The Energy Hub Architect Talks Politics and Plausibility

"Whenever something plays to a stereotype, you've got a problem. There's a stereotype that Philadelphia is a place that shoots itself in the foot."

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Phil Rinaldi is the CEO of Philadelphia Energy Solutions, which runs the South Philly refinery. He’s also the public face of the campaign to make Philadelphia into a globally consequential energy hub. Last month, Rinaldi, the Chamber of Commerce and other energy executives hosted a summit at Drexel University designed to sell the region as a prospective energy hub and lure manufacturers from all over the world to Philadelphia.

It’s a controversial vision, with many opponents. But it also represents a tangible and potentially huge economic opportunity for a city with a crippling 26 percent poverty rate and a severe shortage of quality jobs for workers without college degrees.

Rinaldi proposes constructing a new, very big pipeline, with enough capacity not just to supply existing demand (which is how pipelines usually get built) but future demand as well. He imagines companies with high-energy needs moving to the city in big numbers, both driving up demand for gas and creating jobs.

Further south, in Marcus Hook, Sunoco Logistics is in the midst of repurposing an old pipeline and wants to build an entirely new companion pipeline to transport natural gas liquids from the eastern Marcellus Shale fields. Together, the projects have the potential to fuel a major petrochemical boom in the region.

Rinaldi sat down with Citified to talk about his plans. He was bullish on pipeline prospects, unconcerned about falling energy prices, dismissive of objections from energy hub opponents and highly displeased with how City Hall managed the PGW debacle.

Citified: Let’s start with the event in December. What were your expectations going in? How did it go?

Rinaldi: The whole purpose of this event was not the event itself. The purpose was to bring decision‑makers into Philadelphia that owned factories around the world or had the potential to locate or relocate natural gas consuming‑intensive business in Philadelphia. To demonstrate to them that this had the potential to be a hub… In that regard, it was really very successful. We managed to attract an audience that we wanted and we held their attention for a full day. The exchange of information was lively. We got universally good feedback from the participants.

Citified: Did they seem convinced of the viability of the energy hub vision?

Rinaldi: Yeah, it’s a little bit presumptuous but I thought there was no controversy at all. There was a real sense of inevitability. We never once got a question that said, ‘is this really possible’ or ‘can you really do that,’ or ‘what makes you think that can happen.’ None of that.

There were some focused questions about how do you intend to deal with the naysayers. Because at the end of the day, you’re going to run a pipeline and people care about pipelines. They worry about pipelines and people are going to try to block that kind of stuff; so ‘how are you going to deal with that.’

But those are obviously very legitimate questions and questions that we’re concerned about all the time. I thought from that point of view, it was really, really very successful.

Citified: Do you have a sense that it led to anything concrete? Or is it too soon to say?

Rinaldi: Too soon to say, because it’s a first step. But there are some concrete things that need to happen. The real concrete is going to be the actual kind of creation of the physical movement of the gas. That prize is still a little ways off.

But we’ve had pipeline companies, some participated in the event, and some who have called afterwards. They have a great deal of interest in participating…

Citified: Let’s talk a little bit more about the pipeline. How much further along is it now than it was six months ago? How much more developed is the concept, the framework for putting it together, the coalition of potential customers?

Rinaldi: The framework is a lot further along. One of the very most important natural gas pipeline midstream companies, a year-and-a-half ago had been expressing the idea that building a pipeline with excess capacity on day one is not the way that FERC does it (FERC regulates inter-state pipeline construction, and typically wants to see pipelines built to meet existing demand, not speculative demand).

Now they have kind of come around and said, “Hey, we have some ideas on how to get that done.” It was a big swing…

Citified: Which company is that? Can you say?

Rinaldi: I prefer not to do that, because I don’t want to speak for somebody I’m not authorized to speak for.

But the pendulum’s clearly swung the other way. It’s now people focusing on, how do you go about solving it rather than, “Well, gee, that’s not solvable.”

I do feel comfortable enough to say, though, that even at PGW, (CEO) Craig White… There was a guy who had been concerned that the normal regulatory apparatus doesn’t allow for this. He’s kind of come full circle about that now as well, and is involved all the time now in talking about how do we go ahead and get it done.

Citified: Has the discussion advanced as far as route planning?

Rinaldi: No. I purposely stay away from any issue about route planning because it’s just way too premature here. We got to get the commercial aspects lined up first. Depending on who the participants are on those commercial discussions, it’s going to have some impact on the routing.

Exactly where in northeast Pennsylvania do you start? What’s the route there? I don’t think there is an infinite number of ways to coming down the East Coast of Pennsylvania.

Citified: In terms of the potential customer base, is that reaching a point of critical mass where it’s large enough to get a pipeline off the ground, understanding that excess capacity is part of the picture here. Is that core customer base looking big enough yet?

Rinaldi: Yeah. I think so…

Citified: Can you talk at all about with that initial core of customer might be? Who might be a part of that? Apart from PES.

Rinaldi: I just can’t speak for anybody else. It would be incorrect to do that. I don’t feel like PES is in this alone. Because if PES were in this alone, we’d approach it in a different way. PES definitely has several projects that would help underpin (the early phase of the pipeline).

…We have a very interesting power cogeneration project to do. In order to be able to size that correctly, I need to know just exactly how much additional uninterruptible natural gas was available through PGW.

I called my friend, Craig White, and said, “Craig, how much additional gas is there.” The answer was zero. It wasn’t a little bit. It was zero available. It just tells you how tight that supply point is. We’ve got a project that’s sitting there percolating, waiting for gas supply solution.

Citified: What’s involved in that project in terms of potential economic impact?

Rinaldi: That’s a big project. It depends on the amount of gas. The kind of minimum size we consume here in the refineries about a 130 megawatts of power. The kind of minimum size that we would do is 130 megawatts. That’s a fairly large facility.

The economies of scale are such that there’s good economic value in making it larger and then being a power supplier here to the region, which is part of the whole energy hub idea. That plant could easily be 300, 400 megawatts in size, but that depends on the gas, the availability of the gas.

Impact: those are plants whose value is going to be hundreds of millions of dollars in construction work. A power plant just by itself doesn’t generate a lot of direct jobs, but the power that you have from that is going to generate a lot of direct jobs.

Citified: Getting back to the pipeline a little bit, what’s the advantage of starting with an uncompressed pipeline? Is it cost? Is it speed of construction? Is it easier to get done?

Rinaldi: It’s cost and you have that next built in step. Compression is expensive. It’s expensive for two reasons. One, it’s very expensive to buy and install the compressors and then to operate the compressors.

Number two, you have to site those compressors. That may be the most expensive part of the whole campaign. You need a compression station, so there’s a physical entity that will be there in community. You’ve got some additional burden in making the community feel comfortable that you’re handling this in a kind of safe and sensitive manner.

Citified: Let’s talk about that a little bit. I sat down with a couple of representatives of environmental organizations yesterday to talk about the energy hub concept. They felt that our coverage and the media generally had not been looking at the concept critically enough.

They were sharing with me some of their concerns, and one of them was that they feel left out of the discussion so far. They said that they’d tried to get into the conference, that they would like a seat at the energy action team. I wonder, what’s your response to that?

Rinaldi: …At the moment, there isn’t a particular project. You’re going to engage in a conversation. Most of the conversations we’ve had with people who are representing environmental issues here have the starting point that say, “Listen, our mission is to not have any hydrocarbons anywhere.” That’s a mission that doesn’t really have a good starting point.

If that’s what you want to do, if you want to have all windmills and solar panels, that’s great. It’s not practical, it’s not going to work. The society’s not going to run that way. Responsible people know that.

But the polemical people are going to kind of hammer away at it. To spend energy in arguing the obvious, why we actually need to drive from our home to our work and why we actually need to heat our homes and use air conditioning; it’s a pointless discussion to have.

The more critical discussions are going to be when you’re actually talking about siting a pipeline. Is it safe? Is it effective? What do the factories that would rely on that umbilical, what would they look like? Are they good citizen factories or not good citizen factories? We will certainly engage with environmental people at that level.

Citified: One of the other points they raised is that there’s an opportunity cost for the region in investing so heavily in a fossil fuel, even a cleaner fossil fuel like natural gas, as opposed to investing in green energy. That Philadelphia runs the risk of becoming left behind in 20 years, or whatever the time frame is, when sustainable energy becomes a more plausible source of a significant amount of energy. What do you say about the notion that there’s an opportunity cost to becoming a gas hub?

Rinaldi: I don’t even understand the issue of the opportunity cost. If their point is, please stop investing in hydrocarbon fuels, because if we allow ourselves to get so energy constrained, then we will pay anything for that next piece of energy, I don’t think that’s an opportunity. I think that’s an opportunity to further erode Americans’ style of life. That doesn’t make any sense to me.

The opportunity comes if someone develops a way in which solar power is directly fueling transportation. You can get around and you don’t have to stay on some government-mandated schedule about when you go to work or when you go to shop, that you can do it yourself. I think this region will adopt it in a heartbeat. I don’t think that day will come. But if it does come, this region will adopt it.

Citified: Energy prices have dramatically fallen in recent months. How has that affected both PES’ existing operations and your thoughts about the potential of a gas hub.

Rinaldi: It’s a really interesting dynamic that we’re having right now. The prices that are affected are obviously in crude oil. It kind of starts with crude oil and it’s pretty much going to end with crude oil. It would be nice to say that this is an unprecedented drop, except it’s not unprecedented. The industry’s history is full of dramatic step changes in pricing.

What is the impact? Here in the short term, for oil refiners and for consumers, certainly for consumers in the United States, the low price of crude oil is a good thing. Oil refining is an energy intensive business. We burn part of our feedstock in order to be in business. It’s better to burn $50 crude oil than $120 crude oil. Just like it’s better to burn two dollar gasoline instead of four dollar gasoline in your car.

In the short term, that’s a good thing. Does it affect the market for these products? Yeah, probably to some small extent. The lower the cost, the more the consumption is going to be. People are not going to make big investment decisions right now assuming that crude oil is going to be $50 for the next 10 years. I don’t actually see that as an issue.

The spread between the price of crude oil and the price of natural gas; that is an interesting phenomenon. For businesses that are heavily based on exporting LNG (liquefied natural gas), these very large facilities that are being built in Baltimore and down in the Gulf Coast, that’s a business that’s going to feel a lot of pressure right now, because natural gas tends to be linked with crude price in Europe.

The reason that the natural gas prices are so high is that they were linked to crude. But, obviously, as crude falls, those gas prices are going to fall. There’s going to be less of a differential. That kind of LNG export is going to have a difficult period to weather.

Citified: What about the other LNG uses, marine fuel, truck fuel? (One potential business energy hub companies could get into is producing liquefied natural gas to fuel ships and large trucking fleets).

Rinaldi: Those will remain very, very viable. How long will prices of crude stay down at this level? I don’t have a crystal ball, but I don’t think it will stay there terribly long.

Citified: To get back to the impact on the refinery, these low crude prices are actually good for the short-term bottom line?

Rinaldi: Yeah, sure. For the short-term bottom line, you’re good.

Citified: Even though presumably you can’t sell the gasoline for as much or the diesel fuel for as much?

Rinaldi: It doesn’t matter… People have been refining oil for 150 years… Oil refiners have made money at low crude prices. They’ve made money at high crude prices. They’ve lost money at low crude prices, and they’ve lost money at high crude prices.

Citified: Does it influence one way or another your thoughts on increasing or throttling back the refinery’s capacity?

Rinaldi: No. The refinery’s capacity is really dictated by the market demand for the product. If the demand is there, the refinery runs. If the demand is really strong, it runs a little harder, and if the demand is a little weak, it runs a little more throttled back to meet it. It doesn’t really work off crude price.

… moving domestic crude by rail is a marquee item. Lots of attention on it. But now one can see the reason for it. We weren’t on a mission to just bring in domestic crude by rail. It was a mission to give flexibility to the supply chain in the business, so that if it were sensible to take all domestic crude and to do that by rail, we’d be able to do it. If it was sensible to take domestic crude and some by rail and some by water, we’d do it. If it was sensible to take foreign crude in and take it in by water, we’d do it.

That’s the kind of capability that we built into the supply chain so that we can always chase the economic barrel.

Citified: You’re familiar of course with the safety concerns about the crude by rail supply chain. What’s your view on where we’re headed with that, in terms of track work, the new rail cars? Are the safety concerns in your view being addressed?

Is this a method of transportation that’s here to stay, do you think, in the truly long term? I’m talking 5, 10 years.

Rinaldi: Rail transportation is here to stay. Railroads around the world have been moving cargo, they’ve been moving dangerous cargo, for their entire existence. Over time, that has proven to be a very effective way to move those goods. I have no doubt that that will continue to be the way.

Those rail highways are very valuable. They exist. It’s an easy way to move stuff. I have no question that that will be the case. But what relative amounts move by rail, I don’t know. Ten years from now, I have no idea. That was the whole rationale behind trying to have flexibility, so we didn’t have to try to guess.

Where’s the safety going? Look, there’s an awful lot of attention right now. It’s terrible what happened at Lac‑Mégantic. A terrible tragedy. There’s nothing funny about it, but it was literally a comedy of errors that led to that. With the kind of attention and scrutiny that’s on, I can’t imagine that anything like that would be replicated, ever. That was an engineer parking a train on a hill without setting the brakes and going for a nap while the engine was actually on fire. It doesn’t make any sense at all when you think about it.

What are the inherent properties of moving crude oil? It’s crude oil. It does burn. It can burn. That’s why we use it. But we’ve been transporting more volatile materials for a long time. We transport gasoline. Gasoline’s certainly way more volatile than crude oil. We do that safely. We transport butane and propane and a whole slew of chemicals. Ethanol. The entire ethanol industry is on its rails, and that’s way more flammable than crude oil. The move to making stronger, better, more crash resistant cars, that’s a good thing.

Does it solve every problem? I don’t think so. But directionally, it’s a good thing. Are the railroads spending a lot more time and attention to the condition of the rails? Yeah. We see that evidence every day. I think we’re headed in the right direction.

Citified: Let’s talk about PGW a little bit. It’s fair to say that there’s been a lot of criticism about the way City Hall managed that. People have lobbed attacks at both City Council and the Mayor, and they’ve done the same at each other.

Two questions here. How does the actual fact that PGW will remain a public entity change conditions for the energy hub? Secondly, what does the political squabbling and lack of unity, the political dysfunction, what does that do for the business climate more generally in terms of selling the region as one that’s politically open to energy development?

Rinaldi: That’s a really important point. In terms of the physical assets of PGW, is it a loss to the region to not have certain elements of the PGW asset base available for for‑profit development? Yeah, some.

What are those assets? They have some property, which at least theoretically, would make a good home for locating an energy hub and having a redistribution center. Is that the only property? No. We have other sites that also have other features to them that make them interesting that may obviate the benefit to PGW.

The other is their small LNG facility, which there is commercial business to be done, and PGW as a municipal utility is hamstrung. It’s more of a loss for PGW than it is for an energy hub issue.

Politically, though, that’s a different story. Listen, whenever something plays to a stereotype, you’ve got a problem. There’s a stereotype that Philadelphia is a place that shoots itself in the foot all the time.

Boy oh boy, this is an example that was screaming that in the political process. We spent a lot of time talking about that. It matters. It does matter.

Citified: On the very day of your energy hub meeting, the front page of the “Inquirer” was a story about the death knell of the deal. On the right hand column, if I remember correctly, was the indictment of the latest public official.

Rinaldi: Darrell Clarke went out of his way to come and attend that event. He also went out of his way to write a letter to me explaining a little bit the City Council’s view. He did that, I don’t think, so much, to be persuasive about a view, but to make a point that, “Listen the City Council is really very supportive of energy and energy hub development.” They had particular issues with that particular PGW deal.

Mayor Nutter has also reached out. He said, “Listen, I’m all aboard in helping to support what you’re doing, so please let me know what it is that the mayor’s office can do to help.”

I believe the reality is that in some funny way, that PGW debacle held up a mirror to the political forces here in Philadelphia. That was an image that maybe they didn’t even want to see themselves. It didn’t look so good, and I think it might help them focus.

Citified: Philadelphia Energy Solutions is here. You invested in this city in a big way. The other companies that you are wooing are not here yet. Are you worried that this spooked them, or are the fundamentals so attractive that even an episode like that can be overcome?

Rinaldi: It can be overcome. I hope it can be overcome. The proof of the pudding will be whether we are able to cite the facilities when that time comes. Whether it ends up in a squabble about, “Do you put it over here, do you put it west of there, do you put it south of there, do you put it north of there?” It’s hard to tell, but that’s going to be the proof.

Citified: What are some of the alternatives there? I’m particularly curious about the Southport facility, and what interest PES might have there.

Rinaldi: PES would like to develop that into an energy port. We think we’re the right people to do that.

Citified: What does an energy port mean exactly? Is that the hub, or is it in addition to the hub.

Rinaldi: No. The hub could be located there. It could be located elsewhere, but the energy port is a place where we can take advantage of the deeper water that we’re going to have in the Delaware River by having a world class energy port… with ocean going vessels that allow energy products to both flow in, and flow out of Philadelphia. Those energy products, some of them are chemical in nature. You and I have talked before about some of the things that you do with natural gas.

You make urea ammonium nitrate out of it (commonly a component of fertilizer), which is a liquid product for domestic market, which would move by rail to the Midwest. But you could also make granular urea, which is a natural gas product. It’s a different way of exporting natural gas, because that’s where it comes from. It’s a dry granular product. You’d be able to export that through an energy port.

We can connect Southport to the refineries, so we would be able to move crude oil, refined products, chemical products in and out.

If you’re going to build an LNG business to fuel ships, it’s really convenient to do it in a place where the ships are. If you can build that wharf where those ships are, you can do that. You can have an, obviously, a tank farm that can store goods. That’s what the essence of an energy port is.

Citified: Are you talking, in any way, if the federal ban is lifted, crude oil exportation, or LNG exportation?

Rinaldi: For LNG export, Philadelphia is not very well suited to do that. There are other places in the country that are better suited, and they’re well ahead of Philadelphia in the cue. The Delaware River at 45 feet of depth is deep, but it’s not really deep enough. The bridges that you have to go under are high, but they’re not quite high enough to handle world scale LNG vessels.

What does that mean? No LNG? Not exactly. There’s LNG business that you do here in Philadelphia, which is much more regional in nature. You’ve touched on some of it. You can fuel ships… You can operate a business to supply LNG for trains, and fleet trucks and cars? Sure. That’s something you do. Maybe there’s some coastal trade in LNG. Small amounts that maybe that ship up to New England where there’s existing market for LNG.

Citified: But domestic activity principally?

Rinaldi: You’re not going to do a foreign LNG export from here.

Citified: On the crude side, I remember correctly, you’ve already come out opposing the lifting of the federal export ban, right?

Rinaldi: It’s way premature to be lifting a crude export ban. We still import seven million barrels a day of foreign crude oil. If you want to export to the world market, and let somebody else add value, then sell you back the higher priced good, that’s one approach. It sounds better to be able to add that value here, so I think it’s very premature to lift the ban.

Citified: Have you had any communication, or indication from the incoming gubernatorial administration, as to Governor-elect Tom Wolf’s his feelings about Philadelphia’s prospects as an energy hub?

Rinaldi: Just before the holidays, we did have a small group of business leaders here sit and spend some time with Governor‑elect Wolf, and his designated chief of staff, Kathleen McGinty, and talked through all this stuff. Again, I’m certainly not going to try to speak for the Governor‑elect, but I thought there was a strong meeting of the minds, and buy‑in on energy policies.

Citified: How about his position on the shale tax, which is that Pennsylvania needs one, and a significant one?

Rinaldi: At the end of the day, he’s an economist. He understands that this is a tax for revenue, and it’s better if you’re going to have a revenue generating tax to have more revenue on which to levy it.

That means development, and I’m personally convinced that this administration is going to be supportive of development of the energy infrastructure here in the state.

Citified: We have a big round of city elections this year. I’m wondering if you and other energy interests are planning on making contributions or supporting specific candidates who support the energy hub notion.

Rinaldi: PES is a Carlyle portfolio company. Carlyle is very disciplined in the policy about not making political contributions. We don’t, as a business matter, financially support anyone.

Occasionally, someone may personally support a candidate, but that always becomes a personal issue.

Citified: One last question here. Theoretically, there’s a lot of economic opportunity in an energy hub, but the makeup of the workforce at the refinery is largely white and largely suburban. But if the facilities are in Philadelphia, and Philadelphia has a crying economic need for well-paying jobs that don’t require a college degree, what can be done to diversify the workforce, and to ensure that Philadelphians get a reasonable share of the jobs there?

Rinaldi: It’s really an important point. We spend genuine effort in trying to support the educational structure here in Philadelphia. We sponsor an academy at a high school, which is getting kids that kind of pre‑engineering experience. We’re training there so that kids coming through that program would have the skills necessary to qualify for these jobs.

…Can you get people who are educated enough that they have the right skills, the soft skills? They know how to come to work every day. Drug free. They know how to work in a cooperative fashion.

We’re trying to do what we can to help facilitate that. These jobs are remarkably popular, and that’s an issue. We just got done posting for another 20 positions or something and we got 1,000 applicants. It’s very competitive. It’s clearly way more people interested in these jobs, and there are these jobs available.

Citified: Are there preference programs that you guys might consider for say your residents, or for workers of color, or anything like that, or is it strictly the quality of the resume?

Rinaldi: We don’t have a preference program. We reach out. We believe that we work in an open way. I would not like to give the impression that our work forces are un‑diverse.

We have multi‑generational workers. There’s a good side to nepotism. Nepotism is a word that has a tarnished feel to it, but when it’s done right, it’s done right. We have a lot of people who are families. There are multiple family members who work in the place. That does give you some level of security. You think you know the values, the work ethic of people that come in.