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Pipeline projects aim to fill void from refinery closures

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Feasibility hinges on shipper commitments, analysts say

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Projects face competition from seaborne imports

By Nicole Jao and Shariq Khan

NEW YORK, Nov 18 (Reuters) - A race is on among energy

companies to build a major fuel pipeline to the U.S. West Coast,

a potentially lucrative prize as the planned closure of two

California refineries threatens to send gasoline prices in the

isolated market soaring.

Motorists in West Coast states have long paid some of the

country's highest fuel prices due to limited regional production

and minimal connectivity to the Gulf Coast refining hub. There

are no pipelines delivering fuel to California from across the

Rocky Mountains and only a few pipelines deliver to the West

Coast from the Gulf Coast, according to the Energy Information

Administration.

Phillips 66's Los Angeles plant began winding down operations in

September and Valero Energy's ( VLO ) Benicia refinery plans to close in

April, threatening more price shocks for consumers but

presenting an opportunity for pipeline operators.

Three groups have outlined different proposals to fill the

near 280,000 barrel-per-day supply void the closures create.

These include refiner HF Sinclair ( DINO ), a unit of pipeline operator

ONEOK ( OKE ), and a partnership between refiner Phillips 66

and midstream-focused Kinder Morgan ( KMI ).

However, the first to reach a final investment decision may

be the only one to secure a potential multi-billion-dollar

windfall because multiple pipelines to the West Coast would eat

into each other's margins, which are already limited due to the

availability of waterborne imports to California.

"When you see multiple pipeline projects being proposed at

the same time, typically only one of them gets done," said Skip

York, chief energy strategist at Turner, Mason & Co.

POLITICAL PRESSURE OPENS RARE WINDOW

The planned refinery closures have put intense pressure on

California Governor Gavin Newsom to stop fuel prices from

surging, creating a rare window for the approval of a fossil

fuel project in a state that has long vilified "Big Oil".

"Given the backlash to refinery closures, it's hard to

imagine much resistance to new projects," East Daley analyst

Alec Gravelle said.

Capacity commitments make up most of the financing required

to build pipelines, so securing at least 70% of the proposed

projects' capacity could decide which of them progresses, York

said.

That gives Western Gateway - the Phillips 66-Kinder Morgan ( KMI )

project - and HF Sinclair's ( DINO ) proposal an advantage, as the

refiners themselves could guarantee some of the supply,

Scotiabank analyst Paul Cheng said.

None of the proponents have yet announced any capacity

commitments. Phillips 66 declined to comment on competing West

Coast pipeline proposals. The other proponents did not

immediately respond to requests for comment.

Proposals reusing existing lines also have a better chance of

moving forward than new builds because regulatory approval may

be easier, said Debnil Chowdhury, head of Americas and European

refining at S&P Global Commodity Insights.

Parts of Western Gateway and HF Sinclair's ( DINO ) plan propose

using existing lines.

RIVAL REFINERS BET ON WATERBORNE FUELS

While a new pipeline could provide some stability to regional

gasoline prices, refining executives have questioned whether any

will ultimately get built, pointing to California's access to

waterborne fuels.

"In terms of the pipelines that are rumored to come into the

region, I would say that's a big if," said Rick Hessling, chief

commercial officer for Marathon Petroleum ( MPC ), adding the timing and

transportation cost of waterborne barrels trumped pipelines.

Valero Energy ( VLO ), the second-largest independent refiner, is

unlikely to commit to a long-term shipping arrangement with any

of the three projects, Chief Operating Officer Gary Simmons said

during an investor call last month.

"We like the waterborne option because it allows you to

source barrels from anywhere in the world and take advantage of

international arbs that can be open," Simmons said, referring to

price arbitrage opportunities.