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Colonial seeks FERC permission to change grades in

pipeline

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Gasoline shippers oppose changes, say pump prices will

rise

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Pipeline is most efficient way to ship fuel to US East

Coast

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Colonial says changes will boost capacity on main gasoline

line

By Shariq Khan and Nicole Jao

NEW YORK, March 10 (Reuters) - At least four U.S.

gasoline marketers are preparing legal and regulatory challenges

to the Colonial Pipeline over proposed changes in fuel shipping

terms which the companies say will hurt their margins and drive

up fuel prices at the pump, sources familiar with the

discussions said.

The Colonial Pipeline is a key artery for shipping fuel from

the U.S. Gulf Coast to the East Coast, where refining capacity

has shrunk and pipeline shipments are the most cost-effective

way to meet regional demand. Changes to the pipeline's

operations can have major impacts on markets in the world's

largest motor fuel consuming nation.

Colonial last week sought approval from the Federal Energy

Regulatory Commission to stop shipping different gasoline grades

at the same time, and to eliminate shipments of so-called Grade

5 gasoline. A Colonial spokesperson said the changes would

streamline its operations and minimize slowdowns.

Two U.S. gasoline traders said their firms were

exploring options for court challenges if Colonial follows

through with the changes. Two others said they plan to file

protest notices asking FERC to block Colonial's proposed changes

due to potential harm to shippers and consumers.

Colonial said the changes it proposed last month should add

15,000 to 20,000 barrels per day of capacity to Colonial's main

gasoline line. Colonial believes this will help shippers and

consumers by moving more fuel on a pipeline that ran full

throughout last year, a spokesperson said.

However, Colonial shippers that Reuters spoke with said the

changes will hurt their margins, and restrict the overall U.S.

gasoline supply pool. They said Gulf Coast refiners would have

to reduce blending of additives during times when regulators

allow sale of gasoline with a higher Reid Vapor Pressure, or

RVP.

The traders requested anonymity as the deliberations are

confidential and they are not authorized spokespersons for their

firms. A number of Gulf Coast refiners contacted by Reuters,

including ExxonMobil, BP, and Phillips 66, refused to comment

about the proposed changes.

Colonial said it finds it unlikely a direct link could be

found between its proposed changes and increased consumer

prices, but added it cannot speak to how and whether shippers

pass incremental costs to consumers at the pump.

The company said it does not discuss specific volumes

shipped of specific products, although it did that last month

when it requested changes to gasoline grades traded in the U.S.

Midwest. A number of Colonial shippers have filed protests with

FERC about those changes too, citing similar arguments.

BLENDING BATTLE

RVP ratings denote fuel volatility. Blending gasoline with

butane, naphtha or other cheap additives raises the fuel's RVP

rating but lowers production costs and increases the amount of

fuel available for sale, allowing refiners to sell the fuel at

cheaper prices.

Three Colonial shippers told Reuters that refiners will have

to pump more expensive grades to meet Colonial's proposed new

specifications, so prices will ultimately rise for consumers at

the pump.

Shippers have a valid argument that the proposal could

boost pump prices by limiting their ability to take advantage of

higher RVP blending, said Alex Hodes, oil analyst at brokerage

StoneX.

Colonial is also seeking to amend its rules to specify

that it can deliver fuel that meets local regulations.

Shippers say that would take away their blending

opportunity and shift it to Colonial, which will then be able to

deliver higher RVP grades by adding butane to the fuel through a

joint-venture company Colonial set up a decade ago. Margins

would rise for that joint venture, shippers claimed, and the

venture can then sell more excess gasoline created from its

blending.

"Blending already occurs across the supply chain and fuels

system, and these changes align with industry practices as well

as state and federal standards," a Colonial spokesperson said,

without saying whether the proposed changes would benefit

Colonial's blending operations and gasoline sales.

Shippers said more blending by Colonial would raise pump

prices because its butane blending operations are more expensive

than those of Gulf Coast refiners and blenders, who produce and

store the additive or take deliveries through pipelines. That is

at least 8 to 10 cents a gallon cheaper, they say, than

Colonial's joint venture which takes butane deliveries through

railway, then trucks the additive to its terminal and injects it

into the pipeline in Atlanta.

StoneX's Hodes said that estimate is in line with the

typical increase for rail deliveries of any fuel when compared

to pipeline movements.

"We cannot comment on blending logistics costs along the

supply chain and dwelling on a specific aspect like this ignores

the larger benefits these changes bring to shippers, Colonial,

and the markets we serve," the Colonial spokesperson said.