Colonial defends fine to deter stranded oil product barrels amid tight storage

New York — Colonial Pipeline is defending its temporary fine of up to $25 million to deter shippers from moving refined oil products on its system without firm plans for offloading it amid limited available storage capacity.

The pipeline defended the measures in a June 2 filing to the Federal Energy Regulatory Commission after trading group Gunvor USA protested the tariff changes and asked regulators to reject them.

Colonial said its typical practice of auctioning barrels abandoned by shippers has become more difficult since March, as limited storage capacity near the end of its system in Linden, New Jersey, increases the risk that it will not be able to find a buyer for the fuel. It said that would force it to slow or shut the major pipeline system while it clears that batch of product through some other means.

"A slowdown or shutdown caused by a shipper's failure to comply with the terms of the tariff and to timely provide a valid destination facility for its product is particularly detrimental when shipper nominations exceed system capacity, forcing Colonial to allocate capacity on some or all of Colonial's line segments," it said.

AUCTIONS ACCELERATE

Colonial said it has had to conduct 25 auctions to clear stranded oil products between March 16 and May 31 -- equal to all the auctions in 2019 and more than the 18 auctions held in 2018.

The temporary tariff took effect May 24 and was set to last for 90 days.

Product takes about 20 days to travel the full length of the Colonial route from the Gulf Coast to the Northeast. While shippers can give the generic destination of Linden when they load barrels onto the system, they must identify a specific destination point within three days of delivery.

Shippers that fail to do this face a daily demurrage fee of 25 cents/b for any product that the destination facility will not accept until the product is ultimately cleared from the system. The new tariff allows Colonial to recover lost revenues and other costs up to $25 million if a stranded batch forces it to slow or shut other deliveries.

FERC has not yet responded to the filings by either company.

Gunvor argued in a May 28 motion to intervene that Colonial already has tools in its tariff and through its pipeline system to prevent the damages it envisions with stranded oil supplies.

It added that Colonial did not meet its burden of demonstrating both that a problem exists on its system that its current tariff cannot address and why this "drastic remedy" is justified.

"Colonial's tariff filing appears to be an effort to not let a good crisis go to waste," Gunvor said. "But the current pandemic cannot be converted into a profit opportunity for Colonial by using it as an excuse to make unjustified tariff changes that would give Colonial unbounded discretion to impose damages liability on shippers."

EXCESS BARRELS

Colonial's Line 1 carries 1.37 million b/d of gasoline from Pasadena, Texas, to Greensboro, North Carolina, and its Line 2 carries 1.16 million b/d of distillate fuel along the same route.

From Greensboro, the two lines meet the 855,000 b/d multiproduct Line 3 that runs to Linden, New Jersey, and the 504,000 b/d Line 4 that runs to terminals in Virginia and Maryland.

Diesel shipments have surged since the pandemic as many suppliers in the US Gulf Coast look to get rid of excess barrels.

Storage on the US Atlantic Coast remains tight, with regional stocks at a three-year high during the week ended May 22, US Energy Information Administration data showed. Stocks topped the 50 million-barrel threshold for the first time since 2017, building 3.82 million barrels at 53.41 million barrels during that period, EIA data showed.

Burgeoning stocks have kept diesel markets weak on the USAC, with offline ULSD assessed at the NYMEX July ULSD futures contract minus 4.25 cents/gal on June 1. The same market was assessed at prompt-month futures minus 25 points/gal on May 31, 2019, and at prompt-month futures plus 1.20 cents/gal on June 1, 2018.