Magellan Midstream is proceeding with the reversal and conversion of a portion of the partnership's 18-inch Houston-to-El Paso pipeline to crude oil service, the company announced on Thursday.
The reversed pipeline system is expected to have an initial capacity of 135,000 bpd to refiners in Houston and Texas City, supported by long-term committed volumes for a portion of this capacity.
"Magellan is pleased to announce that we have obtained the necessary commitment level and are moving forward with the reversal and conversion of a portion of our Houston-to-El Paso pipeline to crude oil service," said Michael Mears, CEO.
"Current and forecasted future market dynamics favor the benefits of our pipeline project and customer interest has been strong as new outlets for West Texas crude oil are sought by producers.
"We believe our project represents the most direct and cost-efficient route to safely deliver growing West Texas crude oil production to the refineries in the Houston and Texas City area, providing alternative transportation options that will help alleviate the current crude oil oversupply situation in Cushing, Oklahoma."
The project, which is expected to cost approximately $275 million, includes the following scope:
Reverse and convert the partnership's pipeline from Crane, Texas to Houston to transport 135,000 bpd of crude oil from the West Texas Permian Basin to the partnership's East Houston terminal;
Construct 1.25 million bbl of crude oil storage at the partnership's facilities at Crane and East Houston;
Modify and extend an existing 20-inch pipeline from Magellan's East Houston terminal to the crude oil pipeline interchange at Speed Junction, Texas, which is located on the south side of the Houston Ship Channel;
Construct an additional 24-inch crude oil pipeline along the Houston Ship Channel that will be used to add incremental capacity and connections to several Houston Ship Channel refineries; and
Enhance the operational connectivity of the partnership's existing pipeline assets to transport up to 65,000 bpd of refined petroleum products to the El Paso market by using an alternate route including the western portion of the 18-inch pipeline from Crane to El Paso.
The Crane-to-Houston crude oil pipeline segment could be expanded to transport 225,000 bpd if warranted by additional commitments at an estimated incremental cost ranging from $80 million to $150 million, depending on whether a new pipeline segment is necessary to access crude oil from Midland, Texas, the company said.
Once these modifications are complete, Magellan will be able to provide crude oil delivery from Crane to the refineries along the Houston Ship Channel and the refining complex in Texas City.
The partnership also is pursuing opportunities to provide outbound waterborne capabilities and connections to third party pipelines that can transport crude oil to additional markets.
Magellan will provide storage to facilitate these movements and will also offer additional crude oil storage for lease at its East Houston terminal.
The partnership had previously started the project's required permitting work and, subject to receiving the necessary permits and regulatory approvals, expects the reversed pipeline to be operational by mid-2013.
During the project construction phase and prior to the pipeline reversal, the partnership will continue to deliver refined products to West Texas for local demand in El Paso or further distribution to connecting third-party pipelines for ultimate delivery to markets in Arizona, New Mexico and Northern Mexico.
Throughput at the current commitment level is expected to be accretive once the pipeline is operational in mid-2013.
If throughput reaches the initial design capacity of 135,000 bpd from Crane, the project's $275 million cost is expected to generate returns more attractive than the 6 to 8 times annual EBITDA, or earnings before interest, taxes and depreciation, generally targeted for expansion projects.