GAO: US should improve oil product supply system

Nick Snow
Washington Editor

WASHINGTON, DC, Jan. 22 -- The US petroleum product distribution system is constrained in key areas and will likely become more so without timely investments, the US Government Accountability Office warned in a Jan. 18 report.

"Industry and federal agency officials report a systemic lack of pipeline capacity in the supply infrastructure system in key states including Arizona, California, Colorado, and Nevada, and note the existing supply infrastructure is insufficient to carry the commensurate volume of petroleum products and crude oil needed to meet growing demand there," GAO said.

It noted that in 2006, the US Department of Transportation proposed—and Congress approved—legislation requiring the US Energy and Transportation secretaries to periodically analyze where unplanned product pipeline outages or insufficient pipeline capacity increase prices, and whether regulations are adequate to minimize the potential for unplanned pipeline capacity losses.

"While there is widespread recognition that a study is needed to fully identify the extent of infrastructure inadequacy and the impact on prices, to date no such analysis has been undertaken," GAO said in a cover letter to the two US senators who requested the study: Commerce, Science and Transportation Committee Chairman Daniel K. Inouye (D-Hi.) and committee member Maria Cantwell (D-Wash.).

The senators asked GAO to evaluate trends in the international trading of products, refining capacity and its use internationally and domestically, international and domestic crude and product inventories, and the domestic supply infrastructure to better understand how changes in markets have affected prices, the service said.

Funds weren't allocated
US Department of Energy and DOT officials said the product supply systems study was not undertaken because Congress did not allocated funds specifically for that purpose, according to the report. The departments did not reallocate other funds for such a study, "although DOE told us it has met with DOT to discuss how this work could be approached." The cover letter said, "However, given that the study has not begun, it seems highly unlikely that agencies will be able to meet their June 2008 deadline for reporting to Congress."

GAO noted that there are many private sector plans to expand the domestic oil and product supply distribution system, and that such plans could significantly relieve stresses on the system if they are implemented quickly. "However, a complex permitting and siting process involving as many as 11 federal agencies and numerous stake and local stakeholders has slowed or impeded the expansion and construction of new pipelines," it said.

It added that the permitting process for building interstate gas pipelines and associated facilities is easier because the Federal Energy Regulatory Commission has been designated the lead federal agency to streamline that process. "No such lead federal agency exists to facilitate permitting of crude oil or petroleum product pipeline construction or upgrading," GAO observed.

The report made several recommendations aimed at improving how US product markets function. They included a suggestion that the Energy and Transportation secretaries coordinate with other agencies to encourage more uniform biofuels and petroleum product blending practices in addition to studying whether the domestic oil and product distribution system is adequate and whether a lead agency could be assigned to coordinate infrastructure construction permitting.

FERC chairman responds
In a response to the study, FERC Chairman Joseph T. Kelliher generally agreed with its recommendations. He said while the commission does not have petroleum pipeline construction siting authority, it has encouraged and supported building new and expanded crude and product lines through its issuances of orders on pipeline petitions for declaratory orders.

"The commission has approved certain rate methodologies and granted other rate assurances prior to construction in order to reduce the uncertainty and risk inherent with these large infrastructure projects," Kelliher wrote GAO.

FERC's responsibility for siting US interstate gas pipelines has given it extensive experience in issues surrounding pipeline construction and operation, which it has used to assist other agencies, Kelliher said. He cited assistance that FERC supplied the US Department of State in its environmental review of the proposed TransCanada Keystone Pipeline Project, an oil pipeline crossing from Canada into the US. "I believe our assistance with this project ultimately will provide for an expeditious, but thorough, review and facilitate needed infrastructure for the oil industry," Kelliher said.

"Finally, the report recommends that several agencies, including the commission, work together to evaluate the feasibility and desirability of designating a lead agency with eminent domain authority in order to streamline the process for siting oil and product pipelines, Kelliher said, adding, "The suggested use of the commission's role in the siting of gas pipelines as a model will help to expedite the deliberations of the agencies. Further, the active participation of the commission will help facilitate a decision on the lead agency designation."

Contact Nick Snow at nicks@pennwell.com.

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