Magellan Ramps Up Successful West Texas Pipeline Plans to Avoid Cushing Bottleneck

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Researched by Industrial Info Resources (Sugar Land, Texas)--In September of last year, Magellan Midstream Partners LP (NYSE:MMP) (Tulsa, Oklahoma) announced plans to reverse the flow of a section of its Houston-to-El Paso refined products pipeline. Rather than carrying refined products from Gulf Coast refineries to El Paso for distribution, the section of pipeline between Crane (about 30 miles south of Odessa) and Houston would deliver 135,000 barrels per day (BBL/d) of West Texas crude to Magellan's East Houston terminal for processing at Gulf Coast refineries.

During open season for the pipeline, when Magellan received firm commitments from shippers to use the reversed pipeline, the company was able to justify expanding the capacity of the pipeline to 225,000 BBL/d. The expanded pipeline is now fully committed with long-term agreements from shippers. In addition to the cleaning and modification of the existing 18-inch-diameter pipeline, the original project, which had an estimated cost of $245 million, included the construction 1.25 million barrels of additional storage capacity in Crane and at the company's East Houston Terminal, as well as additional pipeline laterals. With the increased capacity, the additional modifications and construction of grassroot pump stations is increasing Magellan's overall investment in the project by an additional $130 million to $375 million.

The strong commitments from shippers demonstrate the desire for West Texas crude oil producers to have a direct route to Gulf Coast refineries. In a company press release, Magellan President and CEO Michael Mears said: "The market clearly confirmed the attractive fundamentals of our Crane-to-Houston crude oil pipeline, and we are pleased to increase the scope of our project in response to this strong industry demand. We continue to believe our Crane-to-Houston pipeline will be the most direct and cost-efficient route to deliver growing West Texas crude oil production to the refineries in the Houston and Texas City area, providing an alternative transportation option that will help alleviate the current crude oil oversupply situation in Cushing, Oklahoma."

A lack of pipeline infrastructure and the ability to transport oil on water-borne tankers from the Permian Basin has traditionally kept the price of West Texas Intermediate (WTI) lower than Brent and Louisiana Light & Sweet (LLS) crude prices. The pipeline reversal will help alleviate some of the WTI supply glut that occurs at the Cushing, Oklahoma, pipeline hub, which contributes to WTI's lower price.

This rationale is also being used to justify another Magellan pipeline project in the Eagle Ford Shale, which faces similar "land-locked" transportation problems. Magellan has created a 50:50 joint venture with Copano Energy LLC (NASDAQ:CPNO) (Houston, Texas), known as Double Eagle Pipeline LLC, which will construct a grassroot pipeline to deliver Eagle Ford crude to Magellan's refinery in Corpus Christi, Texas.

Magellan expects the reversed Crane-to-Houston pipeline to begin delivering oil at partial capacity in early 2013, ramping up to full its full 225,000 BBL/d by mid-2013. The Eagle Ford-to-Corpus Christi pipeline, which will have an initial capacity of 100,000 BBL/d is expected to begin limited services by the end of this year, ramping up to full capacity in the first quarter of 2013.

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