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Proposed Pipeline Would Carry Shale Oil to Gulf Coast

A proposed pipeline to carry crude oil currently stranded at Cushing, OK, to higher-priced markets in Houston would also serve crude production from established and emerging shale plays in the Midcontinent, the project's backers said.

Enterprise Products Partners LP and Energy Transfer Partners LP agreed to form a joint venture to design and construct the pipeline, they said Tuesday. The project would allow greater access to the U.S. Gulf Coast-area refining complex and add about 500,000 bbl of storage capacity at new facilities to be constructed and owned by the joint venture at Enterprise's new Houston crude oil terminal.

U.S. Midcontinent crude supplies have been growing rapidly and are expected to continue to grow with the development of shale plays such as Bone Spring/Avalon, Bakken and Barnett, as well as increasing Canadian crude production, the partners said. These supplies are accumulating in Cushing, which lacks southbound pipeline capacity to the largest U.S. crude oil market on the Gulf Coast with more than 2 million b/d of refining capacity.

A portion of TransCanada's Corp. $13 billion Keystone Pipeline project would carry crude from Cushing to Port Arthur, TX. Energy Transfer Senior Vice President Roy Patten told NGI's Shale Daily that the Enterprise-Energy Transfer project is a short-term competitor to TransCanada's plans, but longer term there could be room for both projects.

"I think it competes in the short term, but if you look at the fundamentals of how much oil is coming into Cushing, there may be room for two pipelines in there," he said. "There may very well be a need for two pipelines."

The glut in Cushing has resulted in Cushing barrels trading at a substantial discount to the price of crude oil on the Gulf Coast, most of which is crude oil imported from foreign producers. Over the past three months Cushing crude oil (West Texas Intermediate) has been trading at an average discount of approximately $12.57/bbl and $10.54/bbl to Louisiana Light Sweet and Brent crude oil, respectively.

There would have to be a "catastrophic collapse" in the price differential in order for the project not to make sense, Patten said.

The pipeline would provide an outlet for more than 400,000 b/d of crude currently stranded at the Cushing hub and priced at a substantial discount to imported crude oil on the Gulf Coast, the partners said. It would also give refiners on the Gulf Coast improved access to growing supplies of domestic crude production and an alternative to higher-priced imports.

The supplies from Cushing would be entering a market where oil production from the Eagle Ford Shale in South Texas has been growing. However, Patten said he did not see Eagle Ford supply being pushed back by oil from Cushing. Rather, it's the foreign oil imports that would be pushed out of the market, he said.

"We believe our joint venture will be cost-competitive and offer the most expedient solution to benefit domestic crude oil producers and Gulf Coast consumers who are dependent on higher-priced foreign crude oil as a result of the lack of pipeline infrastructure between Cushing and the Gulf Coast," said Energy Transfer CEO Kelcy L. Warren. "We are also excited by this opportunity, which marks our entry into the fee-based crude oil pipeline and terminaling business, further diversifying Energy Transfer's business mix."

Utilizing new and existing pipelines, the 584-mile project would originate at Enterprise's 3.1 million bbl crude oil storage facility in Cushing. Enterprise and Energy Transfer would each contribute existing assets, including Energy Transfer's 240-mile, 24-inch diameter natural gas pipeline in East Texas, which would comprise approximately 40% of the proposed system.

By utilizing infrastructure already in place and following existing pipeline rights-of-way for the 354 miles of new construction, the partners said they expect the pipeline to be in service much sooner than laying new pipe only. The terminus of the pipeline would be at Enterprise's ECHO crude oil storage and terminal facility in southeast Harris County, TX. ECHO would offer access to major Texas Gulf Coast refining centers in Texas City, Pasadena/Deer Park, Baytown and on the Houston Ship Channel.

Enterprise and Energy Transfer are advantaged in the timing of their project as it would make use of the existing natural gas pipeline, which is only moving a small amount of gas currently, Patten said.

"I think our [advantage] is the timing, given the fact that 40% of the pipeline is already in the ground," he said. "The conversion process of that existing pipe is relatively inexpensive and quick. We have a much greater advantage on the timing of it. I think with our partner's connectivity...at Cushing...how well they're integrated at Cushing, as well as the new ECHO terminal being built south of [Houston] Hobby Airport, I think that gives us an advantage from a connectivity standpoint. I think it's timing, price and connectivity."

Subject to commitments from shippers and regulatory approvals, the pipeline is expected to begin service in the fourth quarter of 2012. "Within the next 60 days we expect to have firm, long-term commitments in place for the available capacity," said Michael Creel, CEO of Enterprise's general partner.

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