Although there are doubters in the investment world, NuStar Energy LP's managers are certain they've augmented their core business — pipelines, terminals and storage for petroleum — with the right business at the right time.

The business is asphalt.

NuStar CEO Curt Anastasio has been increasingly bullish since the company closed on the sale of two asphalt refineries from Citgo Asphalt Refining Co. in March. The acquisition of the East Coast refineries immediately made NuStar the largest asphalt refiner on the East Coast and No. 3 in U.S. asphalt production. “The company as a whole is going to do very well this year,” Anastasio predicted, and asphalt is part of the reason.

“Supplies of asphalt have been tight in this country and they're getting tighter. The supply of asphalt will continue to be constrained” because refiners will be producing less of it, he said.

By NuStar's count, refiners across the country are building as many as 21 cokers — expensive processing units that can cost as much as $1 billion each. Refiners are willing to gamble on building cokers because they're needed to turn heavy crude oils into light products, including gasoline and diesel. Diesel, especially, is a high-margin product now.

Because refiners make less money refining heavy crude oil for asphalt than they do on lighter products such as diesel, producing asphalt isn't a priority, NuStar officials predicted last year.

NuStar saw tightening supplies of asphalt as an opportunity; today asphalt inventories are at an 18-year low, Anastasio said.

“It's playing out exactly the way we plotted it,” he said. In the second quarter, NuStar's margins on asphalt were averaging almost $9 a barrel. In the third quarter, Anastasio expects them to jump to $10 to $15 a barrel.

“Margins are great,” he said.

The United States now is undersupplied by about 24,000 barrels a day, he said. By 2012, Anastasio expects the gap to jump to 257,000 barrels a day. “Margins must go up to meet the growing deficit,” he said.

About 85 percent of the asphalt made in this country is used to build roads, with the remainder used for roofing materials. And the buyers of asphalt say prices are exploding.

“In the last three months or so, we've seen almost a doubling in the cost of asphalt,” said Jerry Peterson, manager of the asphalt and chemical branch in the construction division of the Texas Department of Transportation.

In 2001, TxDOT's contractors paid about $150 a ton for asphalt. By 2007, the cost had jumped to $332 a ton. By the start of paving season in May, $625 a ton was “about the median price,” Peterson said.

“The feeling I get from most suppliers is that we have enough capacity to cover everything that's planned,” Peterson said, “but there really is not any extra — it's a tight supply.”

NuStar's two asphalt plants represent 20 percent of the company's assets, but are contributing about 30 percent of its earnings before interest, taxes, depreciation and amortization.

But not everyone is as bullish as NuStar's management. In the next year, asphalt sellers, including NuStar, could face a difficult environment, said energy analyst Ted Harper of Frost Bank in Houston.

“State and federal governments are running into headwinds from lower property taxes brought on by lower housing values,” Harper said. And gasoline taxes paid at the pump are falling because people are driving less.

NuStar investor Edward Nofer, a San Antonio area resident, has concerns about NuStar's asphalt venture in the long term. “I don't know how well they'll be able to pass on the cost” to buy the raw materials to make asphalt, he said. “But I'm willing to continue to hold the stock because it pays a good dividend.”

Anastasio offers reassurance, saying, “The asphalt demand is pretty inelastic.” Some studies show that about one-third of U.S. roads are in fair to poor condition. “You can't have our infrastructure crumble,” he said. “Priuses still have to drive on highways.”

Congress recognizes this. On July 23, the House passed a bill allocating $8 billion for highway and mass-transit projects. The measure has a good chance of passing the Senate, the Wall Street Journal reported.

And Anastasio believes that demand for asphalt to make roofing materials also will stay strong, despite the turmoil in housing brought on by the subprime mortgage crisis.

“The majority of asphalt use is for maintenance,” he said, and maintenance won't be affected greatly by falling house prices and dampening sales.

And it helps that NuStar's two plants can produce high-quality asphalt. The premium asphalt made up about 3 percent of sales in the quarter, but the company's goal is to pump up those sales to as much as 15 percent of the total, NuStar officials told analysts recently.

New York chose the pricey asphalt a year ago for its Central Park bridle paths because it needed a road surface that could last a decade or more.

The paths must stand up to “a very aggressive chemical environment,” said Galileo Orlando, an assistant commissioner in New York City's transportation department. Urine from the horses can corrode lower-grade asphalt, allowing heavy carriage wheels to gouge ruts into the surface. Now when tourists take a carriage ride from the Plaza Hotel to Tavern on the Green, they're traveling across asphalt from NuStar's New Jersey plant.

“So far, so good,” Orlando said. “It's very expensive, but when you have better life, the higher cost is justified.”

Despite the recent attention focused on asphalt, Anastasio stressed that it “won't become our primary business. It's a niche opportunity.”

NuStar's core business remains its pipelines, terminals and storage, while the asphalt business is seasonal. The company now is completing $400 million in improvements to its core business and plans to spend $500 million in 2009.

Although NuStar saw a 2 percent decline in usage of its pipelines in the last quarter, a 5.1 percent tariff increase that went into effect on July 1 offsets the drop in volume, Anastasio told analysts in a recent conference call.

Prices to ship through pipelines have been going up, he said, but shippers “have been willing to pay those prices.”