Colonial Pipeline, shippers face off in gasoline liquidity, grade volatility, tariff feud

Colonial Pipeline's plan to increase gasoline flows from Houston-area refineries to the New York Harbor as much as 10,000 b/d by ending shipment of overlapping gasoline grades, restricting service for some grades, and eliminating shipment of some other niche grades has been met with protests from its shippers.

The Colonial Pipeline is the largest refined products pipeline in the US and a key supplier of gasoline and other refined products to the US Atlantic Coast from the US Gulf Coast. The 5,500-mile pipeline system consists of three main lines.

On March 4, Colonial Pipeline filed with the Federal Energy Regulatory Commission (FERC) to modify its existing tariff, with some changes to take effect on April 4.

Following an outcry from shippers, FERC issued on April 2 an order putting in abeyance all new tariffs in order to examine Colonial's method of determining cost-based shipping rates, sending it to a settlement judge which, given the timeline presented in the order, could mean a decision as early as the end of June.

Changes track gasoline demand patterns

Not included in the abeyance is one of the most contentious changes Colonial proposes: changing shipment protocol to reflect lower flows for M grade -- unleaded 87 octane finished gasoline -- and V grade -- unleaded 93 octane finished gasoline which went into effect on April 1.

Colonial Pipeline now requires unleaded 87 gasoline and premium unleaded 93 gasoline to be nominated in segregated batches from Pasadena, Texas, to Meridian, Mississippi, citing limited usage.

Under the latest tariff, the minimum volume for unleaded gasoline grades will rise to 75,000 barrels at the Gulf Coast, a five-fold increase from the 15,000 barrels required for fungible deliveries.

Shippers can still move the "niche" unleaded grades -- M and V -- in fungible deliveries at the lower volume threshold from and including Meridian to markets downstream, a reflection of changing gasoline specifications where M grade -- unleaded regular 87 octane gasoline -- once dominated.

"Unleaded M and V grades have consistently dwindled over the years," a US gasoline trader said on March 30. "Between this and Colonial Pipeline wanting to only ship one Reid Vapor Pressure (RVP) in spring and fall now, it's going to be a battle between refiners/blenders and Colonial."

Colonial Pipeline noted in its Feb. 14 FERC filing that M-grade and V-grade gasoline volumes have declined sharply since 2015, down 77% and 90%, respectively.

Another USGC market participant noted that NYMEX gasoline futures have been "RBOB basis" since 2007 due to the exchanges' contract basis move from HU -- Unleaded 87 -- to RB, and that M grade "hasn't had any meaningful direct impact on the futures contract since then."

"Colonial is rationalizing its operations by pushing M into the same category as V grade. They will no longer be fungible batches, and can only be shipped as segregated batches like naphthas. It's a reflection on how little of either M or V ever ship in the pipeline now," the shipper added.

Consumers to benefit from freeing up line space

Freeing up line space would benefit consumers as Colonial said it could then increase line space capacity on lines that are fully utilized and often with space allocated in peak demand times.

Demand patterns on the Colonial's gasoline line can be measured by the price of line space.

As the summer driving season nears and gasoline demand rises, the price of Line 1 line space averaged 0 cents/gal for the week ending March 30, compared with minus $4.25/gal for the week ended Feb. 23, according to assessments from Platts, part of S&P Global Commodity Insights. A negative line space value shows less interest to ship product up the pipeline.

Colonial's Line 1 carries 1.37 million b/d of gasoline and Line 2 carries 1.16 million b/d of distillates from the USGC to Greensboro, North Carolina. Line 3 with a capacity of 885,000 b/d carries both gasoline and distillates from Greensboro to its final destination in Linden, New Jersey, and New York Harbor.

"The small and irregular amounts still shipped have increased operational risk to the point even of wide-scale short-term system shutdowns and generated outsized physical losses allocated over fewer shippers and fewer volumes," Colonial Pipeline said in its Feb. 14 filing.

Ownership of RVP margin capture

In its March 4 FERC filing, Colonial Pipeline seeks to eliminate overlapping grades of gasoline, and stop transporting grade 5 gasoline, limiting the grades per type of gasoline to four, which means Colonial "will be moving fewer types of gasoline, which leads to operational efficiencies, increased capacity, and the array of additional benefits," the filing said.

Colonial Pipeline's elimination of grade 5, a cold weather specification gasoline, met with protests from shippers, who assert that this "breaches" Colonial's Interstate Commerce Act duty to "provide transportation upon reasonable request."

However, two days before implementation, FERC on April 2 suspended until Nov. 4, 2025, one of Colonial Pipeline's proposed tariffs, which would have required one grade per type of gasoline to be shipped at a time based on RVP.

RVP is key to meeting the Environmental Protection Agency's clean air requirements. In the summer, shippers nominate cleaner-burning, more expensive, lower RVP gasoline, while in the winter, shippers nominate cheaper, high RVP grades.

A problem arises during transitional periods when RVP specifications are changing regionally but not simultaneously, posing a liquidity crunch for buyers seeking different specifications for the same type of gasoline, thus putting a strain on pipeline flows.

"Colonial asserts that under the currently effective tariff, managing multiple overlapping grades increases operational complexity and pressure cycling, thereby risking pipeline integrity," Colonial Pipeline said.

Shippers disagree, saying it will mean sending a higher, more expensive RVP product into a market that does not require the more expensive RVP specification material, increasing their production costs needlessly and only benefiting Colonial Pipeline, shifting the ability to benefit from the RVP margin capture to Colonial Pipeline and its affiliates away from the shippers.

In a March 19 FERC filing, ExxonMobil, a shipper on the line, noted that under the current tariff Colonial "may deliver petroleum products of substantially the same specifications," while the new proposed tariff language allows Colonial to impose on shippers at the origin point of the shipment "the most stringent destination-point RVP specification for various grades of gasoline."

Based on Colonial's shipping calendar, this would mean a shipment of M4 gasoline with an RVP of 13.5 during shipping cycles 65-72, the last seven cycles of the year, would be delivered to points in Pennsylvania, New Jersey and New York, where an RVP of 15 is required.

"Where shippers today are allowed to ship gasoline products with higher RVP and have that higher-RVP product delivered to their desired downstream markets, Colonial's proposal will force some shippers to meet a standard that is not required for their downstream market," ExxonMobil said.

ExxonMobil and other shippers say they will be forced to produce earlier in the year lower, more expensive RVP during the winter-to-summer grade transition in March and April, while maintaining production longer of the lower, more expensive RVP gasoline in the summer-to-winter transition in September and October.

This will reduce shippers' ability to capture the RVP margin arbitrage between the USGC and the USAC during the seasonal shifting grade period.

Currently, CBOB 87 gasoline pipeline assessment at the current RVP of 9 would cost 4.35 cents/gal more than 8 RVP or 1.9 cents/gal less at 10 RVP, according to assessments from Platts.

Colonial's rationale of applying the lowest seasonally applicable RVP is needed to achieve their operating efficiencies goals is without merit, ExxonMobil said in its filing.

This is because, despite differing regional RVP specification changes, Colonial is not achieving efficiencies since it is using the same pipeline to ship gasoline with different RVPs.

"The only difference is that now Colonial, or more likely its marketing affiliate, is recouping the value resulting from blending butane into gasoline to make up the difference in RVP between the origin and destination markets," ExxonMobil said.

The wrangling over the new tariff comes amid news that Brookfield Asset Management on April 3 entered into a definitive agreement to buy 100% of Colonial Enterprises. Currently, Colonial's owners are the Canadian pension fund Caisse de dépôt et placement du Québec, with a 16.6% stake; IFM Investors, with a 15.8% stake; KKR, with a 22.44% stake; Shell Midstream, with a 16.125% stake; and Koch Capital Investment, holding the remainder.