UPDATE 1-Kinder Morgan shelves Texas-to-California oil pipeline plan

Fri May 31, 2013 3:11pm EDT

* Freedom Pipeline failed to solicit enough shipper support

* Companies more interested in cheaper Canadian crude

* Similar Questar Pipeline project still under review

By Kristen Hays

HOUSTON, May 31 (Reuters) - Kinder Morgan Energy Partners LP shelved a $2 billion plan to convert a natural gas pipeline to carry cheap West Texas crude to Southern California, citing lack of shipper interest.

"We don't believe in the concept of build it and they will come," Mark Kissel, a Kinder Morgan executive, said on Friday. "We stated at the outset that we would not move forward with the project without customer support."

The Freedom Pipeline project involved converting a 740-mile (1,191 km) natural gas pipeline to move crude oil from the Permian Basin to refiners in Southern California that otherwise rely on pricey imports.

However, the company said it did not garner enough shipper interest to justify the investment.

Greg Garland, chief executive of U.S. independent refiner Phillips 66, said earlier this month that his company had little interest in tapping light sweet Permian crude delivered via the Freedom Pipeline.

Phillips 66 operates a 139,000 barrel-per-day (bpd) Los Angeles-area refinery and a 120,200 bpd San Francisco-area plant. Both refineries - like others in California - are configured to run heavy California crude. They can run light sweet, but they process heavy crude more efficiently.

"I think we're more interested in trying to move heavy Canadian crude down to California to process in our refineries," Garland said.

Refiners increasingly use railroads or a combination of rail and barge to transport Canadian heavy crude, which is cheaper than inland U.S. crude.

Alon USA Energy and Valero Energy Corp are seeking permits to build rail offloading facilities at some of their California facilities. California refiners also can ship Canadian crude south via barge or tanker to unload at their docks, already in place to receive imports.

Another company is considering converting a natural gas pipeline to move inland crude to California. Late last year Questar Pipeline initiated a review of possibly converting its underused natural gas Southern Trails pipeline to move crude from Texas and New Mexico to Southern California, starting in early 2016.

Earlier this month Questar CEO Ron Jibson told analysts the company was in its second round of proposals and expected to decide by mid-2013 whether to move forward.

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