[ANALYSIS/COMMENTARY] Flashback: The week a gas pipeline rupture paralyzed Phoenix

Is Arizona still too reliant on an out-of-state fuel supply structure?

By Phil Riske, Managing Editor, Rose Law Group Reporter

and George Seitts, Rose Law Group Senior Project Manager/Energy Consultant

It’s been nine years since a portion of a gas pipeline from El Paso, Tex. to Phoenix ruptured in Tucson, resulting is a gas crisis in Phoenix that lasted for several days.

Three months before the pipeline rupture, the then-Arizona Department of Commerce (ADC) warned in a report of “chaos” and “mayhem” if Phoenix’s fuel supplies were shut down entirely.

“If the faucet is turned off . . . one day = chaos. Three days = mayhem,” an ADC Power Point presentation stated in its warning of serious social consequences of a complete gasoline pipeline shutdown.

The warning was so colorful a group of investors that wanted to build an oil refinery in the desert southwest of the city posted the report on its Web site.

ADC did not post the report on its Web site and then-Gov. Janet Napolitano, who stalled in calling the situation a “crisis” and was briefed by department energy advisors on potential gasoline problems shortly after she took office, said no one use such words as chaos and mayhem when they talked to her in January, 2003.

A second and larger Kinder Morgan pipeline from refineries in southern California supplied increased amounts of gas to Phoenix during the shortage.

“We are very vulnerable to the oil industry,” Napolitano acknowledged in a news conference just before Labor Day.

Napolitano formed a task force to study the state’s gasoline infrastructure, supplies of natural gas and water and to take a look at a proposed to build an oil refinery near Phoenix.

Consultant and lobbyist for Clean Energy Fuels, the investors who wanted to build a $2.5 billion, “most advanced refinery in the history in the history of the United States,” said ADC officials were supporting of the idea.

Gas lines in Phoenix stretched around the block when the gas supply was interrupted. This Tempe Quick Trip station just west of Rural had a line stretching a quarter mile east on Baseline.

More on the ADC report

The report described the Phoenix metropolitan area as “an island in the desert dependent upon out- of-state suppliers — Texas and California refineries — and connected to them by two skinny pipelines.”

The report stated American refineries are reaching capacity and Arizona needs to “investigate in-state crude oil production and refining capabilities.

The last refinery built in the United States was Marathon Oil’s plant in Garyville, Louisiana It was begun in 1973 and completed in 1976, and the only proposed U.S. refinery in public discussion in 2011 was Arizona Clean Fuels’ refinery project in Yuma, financing for which has reportedly brought that project to a standstill, U.S. News reported. Also, the Quechan Indians oppose the refinery plans, saying it would be on sacred land.

Arizona not only does not have a refinery, it historically has only a small amount of petroleum production and is rated 30th of the 31 oil-producing states by the U.S. Energy Information Agency.

Commerce said Phoenix had only three days of fuel, lacking “a substantial reserve.”

The report concluded with several recommendations, including:

  • Avoid legislation of rulemaking that further “isolation” of the Arizona market.
  • Support expansion of the Kinder Morgan line from El Paso to Phoenix.
  • Open communications with Mexico about importing finished petroleum products.

Napolitano’s Essential Services Task Force was effective, albeit a number of parties thought otherwise at the time: It suggested improvements and oversight that needed to exist since commerce and trade in the region and nationally is highly dependent on secure supply and infrastructure reliability.

The transportation fuels infrastructure is more efficient than it was back then, including improvements made by Kinder Morgan, the terminal operators in Phoenix and Tucson and the supply chain in general around the state, however, what must never be compromised is health, safety, and environment, and that begins at the boardroom level of every company serving America.

Kinder Morgan Energy Partners LP’s $3.3 billion sale of Rocky Mountain natural gas pipeline assets today put the final touches on a merger with El Paso Corp., breaking up the companies’ dominant shares of gas transportation out of the middle of the country.

Kinder Morgan, which currently supplies Texas gas to Mexican oil monopoly Petróleos Mexicanos through a cross-border pipeline from the Lone Star State’s Starr County, has proposed an extension from its Arizona pipeline network to the Pacific city of Mazatlan. The company expects the project to initially send 160 million cubic feet of gas per day across the border.

Down the road

Government and the oil industry have a responsibility to work hand and hand on across the board issues to try and avoid disruptions in the petroleum supply system, particularly at the refinery, pipeline, and retail levels. Community outreach by the oil industry is equally important, as is the role of government to more fully understand and become better educated on how the supply chain from wellhead to retail functions in real world terms. That said, history shows that while we can try to put as many safeguards in place as possible, there will be disruptions that will affect businesses and consumers alike due to the complicated nature of the global energy industry. When supply disruptions occur, and they will, Arizona must be ready with rapid response.

Whether Arizona should have a refinery is still an open question; the market will decide that.

As of this writing, however, demand is down for refined petroleum products, and prices are on the rise, so it’s unclear how the investment community and potential owner-operators would justify the construction of a refinery in Arizona any time soon like the one proposed at Yuma.

That could always change because of U.S. energy dynamics and or geopolitics. Any discussion in the future about an Arizona refinery should include close talks with the Mexico, since it has oil production that could always find its way to border states, such as Arizona, through the expansion of its refinery and pipeline systems.

What’s needed is on-going dialogue with Mexico in terms of cross-border energy and trade opportunities, and, of course, with current suppliers on the West Coast, New Mexico, Texas and elsewhere along the Gulf Coast.

For Arizona, it’s all about strategic positioning, and how best to protect the interest of consumers.

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August 2012