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Longhorn Pipeline a Long Shot to Lower Pump Prices

California views the project as key to increasing its fuel supplies. But the essential link won't be completed until 2006.

June 12, 2004|Dana Calvo | Special to The Times

GALENA PARK, Texas — By summer's end, the first precious drops of gasoline, diesel and jet fuel should begin rolling from a terminal in this industrial patch near Houston to a receiving station 756 miles west in the dusty border city of El Paso.

At full capacity, the new $300-million Longhorn Pipeline will carry nearly 10 million gallons of fuel a day from the refinery-rich Gulf states -- and a distant hope of lower gasoline prices for Californians.

The long-awaited project could redefine the Southwest's fuel delivery infrastructure, a patchwork of refineries, pipelines and terminals that can barely quench the region's thirst for hydrocarbons.

But obstacles remain, including getting the stuff across the Texas border. That won't happen until sections of an existing smaller pipeline in Arizona are widened to send the newly arrived batches of fuel from El Paso to Tucson and Phoenix.

Kinder Morgan Inc., which owns the Arizona pipeline known as the East Line, says an expansion won't be ready until 2006. In the meantime, Arizona will continue importing about 5.5 million gallons each day of gasoline and other fuels from California, more than enough to satisfy motorists in a city larger than San Diego.

The California Energy Commission has called completion of the Longhorn a "key step" toward increasing fuel supplies for the state. But as a solution to California's chronically high gasoline prices, the Longhorn is a bit of a long shot.

"There are no quick fixes to this stuff. It's infrastructure, and it takes time and lots of capital," said Carter Montgomery, president of Longhorn Partners Pipeline, the Dallas-based company that has labored for nearly 10 years on the endeavor.

Building a pipeline like the Longhorn is such an expensive and arduous process that decades can pass without a new one opening. To remain competitive, companies must have deep pockets and a strong enough reputation to bring investors on board for long-term, risky projects.

The story is similar with oil refineries. As a result, California's 13 gas-making refineries operate at maximum capacity to fill the needs of the Golden State and other areas without their own facilities, including Arizona, Nevada and Oregon. With such a close balance between supply and demand, any potential improvement is anxiously awaited.

"We support all additional infrastructure because everything is stretched very tight right now," said John Felmy, chief economist for the American Petroleum Institute.

Gordon Schremp, senior fuel specialist with the California Energy Commission, agreed. "It's an indirect supply for California. It takes some of the pressure off the California refineries to send fuel to Arizona."

Longhorn Partners took an old pipeline from the 1950s, modernized it and added 250 miles of pipe. Along the way, the project slammed into operational, political and financial challenges that were only recently sorted out.

Critics say the Longhorn illustrates the kind of piecemeal expansion common in the industry, akin to long-term highway projects that are out of date before their completion.

"I think [Longhorn] is a bad project," said Paul Foster, president of Western Refining Co. in El Paso. "They're talking about bringing all these barrels from the Gulf Coast and there's nowhere to go. It's not just a bottleneck. It's a dead end, even with the Kinder Morgan expansion."

Petroleum expert Philip K. Verleger Jr., a senior fellow at the Institute for International Economics, said the lack of industry foresight was inexcusable.

"Everybody knows Longhorn's been coming along for a while. You would have thought they would have built a link," he said.

The Longhorn Pipeline was supposed to be up and running six years ago, but in 1998 the project was temporarily halted. A federal judge issued a temporary injunction against Longhorn at the request of a competitor who sued and was then joined by other plaintiffs, including the city of Austin and the Lower Colorado River Authority, concerned about the environmental effect of resurrecting the project.

By 2001, legal settlements cleared the way for construction to resume. As part of one agreement, an old 19-mile pipe that ran through a zone of Austin's Edwards Aquifer was removed and the new pipe was laid in a specialized trench lined with both gravel bedding and a leak-detection cable. The trench was filled with dirt and capped with a concrete lid.

"This was a real belt-and-suspenders kind of approach," Montgomery said.

By the end of 2002, several of the pipeline's financial arrangements fell through. Longhorn executives spent all of 2003 recapitalizing.

Even if the Longhorn Pipeline eventually helps ease California's fuel supply headaches, it remains unclear what would happen to the state's gasoline prices, currently about 30 cents a gallon higher than the national average.

"I can't read those tea leaves," said Raymond Paul of the Assn. of Oil Pipe Lines, a nonprofit information clearinghouse for the industry.

Any bump in supply thanks to the Longhorn would be quickly swallowed, Schremp said. Energy experts have projected that Californians would use 1% to 3% more gasoline each year for the next 10 years.

"I wouldn't say prices would go down, because, remember, we're looking at an ever-increasing demand in California," Schremp said.

"Demand's growing so strongly that in our region we need every drop we can get," said David Hackett of consulting firm Stillwater Associates. "So it helps, but how big a change is that going to be? We're not quite sure. It'll be interesting to see."

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