UPDATE 2-Kinder Morgan to start work on Texas-California oil pipeline

Wed Jan 16, 2013 6:48pm EST

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By Kristen Hays

HOUSTON Jan 16 (Reuters) - Kinder Morgan Energy Partners is moving forward on converting a natural gas pipeline to run crude oil from Texas to California, the latest move by energy companies to move cheap inland U.S. crude to the import-dependent state.

Kinder Morgan Chief Executive Richard Kinder on Thursday called the potential $2 billon "Freedom Pipeline" to move growing output from the Permian Basin in West Texas to Southern California refiners "a marriage made in heaven" if shipper commitments roll in as expected.

"So far the response has been positive, but until you put a saddle on, you don't get on the horse," Kinder told analysts during the company's fourth-quarter 2012 earnings call.

The pipeline could move up to 400,000 barrels per day depending on customer interest, though Kinder said it would be profitable at 250,000 bpd.

Kinder first mentioned the conversion possibility last fall when an analyst asked about the company's underused 10,200-mile (16,415-km) El Paso Natural Gas (EPNG) pipeline system. That system transports natural gas from the San Juan, Permian and Anadarko basins to California, Arizona, Nevada, New Mexico, Oklahoma, Texas and northern Mexico.

The company has not specified which part of the system could be converted, but the EPNG system connects with Kinder Morgan's 500-mile Mojave Pipeline near Cadiz, California, about 215 miles west of Los Angeles.

Experts say such a conversion could take a year or two years to complete, depending on the size of the pipe and the need for custom-made components, such as valves, pumps, motors and meters.

"We're out working with both shippers in the Permian and refiners on the West Coast to ascertain their level of interest and I think we will know more by the end of this quarter," Kinder said.

CALIFORNIA ISOLATED

California remains heavily reliant on foreign crude for its refineries, which have seen margins squeezed by high prices, as the state's production declines. Gasoline prices there are among the highest in the United States.

Refiners in other parts of the country have realized higher profits by tapping cheap surging U.S. production from shale oil, largely in Texas and North Dakota.

But California is isolated from that attractive supply. No major pipelines carry crude west, and no major waterways flow east to west into the state's refining hubs. Even the country's major freight railroads thin out over the Rocky Mountains and on the West Coast.

Some refiners in the southern part of California are tapping that supply via rail.

Alon Energy USA last fall shut down its 84,500 bpd California refining system for at least a year, until the company builds and begins using a rail offloading facility by the fourth quarter 2013 at the earliest.

Tesoro Corp is railing in about 5,000 barrels per day to its 166,000 bpd San Francisco-area refinery, but would need to build an offloading facility there as well to significantly increase those shipments.

Others are looking at doing the same, though refiners say they expect permitting to build such facilities to take longer than in other states given California-specific emissions and pollution regulations.

Kinder told analysts he did not expect regulatory barriers to prevent the company from transporting crude to California, assuming the conversion is approved by the U.S. Federal Energy Regulatory Commission.

"We think all of the barriers are certainly achievable," he said.

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