RBN Energy: Freedom Pipeline, From The Permian to California, Part II

RBN Energy: looks at the new pipeline from Texas to California being offered by Kinder Morgan, the Freedom Pipeline, Part II.

Wow, look at the amount of foreign oil that California buys. It appears that more than half of all oil refined in California comes from foreign sources. Wow.

What's the phrase? Carrying coal to Newcastle?

With regard to the Bakken:

We covered crude by rail delivery to the West Coast recently.

We noted then that crude by rail has been slow to penetrate into California. That is partly because state regulations have delayed the building of rail unloading terminals because the permitting process is complex. A lot of crude is being railed to refineries in Washington State from the Bakken or to marine terminals in Washington and Oregon.

Some of that crude will reach California refineries by barge or tanker. Some refiners – notably Alon and recently Valero have announced plans to build rail terminals at California refineries – so far with the intent to rail light crude from the Bakken or heavy crude from Canada.  Crude is also being sent by rail from the Permian Basin – where a number of rail loading terminals have been built including a KM/Watco terminal at Pecos, TX.

Recent company presentations estimate crude by rail costs from the Bakken to central California at $13/bbl and to Southern California at $14/bbl. We did not find a published rail rate from West Texas to California but have heard estimates in the $8 -$10/bbl range plus terminal and lease charges.  If this is the case then shipping Permian crude to California by rail will be less expensive than Bakken or Canadian alternatives. Although KM have not published their pipeline tariff yet it will almost certainly undercut rail freight door to door. So if California refiners decide that they need to start using inland US domestic or Canadian crudes then they might as well lock in the least expensive delivery option.