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Kinder Morgan Energy Partners is in the news a lot lately. The Houston-based company is one of the leading pipeline and energy storage companies in the U.S. The company has a combined enterprise value of approximately $115 billion. It owns an interest in or operates approximately 80,000 miles of pipelines and 180 terminals. Understandably, many analysts follow it closely. They’re curious to see where this company is going, both figuratively and literally.

In April Kinder Morgan had proposed a 277,000 barrel per day ‘Freedom’ pipeline that would transport light sweet crude from the West Texas Permian Basin to refiners supplying Los Angeles and southern California. But, strangely, they had no takers.

DownstreamToday.com reported that refiners such as Valero Energy Corp., Tesoro Corp and Phillips 66 had declined to sign contracts with Kinder Morgan; and instead, will continue to rely on rail cars and barges to deliver the oil from N. Dakota, Canada and Texas to the refineries.

The refiners say that relying on train shipments allows them access to crude from different regions at different prices, and that flexibility is not always present in long-term pipeline contracts. An effective bluff, perhaps?

Of course, it's no secret that refiners in California have the highest operating costs in the U.S. and that's due to geography that keeps them isolated from the larger U.S. market and also because of the state’s self-imposed air-quality regulations.
So for now the competition from other markets may serve the refineries well.

But, as encouraging as it may be to have cheaper fuel arriving by rail, one cannot ignore the inherent risks associated by oil traveling on trains… it’s a great delivery system until it isn’t and something happens. Perhaps the security of that pipeline has been overlooked?

In time it may be inevitable that California refineries regret their decision that shelved the Freedom pipeline. Kinder Morgan said then that they would ‘not move forward without customer support.’ They don’t operate on a ‘build it and they will come’ philosophy. So is it simply a matter of time before that 277,000 bpd option warrants a closer look?

We'll see.