4 Takeaways From the Colonial Pipeline Shutdowns
By Samantha Oller on Nov. 14, 2016HELENA, Ala. -- The Colonial Pipeline, the main artery of fuel supplying the Southeast and the East Coast with gasoline and diesel, has shut down twice in two months. In September, a leak forced Line 1, the main gasoline pipeline, to go offline for weeks, triggering a spasm of states of emergency, supply shortages, price increases and long lines at the pump throughout the Southeast.
Most recently, in November, an explosion knocked Line 1 again out of operation, and resulted in the death of a contract worker and several injuries.
Since Nov. 6, the pipeline’s owner and operator, Colonial Pipeline Co., has gotten Line 1 back in operation. But questions remain: What do these two incidents say about the state of fueling infrastructure? What can fuel retailers do to respond to another disruption in supply?
Four of CSPFuels’ experts weighed in with their biggest takeaways from the pipeline shutdowns—and advice for countering future disruptions ...
Joe Petrowski, founder and managing partner, Mercantor Partners
The Colonial Pipeline shutdowns highlighted the need for optionality. The secret is to build optionality into your procurement and contingency plan. Specifically, have:
- Multiple suppliers
- Several sourcing terminals
- A mixture of pricing contracts (e.g. index, fixed, NYMEX-based, branded, unbranded of varying terms)
- If you do not own your own trucks, develop a strong relationship with several contract carriers to lean on in an emergency
- Multiple sourcing modes (rail, truck, pipe, barge)
- Enough working capital to expand inventory balances when needed.
The time to plan is before an emergency. For example, if you were heavily reliant on one terminal area like Boston or Providence as I was at Gulf Oil, what is your plan should a catastrophe happen?
The time to understand alternate transport costs is immediately. True risk management in all commodities focuses on time, location, substitution, quality and sourcing costs.
Norman Turiano, principal, Turiano Strategic Consulting
My biggest takeaway was just how precarious our infrastructure is, and what a ripe target for terrorism we are on this pipeline. One well-coordinated act could cripple supply on the Eastern Seaboard for an extended period of time. I don't believe consumers overreacted to these two incidents, but a coordinated attack would likely result in panic buying, exacerbating the effect. This would make the panic buying as a result of Hurricane Katrina or Superstorm Sandy seem minor in comparison.
Tom Kloza, global head of energy analysis, Oil Price Information Service (OPIS)
We traded 57 times the daily consumption of gasoline on the Tuesday following the explosion and fire, and we saw an immediate but shortsighted spike in futures' prices. As large as the gasoline market is (in terms of liquidity) it can move drastically, based not on real analysis but on hearsay related to headlines.
Colonial Pipeline is not a big client or customer of OPIS but I would be hard-pressed to find a more responsible company in 40-plus years of following North American distribution. That said, we now know that lightning can strike twice (metaphorically) with even the most diligent companies.
It should demonstrate to all that we can have crude-oil gluts, but just-in-time inventory practices through the United States dictate that there is never a glut of gasoline. Just-in-time can be just intolerable when problems (pipeline ruptures, hurricanes) happen.
One other thought: When something goes wrong with air traffic, all hell breaks loose and millions of Americans are inconvenienced for weeks or longer. In contrast, whether it was with Hurricane Sandy or other events, the petroleum distribution community really pulls together and works long hours so that product dislocations are brief and don't disrupt many lives.
Blake Young, president, Mansfield Oil Co.
These two very recent situations highlight the significant dependency of the U.S. refined products on aging infrastructure prone with points of failure that can have a potentially dramatic effect on business operations. About 50% of the crude-oil pipeline infrastructure in the United States is about 50 years old or more. At least 25% of this infrastructure was constructed during or before the 1940s and is still operating today.
This is somewhat sobering given the economic dependency on this aging infrastructure. While both of these recent outages on the Colonial system introduced temporary inconveniences and stressed customer deliveries, the fact that the timeframes were limited didn’t result in massive disruption. But it is entirely conceivable that a dramatic sustained disruption could occur and this should encourage regulators to consider the long-term impact of aging infrastructure supporting the country, particularly in areas where alternative pathing of commodity isn’t feasible over a long-term period without significant increased costs and inconvenience.