By Kristen Hays and Sabina Zawadzki
HOUSTON/NEW YORK (Reuters) - The U.S. oil and gas renaissance that has bestowed unexpected prosperity on states from North Dakota to Pennsylvania and boosted distillate production to a record high in the Midwest is also causing pockets of fuel scarcity: just ask Arkansas.
Farmers, truckers and politicians there are up in arms over plans by Enterprise Product Partners <EPD.N> to end deliveries on a key pipeline that ships diesel and jet fuel from Texas on July 1. Instead, Enterprise plans to reverse the line to ship ethane, chiefly used as a petrochemical feedstock, from the shale fields in Ohio and Pennsylvania to the Gulf Coast.
The Arkansas attorney general has appealed to federal regulators to intervene, local merchants warn of a "catastrophe," truckers fear a jump in prices and even a U.S. Air Force base is stocking up on extra fuel.
The controversy is the latest sign of how energy and infrastructure companies are rushing to adapt to the production boom that no one predicted five years ago. And while the eventual result should be a more modern, efficient U.S. fuel network, the changes are forcing some parts of the country to redraw decades-old supply lines.
"When you cut off supply, it's not as if there's a lot of extra supply just waiting to be used," said Ron Leone, executive vice president of the Missouri Petroleum Marketers and Convenience Store Association.
"You're going to have to scramble to make it up, and in that scramble there will be outages and shortages," he said.
Enterprise, which announced its plans for the so-called TE Products line in March, says demand for interstate shipments on the 230,000 barrels per day line has fallen sharply in recent years, and that it is not "commercially feasible" to invest an estimated $50 million to upgrade a parallel line.
Enterprise declined to say how much the pipeline was delivering on a daily basis now.
Local fuel groups argue it is an energy lifeline and that closing it will roil the local market, raising prices as fuel is fetched from further afield and sparking shortages when demand normally met by the pipeline shifts to other sources.
Arkansas, a state of 3 million people north of Louisiana and best known as the home of former President Bill Clinton, is not the first to see a darker side of the shale energy bonanza. Northeast states have also fretted over fuel supplies following the closure of several refineries, partly because they could not compete with inland rivals running cheap shale crude.
The reversal would have a "significant, damaging effect" on business, the Arkansas Attorney General's office said in an April 25 filing to the U.S. Federal Energy Regulatory Commission (FERC), asking for Enterprise's plan to be rejected or at least suspended for seven months for an investigation to take place.
Enterprise declined comment on the filing.
'OUTAGES AND SHORTAGES'
The TE Products line runs 806 miles from Texas via Arkansas to southeast parts of Missouri, Illinois, Indiana and Ohio.
Under the company's $1.5 billion Appalachia-to-Texas, or ATEX, project, it would reverse the pipeline and build an extension into Ohio and Pennsylvania to pump ethane gas, often produced alongside natural gas from shale reserves from the northern Utica and Marcellus plays, south to petrochemical producers on the Gulf Coast.
The plan emerges at a time when overall fuel supplies in the broader Midwest area are healthier than ever, with refiners running flat-out as a glut of discounted Canada and North Dakota crude pumps up profit margins, while demand is dimmed.
Distillate production in the PADD 2 region from Oklahoma to Michigan is at a record high, up almost 9 percent since 2007, while demand has fallen by 8.6 percent during the same span, according to data from the U.S. Energy Information Administration.
But regional traders say that broad trend is irrelevant for a narrow corridor including Arkansas, about a third of Missouri, up to a third of Illinois and parts of southern Indiana and Ohio that rely on the TE Products line.
"I think it borders on being catastrophic," said William Fleischli, executive vice president of the Illinois Petroleum Marketers Association.
Tom Gabe, president and chief executive of Heritage Petroleum, an Indiana-based fuel distributor and shipper on the line, explained how customers on the TE Products line in North City, south Illinois, might now have to go 100 miles south to a different terminal Cape Girardeau, Missouri, to get fuel.
If demand for fuel from that other terminal suddenly doubles to 3,000 truckloads a week, local prices will have to adjust.
"The end user is going to pay more for his fuel," he said.
Other alternatives include the Explorer Pipeline, from southeast Texas through Oklahoma and central Missouri up to northeast Illinois, or the Explorer line through Illinois, to then be loaded into Buckeye Partners' <BPL.N> system to move east.
But if the endpoint is Missouri or Arkansas, "you're driving the barrel," a Midwest oil products trader said, meaning trucking it from a source other than the TE Products line, adding freight costs.
The Association of Oil Pipelines says trucking products for 300 miles could cost 20 to 30 cents a barrel compared with 4 cents for a barrel shipped on a pipeline.
AIR FORCE ANGST
"Driving the barrel" is what the Little Rock Air Force Base and airlines at the Clinton Airport in Little Rock will have to do because no other major pipelines shipping jet fuel or distillates run through the center of Arkansas, traders say.
The one petroleum refinery in Arkansas, Delek US Holdings' <DK.N> 83,000 bpd plant in El Dorado, could make commercial jet fuel, but that would only reduce diesel output - emptying one cup to fill another, said Steve Ferren, executive vice president of the Arkansas Oil Marketers Association.
Delek declined comment on how the closure may affect its production.
The Air Force base in Little Rock will be topping up its fuel tanks to add an inventory buffer while it looks into alternative supply sources, says Mimi Schirmacher, a spokeswoman for Defense Logistics Agency-Energy, which sources energy for U.S. military forces.
The 16-inch (40-cm) TE Products distillate pipeline runs alongside a 20-inch line that moves gasoline and natural gas liquids along the same route. The larger line could be reworked to allow it to transport distillate fuel as well, including the installation of more pumps, but the investment is not warranted, Enterprise says.
"Every terminal and destination that is currently served by this pipeline, has and will continue to have other alternatives - including terminals served by other pipelines, terms attached directly to refineries, or terms served by barge," says Enterprise spokesman Rick Rainey.
Adding to the concerns of traders, Enterprise is considering similar options for the 210,000 bpd Centennial line, which ships gasoline and distillates 795-mile from Texas to Chicago. The Centennial is a 50/50 joint venture with Marathon Petroleum Corp <MPC.N>.
The 24- and 26-inch line runs north along the Mississippi River on the eastern border of Arkansas and southeast corner of Missouri, then to Bourbon, Illinois, south of Chicago.
Tom Zulim, Enterprise's senior vice president of regulated businesses and refined products, said last month the company considered moving different products or reversing the line but "nothing has really come to fruition" yet.
(Reporting by Kristen Hays and Sabina Zawadzki; Editing by Marguerita Choy)