How Pipeline Perks Sweeten Industry M&A
Recent retail deals benefited from Colonial access, but that benefit may be undercut
WASHINGTON -- In two major industry acquisitions in the past couple of years—Speedway’s October 2014 purchase of Hess and CST Brands’ November 2015 acquisition of Flash Foods—access to the Colonial Pipeline has been a coveted, if relatively unnoticed, asset in the deals. Now a move by the pipeline company may undercut some of the value of that asset.
The Colonial is the largest refined-products pipeline in the country, stretching about 5,500 miles from Houston to the Ports of New York and New Jersey, and pushing 2 million barrels per day (bpd) of refined product through nearly a dozen states.
Speedway acquired about 40,000 bpd of shipping history on the Colonial Pipeline, along with more than 1,200 stores from Hess. And CST Brands picked up access to the Colonial and Plantation Pipelines with its acquisition of 164 Flash Foods sites.
Ken Shriber, managing director and CEO of Petroleum Equity Group Ltd., Chappaqua, N.Y., told CSP Daily News that any company with significant access and history on the pipeline is in a prime competitive position.
“This is a critical pipeline linking Texas to the Northeast, so if you have rateable barrels coming up the pipe you are in position to keep your customers wet with product,” said Shriber. It’s also a boon for the pipeline owners, who collect “tolls” from companies trying to get pipeline space.
Jerry Ashcroft, president and CEO of Boston-based Gulf Oil LP, and a former executive at Colonial Pipeline, concurred.
“There’s more demand than supply,” Ashcroft told CSP Daily News. “It can ship two million barrels a day, but there may be demand to ship 2.5 million, so having that access on Colonial to meet growth needs, for example, in the Southeast, is making space on the pipeline very valuable.”
The space is so valuable that a secondary market has sprung up for additional shipping capacity on the Colonial, with some shippers acquiring others’ histories to pump up the volume of product they can ship. Platts reported that some of these companies are paying up to $500 per barrel in these buys.
This market might have a limited life span, however; the Colonial Pipeline Co. has filed a request with the Federal Energy Regulatory Commission (FERC) to implement rules ending the trading practice. But some shippers argue that Colonial is part of the problem.
In early March, more than 20 companies, including fuel retailers and refiners, met with FERC officials to raise concerns about Colonial Pipeline’s refusal to expand pipeline capacity between Texas and New Jersey, according to The Wall Street Journal. This restricted capacity, the businesses argued, forces them to buy fuel at a greater expense elsewhere or buy additional shipping capacity on the secondary market, and those costs trickle down to the end user.
Greg Downum, senior director of supply and distribution at Murphy USA, El Dorado, Ark., told regulators that companies such as his are often buying additional pipeline space from traders that won capacity in Colonial Pipeline’s lottery system for new shippers, just for the purpose of reselling the space.
“We believe there are some small shippers out there, and we’ve transacted with them, who have no intention at all of ever possessing a barrel,” Downum said, according to the Journal.
Andy Melton, who oversees petroleum product pricing and allocation for Marathon Petroleum Corp., told regulators that the refiner is forced to buy fuel on the East Coast because it is unable to ship enough on the pipeline.
“It incurs an additional cost to us and to our customers,” he said.
And Naill Alnatour, director of fuel supply and trading at Costco Wholesale Corp., told regulators that “the only solution to this problem is to create new capacity,” the report said.
While Colonial Pipeline is considering adding capacity, its representatives said that it first must analyze the cost—which would run in the billions—and regulatory implications, as well as future demand.
“Expansion sure is a solution to a lot of things,” Steve Brose, an attorney for Colonial, said at the meeting, Reuters reported. “What we have to do right now is deal with the world as we know it.”