ExxonMobil on March 19 filed a protest with US regulators against the tariffs proposed by Colonial Pipeline, saying the pipeline’s move to streamline operations in part by reducing and consolidating grades of gasoline carried on the system will create supply disruptions and increase consumer costs.
“These proposed changes are veiled as creating ‘operational efficiencies’ but they are nothing more than an attempt to increase profits at the expense of everyone else involved in the supply chain,” said ExxonMobil’s March 19 filing with the Federal Energy Regulatory Commission.
The Colonial Pipeline is the largest refined products pipeline in the US and 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.
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.
Colonial Pipeline said pipeline tariff rate changes, some of which will begin to take effect April 4, would actually benefit consumers as they would 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 is averaging a minus $1.0833/gal so far for the week ending March 21, compared with minus $3.65/gal for the previous week ended March 14, according to Platts assessments. Platts is part of S&P Global Commodity Insights.
“First, we are not increasing any of the fees we charge to shippers – which average less than 4 cents/gal – and those fees are otherwise, at most, a small fraction of the prices at the pump. And we are increasing our capacity to transport supply to markets to the benefit of consumers,” said a Colonial Pipeline spokesperson in a March 20 email.
“The price consumers pay at stations is influenced by multiple factors – from local competition to profit margins along the supply chain – but mostly by supply and demand. Increasing our capacity benefits the supply dynamics,” the spokesperson said.
Industry pushback
ExxonMobil, along with fellow refiners Motiva Enterprises, Chevron, Valero, BP, Marathon, and Shell, which also owns a share in the pipeline have filed with FERC protesting the changes. Also filing in protest are traders and blenders including George E. Warren, Castleton Commodities, and Trafigura.
Shipments of gasoline grades have evolved over the past 25 years as more stringent environmental policies saw volumes of finished gasoline grades like 87 octane M-grade and 93 octane V-grade being overtaken by oxygenate blend stocks which need to be blended with ethanol to meet the 10% mandate.
According to data from the Energy Information Administration, volumes of conventional gasoline shipped on the line fell from over 500,000 barrels in 2004 to under 10,000 barrels in 2024. Conversely, volumes of CBOB, conventional blendstock for oxygenate blending, between the USGC and the USAC have grown from just over 3,000 barrels in 2007 to 430,000 barrels in 2024.
Colonial Pipeline said its proposed modification to shipping schedules will permit the ongoing movement of M and V grade gasoline for those shippers still interested in shipping “niche products,” while addressing the operational issues caused by the small volumes of these niche products shipped.
RVP margin capture
The changed shipping schedule would benefit Colonial Pipeline, allowing them to capture the benefit from gasoline specification changes arising from the seasonal Reid Vapor Pressure requirements.
Lower RVP gasoline is more expensive to make than higher RVP gasoline. Summer grade RVP is more expensive to make because it uses blend stocks like alkylates and reformates while higher RVP gasoline uses cheaper butane as a blend stock.
ExxonMobil notes 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 with an RVP of 15.
“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.
“Thus, the shippers that today are able to ship a product with a higher RVP to be delivered to markets with higher RVP requirements will instead be required to ship a product with a lower RVP but will receive a product with a higher RVP,” ExxonMobil added.
ExxonMobil noted that requiring shippers to ship barrels at the origin point with an RVP below that required at the shippers’ destination points, Colonial will cause shippers to incur greater costs than would otherwise be required to meet a lower RVP specification, giving itself and/or a marketing affiliate the ability to raise the octane in gasoline using cheaper butane, while also raising the RVP.
“Only Colonial benefits from this proposal, which thereby is unduly discriminatory, economically harmful, and disadvantageous to all other market participants, including shippers, operators, customers, and refiners,” ExxonMobil said.
Other protestors of the new tariffs agree.
“Colonial demands from shippers that do not use its blending services ship, and the higher RVP value products (which have a lower economic value) it returns to those shippers. In many cases, these margins can actually exceed the total cost of transportation on the Colonial pipeline system,” said a joint protest filed by Chevron, Trafigura and Valero made with FERC on March 19.
Colonial’s rationale of applying the lowest seasonally applicable RVP is needed to achieve their operating efficiencies goals is without merit, ExxonMobil said.
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.
Colonial played down this impact.
“If minor fluctuations occur as other parties in the supply chain seek to protect their margins, we would expect such impacts to be limited to a small number of markets for a short part of the year, which is supported by analysis conducted by third-party experts,” the Colonial Pipeline spokesperson said.
The wrangling over the new tariff comes amid news that Brookfield Asset Management is interested taking a stake in the pipeline. Currently, the owners are 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 with the rest.
Colonial Pipeline declined to comment. Brookfield Asset Management did not reply to a request for comment. A spokesperson for Shell declined to comment on the issue.
Source: Reuters