HOUSTON Oct 18 Kinder Morgan Energy Partners may convert part of a natural gas pipeline system to transport West Texas crude oil to Southern California, a move analysts lauded on Thursday.
Allowing Los Angeles-area refiners to replace pricey Alaskan crude with cheaper oil from the Permian Basin in West Texas and New Mexico "would be a huge game-changer," Tudor, Pickering, Holt & Co analyst Robert Kessler said Thursday in a note to investors.
Kinder Morgan Chief Executive Richard Kinder told analysts on Wednesday that the company is considering a possible $2 billion project to convert part of its underused El Paso Natural Gas (EPNG) pipeline system to possibly transport up to 400,000 barrels per day of light Permian crude to Southern California.
"That is very speculative at this point, but there are a lot of opportunities that could be very exciting there," Kinder said. "We have had some interesting conversations with potential shippers on that line who are very enthusiastic."
Some Southern California refiners have said they are looking into transporting light-sweet crude by rail or pipeline to their plants to capitalize on cheap inland U.S. crude already processed by refiners in other regions to varying degrees.
Tesoro Corp last month began receiving North Dakota Bakken crude oil via rail at its 120,000 bpd refinery in Anacortes, Washington.
In August when the company announced its $2.5 billion purchase of BP Plc's 240,000 bpd Los Angeles-area refinery next to Tesoro's 103,800 bpd plant, Tesoro CEO Greg Goff told analysts that he expected to see more U.S. crude move west, "whether from North Dakota or West Texas."
Also, Alon Energy USA Inc President Paul Eisman in August told analysts that the company was in advanced talks to move cheaper inland U.S. crude to its 84,500 bpd Southern California refining system via new rail facilities or existing pipelines. He declined to provide details, but said Alon would "more likely than not" start with Bakken crude as well.
Credit Suisse analyst Ed Westlake said in a note to investors on Thursday that key drivers of oversupply of crude in the Gulf Coast region -- home to 44 percent of the nation's refining capacity -- is supply coming from the Permian as well as the Eagle Ford shale play in South Texas.
Much of the Gulf Coast's refining capacity is designed to process heavy-sour crudes like that from Venezuela or Canada rather than the light-sweet variety that comes from the Permian and Eagle Ford.
Such refineries can still process that light crude, but it makes less efficient use of heavy-oriented refineries because some units not needed to process light crude, like cokers, would not be needed.
"If there is no available light processing capacity in the Gulf, we believe it would make sense to push crude to the California market," Westlake said.
VERY EARLY STAGES
Kinder stressed that Kinder Morgan's consideration of converting part of the EPNG system to transport crude is in "very early stages of our thoughts."
He said Kinder Morgan would not convert the entire system and would still deliver gas to customers at whatever throughput levels they want.
"We have multiple lines across there, and still could convert a line all the way from the Permian into Southern California," Kinder said.
The 10,200-mile (16,415 km) EPNG system now transports natural gas from the San Juan, Permian and Anadarko basins to California, Arizona, Nevada, New Mexico, Oklahoma, Texas and northern Mexico.
The EPNG system connects with the company's 500-mile (800.7 km) Mojave Pipeline near Cadiz, California, about 215 miles (346 km) west of Los Angeles.
Kinder Morgan spokesman Larry Pierce said on Thursday that it was too premature to specify which lines would be involved in a crude conversion because it was "extremely early in the process."
(Reporting By Kristen Hays; editing by Andrew Hay)