CHS Advances Infrastructure Buildout as Other Projects Stall

Even as other propane infrastructure projects stall and flounder nationwide, CHS Inc. (Inver Grove Heights, Minn.) is successfully following through on its 2013 pledge to bulk-up propane system architecture, especially for customers whose supplies were severely compromised by the reallocation of Kinder Morgan Energy Partners’ Cochin pipeline last year. In its latest move, the company, which markets and distributes propane under the Cenex brand, in May launched a strategic alliance with San Antonio, Texas-based NuStar Energy LP to develop an expanded pipeline and terminal network to increase supply in the Upper Midwest.

CHS, a leading farmer-owned cooperative with global energy, grains, and food businesses and significant propane operations in the Midwest and across the nation, said it would increase supply to meet product demand in the region by utilizing a NuStar Energy pipeline and terminal network. That network connects to the Conway, Kan. storage, fractionation, and trading hub in the Midcontinent, home to about 33% of the available underground storage capacity in the U.S. and second only to Mont Belvieu, which has about 50%.

“We are excited to pursue this strategic alliance with NuStar. The investments support our long-term commitment as a reliable supplier of propane,” said Andrew Combs, CHS vice president, propane. “These projects will enhance the overall efficiency of our distribution system and assist our customers’ continued growth.”

The agreement is aimed at increasing the availability and dependability of supply by NuStar boosting propane volumes moved on its Central East refined products pipeline and terminal system. The 1900-mile line provides multiple origination and termination points, and in addition to propane carries gasolines, distillates, natural gasoline, and naphtha. The two companies outline that key projects under development include construction of an eight-mile, eight-in-dia. pipeline at NuStar’s Conway origin facility near the southern end of its East Refined Products Pipeline system.

The new pipeline and modifications to the origin facility will allow increased propane volumes to be sourced from Conway for delivery to terminals on the system. As part of the initiative, NuStar is also expanding its Rock Rapids, Iowa terminal to include propane service, which is not afforded now. The terminal expansion seeks to allow NuStar to gain efficiencies at an underutilized facility and allow CHS to better supply the region. All projects are expected to come online by the fourth quarter of this year.

NuStar, a major independent liquids terminal and pipeline operator, has 8708 miles of pipeline and 81 terminals and storage facilities that store and distribute crude oil, refined products, and specialty liquids. The company’s combined system has about 93 MMbbl of storage capacity. Operations are centered across the U.S., Canada, Mexico, the Netherlands, the Caribbean, and the United Kingdom.

All capital investments related to the infrastructure build out are backed by long-term, dedicated throughput and storage agreements with CHS. “CHS has been an outstanding customer and business partner to NuStar for many years, and we look forward to taking our relationship with them to an even higher level through this alliance,” said Brad Barron, president and CEO of NuStar.

“This is definitely going to help us in the peak season as we continue to look for additional proprietary supply,” added Combs. “NuStar will be the operator and CHS will be the shipper of record with long-term commitments.” He noted that six 90,000-gal. tanks are being installed at the Rock Rapids terminal in Iowa, bringing the initial storage capacity to 540,000 gal. At the same time, increased propane volumes will move in batches along the Central East line in order to enhance throughput. The project builds on previous longstanding shipping agreements with NuStar that have CHS moving other refined products and natural gas along its systems.

“We are constantly in discovery mode,” said Combs. “Key at CHS is that we are always looking for opportunities to help with offtake out of Conway—takeaway to storage to new fractionation.” Such opportunities include strategic partnerships such as the NuStar initiative, as well as funding its own projects. He commented that the company operates 750 proprietary railcars, as well as leasing others. CHS is also a large shipper on all the nation’s NGL pipelines in order to serve its operations in nearly all the Lower 48 states. Collectively, Combs said the company shipped about 1.2 Bgal. of NGLs in 2014 alone. Transportation agreements extend to Canada, where CHS has cross-border wholesale relationships and rail transportation agreements.

Another ongoing infrastructure project is taking place well outside the Midwest at the CHS propane terminal in Biddleford, Maine, where the company is expanding its offloading capabilities by adding two more truck racks, bringing the total to six. Commissioned in November 2012, the rail-in, truck-out facility is served by Pan Am Railways. Construction of the terminal that year was one of several initiatives to increase supply assets, including securing a multiyear agreement for propane supply from North Dakota and purchasing additional company-owned railcars.

Just in time for last winter’s heating season, CHS opened a new propane rail terminal in Hixton, Wis. Served by the CN railroad, the facility had an initial storage capacity of 360,000 gal. and the ability to unload six railcars every four and a half hours. Two truck loading bays are capable of loading six trucks an hour. The facility was designed to serve customers in Wisconsin, Minnesota, and Iowa. Construction was part of a $24-million investment announced by CHS to expand propane service in the region affected by the Cochin pipeline reversal.

Previously, and in advance of the Cochin being taken out of propane service, the company added additional propane storage and rail services in Hannaford, N.D. in September 2013. The terminal serves eastern North Dakota and northwestern Minnesota. Earlier that year it signed new contracts to secure additional propane rail supply, including garnering exclusive, long-term throughput agreements, adding propane storage and rail services, and expanding service agreements with the Canadian Pacific Railway and Burlington Northern.

In addition, last year CHS said it was investing an additional $20 million to strengthen refined fuels dependability and flexibility for its customer network. Projects included replacement of its refined fuels pipeline between Billings and Glendive, Mont. and construction of a new pipeline connection at Council Bluffs, Iowa. CHS’s portfolio includes refineries in Laurel, Mont. and McPherson, Kan. Laurel is a 56,000-bbld facility that distributes products throughout the northern tier of the U.S. where a multimillion-dollar project is under way to increase production of gasoline and diesel to 880 MMgal. a year. CHS purchased the refinery in 1943. McPherson is an 85,000-bbld refinery that refines crude sourced mainly from Kansas producers. Current investments in infrastructure and pipelines will raise its capacity to 100,000 bbld in 2016. CHS has been an owner since 1943, and will become its sole owner in September.

Grafton & Upton Railroad

In the New England region another propane infrastructure project in mid-June appeared to be clearing its final hurdles as the Grafton & Upton Railroad installed the first two tanks at a long-contested rail terminal in North Grafton, Mass. Project developers have for years fought off fierce community opposition, adverse court rulings, and even an attempt by the local U.S. House representative, to kill construction. Grafton & Upton has been seeking to build a 320,000-gal. propane storage and transloading facility.

In December 2012, railroad owner Jon Delli Priscoli informed Grafton town officials that four 80,000-gal. tanks would be delivered and installed for a proposed propane storage at the company’s yard. The town immediately filed suit in Worchester Superior Court seeking a preliminary injunction to enforce its cease-and-desist order halting delivery of the tanks. In June 2013, a superior court judge prohibited the railroad from delivering the tanks and ordered Grafton & Upton not to construct any part of the facility, ruling the railroad had to comply with the terms of the cease-and-desist order issued by the Grafton building inspector in 2012.

However, that same court, with a different judge presiding, later ruled in favor of a motion by the railroad to dissolve the injunction and declare the town’s cease-and-desist, stop-work order null and void. The railroad cited a ruling by the U.S. Surface Transportation Board (STB) that found federal law preempted state and local regulations concerning the facility.

“After hearing and further review of the parties’ submissions, this motion is allowed. The injunction is dissolved. The cease-and-desist order here is declared null and void. The court is persuaded that it is not in a position, in effect, to overrule the unequivocal decision of the STB regarding federal preemption, even if the decision faces challenges,” the judge’s ruling said.

And there were more challenges, and town officials continued fighting the project. As of mid-June officials were pinning any last hopes of halting construction on oral arguments in a town appeal of STB’s ruling scheduled to begin July 28 in Boston’s U.S. First Circuit Court of Appeals. Many in Grafton say the terminal is in a tight residential area and is too close to schools, playgrounds, and the municipal water supply.

Meanwhile, up the road in New Hampshire a superior court judge issued two rulings in late June that will allow the city of Portsmouth to appeal an approved expansion of Sea-3 Inc.’s (Houston) propane storage and distribution facility in Newington. While denying a motion to dismiss filed by Sea-3 and a motion for reconsideration, she set a July hearing to consider the merits of Portsmouth’s appeal of the Newington Planning Board’s decision in May 2014 to approve the expansion.

Sea-3 argued the appeal shouldn’t be allowed because the court does not have jurisdiction over railroads, adding that Portsmouth’s appeal centered on safety concerns related to increased railcar traffic. Sea-3 maintained railroad-related issues are governed by the Interstate Commerce Commission, and therefore the court should dismiss the appeal. Despite allowing a hearing on the appeal, the superior court judge cautioned Portsmouth litigators that all the relief they are seeking won’t likely be available to them.

Sea-3 has long sought to build five additional rail unloading tracks, install three 90,000-gal. aboveground tanks, a condenser, condenser cooling equipment, a dryer and heater, a mechanical building, refrigeration equipment, and associated pipelines and accessory equipment. A company spokesman noted that “the presence of a primary storage tank facility in New Hampshire allows propane to be stockpiled and released during peak-demand, cold-weather months, thereby stabilizing the local propane market and securing a critical energy supply for the state and region.”

Many area officials and residents who oppose the expansion plans have focused on the condition of Pan Am Railway’s tracks, which will be carrying a substantial increase in propane railcars if expansion plans are allowed to go forward. The New Hampshire Site Evaluation Committee will continue its review of the project in October. Before then, Sea-3, Portsmouth, and other parties will be filing witness testimony documents. Sea-3 has filed a request with the committee to be granted an exemption from a full review of its expansion.

The Sea-3 facility, in operation for decades, has traditionally been used as a waterborne import terminal. However, with the advent of the shale revolution, and exponentially higher domestic supplies sufficient to cover U.S. demand in most instances, Newington fell into disuse. That is until the winter of 2013-2014 when supply and logistics woes once again called the facility back into service for imported offshore propane to heat homes in New England.

Sea-3’s Newington terminal, built in 1975, is said to handle up to 200 MMgal. annually. Current capacity is 2 MMgal a day traveling in and out by truck and railcar. The company wants permission to expand the rail yard to handle more propane. Controversy arose when the company initially asked to export propane from the facility. Subsequently, plans were adjusted to allow some exports, but focus on regional distribution in New England from the terminal. Propane sourced from the Marcellus and Utica shale producing regions would feed the terminal. Sea-3 emphasizes the expansion is critical to its business and the viability of the facility. Change is necessary for the survival of the business due to changes in the propane market resulting from domestic hydraulic fracturing.

Again, early thinking had Newington becoming an export terminal. However, such operations would be much smaller than Gulf Coast exports. Sea-3 now envisions the expansion as a necessary first step to bring the terminal back into use by capturing domestically produced propane and distributing it in the region. Refrigerated storage tanks can hold about 23 MMgal., volumes of importance to New England in the winter months.

Sea-3 officials cite the prohibitively high cost of constructing a new facility closer to the Marcellus and Utica producing regions. Rather, the company hopes to make use of its existing terminal in Newington, and employees who have worked there for years. It is expected that if the company finally does get all necessary permits in hand, it would still be a year before all engineering, construction, and equipment installation would be completed.

Finally, over in New York State’s Finger Lakes region near Watkins Glen, protesters are still being arrested for trespassing and for blocking and chaining themselves to the gate at Houston-based Crestwood Midstream’s complex. Crestwood owns salt mining operations there and stores natural gas in salt caverns. It has federal approval to increase natural gas storage, and wants New York’s permission to store 88 MMgal. of propane as well. But that’s not OK for environmentalists who are fighting to block gas produced by hydraulic fracturing from being stored in the region. About 300 have been arrested for blocking entrances to the storage site recently.

Crestwood executives point out that the new project will relieve the propane shortages that in recent years have hit the Northeast, citing price spikes that cost New Yorkers $100 million in 2013. The new storage would include a rail siding, two brine ponds, and a flare stack. While natural gas and propane are already stored in the area, more than 300 business owners have signed a petition opposing the project, fearing, among other things, that the storage will adversely affect the tourism and wine producing industries, as well as industrialize the area.

Crestwood counters that opponents are misinformed, and that building the storage carries low risk and will result in several hundred thousand dollars in annual tax payments, all while coexisting with wineries and tourism. The New York Farm Bureau has thrown its support behind the project, asserting that the facility would keep propane prices low, which in turn helps farmers who use the fuel to dry crops while presenting no significant environmental risk.

“The agriculture industry has no desire to bite the hand that feeds us, and we are conscious of helping our industry overcome challenges in an environmentally responsible manner,” said Farm Bureau president Dean Norton. “Underground propane storage in the Finger Lakes region has an established track record, with salt cavern storage facilities operating safely in Steuben and Cortland counties since the 1950s. Most generally, we know from the almost 30 natural gas and LPG underground storage facilities located across New York State that these facilities can benefit consumers without harming our environment.”

Schuyler County lawmakers have also voted in favor, although surrounding counties outside the project limits have voted no or voiced concern. In November 2014, the New York Department of Environmental Conservation (DEC) issued a draft permit for propane and butane storage at the site. By that time the proposal had already languished for five years. But state officials cautioned that the draft permit did not mean the project was moving forward.

“The release of these draft permit conditions in no way indicates that the project will ultimately be approved,” said DEC spokesman Tom Mailey. “The draft permit conditions contain requirements and obligations that DEC staff believes would be appropriate and necessary to be imposed upon the applicant in the potential event that, after the hearing process, a permit is issued.”

DEC at the time said the state would decide the issue before the end of the year. Commissioners ordered an issues conference for February 2015, but so far no word from the state on whether it will approve or disapprove Crestwood’s proposal. Even if New York grants the OK, the project will surely face additional delays when community and environmental groups appeal the decision in court. —John Needham