If it looks like a duck, swims like a duck, and quacks like a duck, it is probably a duck.
With an expired permit to cross Arkansas waterways and drilling problems on the line, what started as a rumor may end up as a dry pipeline. Diamond is an uncommon pipeline. Not in the sense of being weird, peculiar, or bizarre. It looks like other bulk crude pipelines, but it is not a common carrier. Diamond is a private pipeline for the Valero Memphis refinery.
Private pipelines don’t serve the public interest and don’t have the right of eminent domain. Private pipelines must negotiate with landowners to lease their surface rights to build, operate, inspect and maintain the pipeline. Landowners may or not decide to give private pipelines an easement; they own the land and have rights to privacy, safety, and security. Landowners have the title to their home, farm, or estate and constitutional private property rights.
A hose and a bucket
Please make two yard signs, one for “Cushing, OK.” and the other for “Valero, TN.” Place Cushing by an outdoor water faucet. Connect a 100-ft. long garden hose with the hose extended and place Valero at the end. Open the faucet all the way. This is what Diamond will look like on day one, unless it starts to leak. Take a couple of pictures of your water pipeline.
The Diamond PSC Application says, “The pipeline will include a truck unloading facility located in Van Buren County, Arkansas, for the purpose of receipt and transport of oil produced in Arkansas or elsewhere by multiple potential users of the proposed pipeline under common transportation rates to be filed and posted…” Here is where things get tricky. What started out as a simple, low-cost project is now a complex system with many requirements at twice the cost.
Where is this facility? Who would want to ship crude from Van Buren to Memphis, just to take a ride through Arkansas?
To understand how the phantom facility would work, get three buckets and fill them up with water. Use red, yellow, and green food coloring to distinguish the new shippers, and line-up the buckets at the midpoint of the hose. How would you inject the red water into the hose filled with running water? Let’s say you find a way and you can make it work for the yellow and green buckets. What would you end up with at the Valero side?
PAA can prove me wrong by sending a picture of the phantom facility and the new Valero terminal for the “other” shippers. Will they?
It is all about cheap crude
There are two main sources of light sweet crude for Valero. Imported crude stored in St. James, La., and domestic shale crude stored at Cushing, Okla. Cushing has storage capacity of 85 million barrels of oil. Most of the time, imported crude trades at a premium to domestic crude, but fracking is not all milk and honey.
Refineries buy crude oil and sell gasoline, diesel, and other petroleum products at market prices. To make a profit, Valero needs a reliable supply of low-cost crude. Investing in Diamond and making 10-year purchase agreements, seemingly gives Valero a competitive advantage.
The cat is out of the bag
A Reuters January 2015 report describes 81 U.S. crude pipeline projects, including Diamond. This report says, “Valero in 2013 received 100,000 barrels per day (bpd) of Bakken crude railed to St. James, Louisiana, then shipped to the refinery via the Capline pipeline. But volumes to Valero have declined as Bakken shipments to the East and West coasts have ramped up. What the 440-mile Diamond Pipeline will do is route 200,000 bpd of cheaper crude supplies to Valero’s 195,000 bpd Memphis refinery. A Cushing-Memphis pipeline would shorten the distance and save costs.”
The simplest explanation is usually correct
Investing $900 million in a 100-year pipeline is the price of denial. Guzzlers will be forgotten. The Electric Avenue will soon be the new normal, the common carrier of the future.
Dr. Luis Contreras