline projects and branch out into other transportation segments, said Darren Horowitz, analyst at Raymond James.
"It's probably the smaller-scale, smaller-scope projects getting built, not the multi-year, billion dollar type projects," Mr. Horowitz said.
Kinder Morgan Energy Partners first pitched the 277,000 barrel-a-day pipeline in April, hoping to woo West Coast refiners dependent on more expensive oil shipped in from Russia, Ecuador and about a dozen other countries. Refiners in the fuel-hungry California market are eager to buy the same cheaper domestic crude that is already benefiting their competitors in the Midwest and Gulf Coast.
But Valero Energy Corp., Tesoro Corp. and others operating on the West Coast turned Kinder Morgan's proposal down, saying railcars gave them more flexibility. Bringing west Texas crude oil via Freedom and its $5-a-barrel tariff would not be much cheaper than shipping crude oil via rail from the Bakken oil field in North Dakota but would tie refiners down to long-term pipeline contracts.
That lack of interest forced Kinder Morgan to cancel plans for Freedom, said Mark Kissel, the company's president of west region gas pipelines.
"We don't believe in the concept of build it and they will come," Mr. Kissel said.
Kinder Morgan Energy Partners said it will now switch its focus to crude-by-rail projects in Texas and California.
Refiners on the West Coast are already pursuing their own rail projects. Valero, one of the largest independent refiners in the U.S., is in the midst of a $30 million project to add rail capacity at its 170,000 barrel-a-day refinery in Benicia, Calif.
Tesoro, considered the biggest proponent of crude by rail, announced last month a $100 million joint venture with freight company Savage Cos. to bring an initial 120,000 barrels a day of crude from the Bakken Shale in North Dakota to the company's West Coast refineries by rail and barge.
Kinder Morgan Energy Partners' general partner is owned by Kinder Morgan Inc., one of the largest energy companies in the U.S.
Copyright (c) 2012 Dow Jones & Company, Inc.
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