The stocks of Magellan – circumnavigating crude oil storage and distribution

Sandy Fielden, RBN Energy

Early next year (2013) the first phase of the Longhorn Reversal project will be completed and an initial 75 Mb/d of crude oil will begin flowing from Crane in the Permian Basin to Houston. Around the same time the Seaway pipeline from Cushing, OK to Houston will expand from 150 Mb/d to 400 Mb/d and the Double Eagle Pipeline in South Texas will start delivering 100 Mb/d of condensate to Corpus Christi. Today we look at how Magellan Midstream Partners has developed a leading position in crude storage and distribution in Cushing, Houston and Corpus Christi during the past two years.

This is Part 4 in our blog series covering crude oil terminals in the Gulf Coast region. In Part 1 (see Echo and the Blending Men) we looked at the new 6 MMBbl Enterprise ECHO crude terminal. In Part 2 (see Nederland Crude Wonderland) we looked at the 22 MMBbl Energy Transfer Partners/Sunoco Logistics Nederland Terminal at Port Neches between Beaumont and Port Arthur. In Part 3 (see Crude Accommodation at the Oiltank Inn) we covered Oiltanking Houston’s 12 MMBbl terminal in the middle of the bustling Houston Ship Channel refining center.

This time we turn our attention to Magellan Midstream Partners LP, another Master Limited Partnership (MLP) that owns assets originally belonging to Williams Energy. Just two years ago, Magellan could comfortably have been described as a refined products distribution company with a network of 50 terminals and 9600 miles of pipelines stretching through the center of the US from Grand Forks, ND to Houston, TX. During 2011 about 77 percent of the company’s operating margin came from the refined products pipeline system. In 2010 however, Magellan made a strategic purchase from BP of 7.8 MMBbl of crude oil storage in Cushing, OK as well as pipelines linking several refineries in Houston and Texas City. Since that asset purchase, Magellan’s has concentrated its expansion investment on crude oil storage and distribution. By the end of 3Q2012 Magellan’s crude assets still only represented 10 percent of the company’s operating margin but 85 percent of their $1.3 B expansion budget is devoted to expanding these crude oil assets.

Magellan’s Gulf Coast crude assets are a mixture of pipelines and storage facilities grouped around three centers of activity – Cushing, OK (technically not the Gulf Coast, we know – but bear with us), East Houston and Corpus Christi. These three centers and the connections between them are designed to put Magellan in a strong position to benefit from the flood of new crude production from Western Canada, North Dakota, the West Texas Permian Basin and the Eagle Ford in South Texas that will bring more than 3 MMb/d of new crude into the Houston Gulf Coast region during the next two years.

Cushing
At Cushing, after the purchase of BP’s storage in 2010, Magellan constructed a further 4.25 MMBbl of crude storage during 2011 making a total of nearly 12 MMBbl at this key Midwestern trading hub. Magellan is now one of the largest owners of storage at Cushing with 18 percent of the 67 MMBbl total (see map below). Some market commentators have speculated that with all the coming new pipelines moving crude to the Gulf Coast and the new production coming online in Texas, that Cushing will lose its influence as a trading hub and delivery point for the NYMEX West Texas Intermediate (WTI) crude futures contract.  We at RBN Energy have argued that is not the case and that Cushing will remain a key distribution hub for crude oil coming to the Gulf Coast from Canada, North Dakota and the Rockies and for distributing crude to refineries in the Midwest (see You’re Doin’ Fine Oklahoma), and due to the liquidity of the CME/NYMEX contract will retain its role as the primary marker for US crude production. 

Magellan currently has 100% of their Cushing storage contracted for and their facilities are well connected to other Cushing terminals and key pipelines such as Seaway. The new Seaway pipeline expansion expected in service early in 2013 and the Keystone Gulf Coast Expansion Project at the end of 2013 will add nearly 1 MMb/d of capacity from Cushing to the Gulf Coast. We believe that as Cushing pipeline connectivity to the Gulf increases, that having access to crude oil storage in Cushing will give producers and shippers the flexibility to send crude to either Midwest or Gulf Coast markets.

 

 

Source: Magellan Analyst Day Presentation 

East Houston
The BP crude pipeline assets in Houston that Magellan acquired along with the Cushing Storage in 2010 provide the company with a comprehensive system to distribute crude oil to Houston and Texas City-area refineries. The Magellan crude delivery system is centered at their East Houston Terminal that currently has 2 MMBbl of crude storage. The East Houston Terminal is the end delivery point for the Magellan Longhorn Reversal Pipeline that is due to come online with 75 Mb/d of crude from Crane in the Permian Basin in early 2013 with a further 125 Mb/d being added in the third quarter of 2013 for a total throughput capacity of 225 Mb/d. Magellan are also 50/50 partners with Oxy Midstream Strategic Development (Occidental) in the 278 Mb/d Bridge Tex Pipeline that will run from Colorado City, TX in the Permian to Magellan’s East Houston Terminal. Bridge Tex is expected online in late 2014. The Bridge Tex project will include the addition of 1.4 MMBbl of crude storage at East Houston and 1 MMBbl of storage at the Colorado City origin.

The map below shows how the East Houston terminal is connected to area refineries in the Houston Ship Channel and Texas City region including connections that Magellan is building as part of the Bridge Tex project (blue dotted line). 

 

Source: BridgeTex Open Season

After the Bridge Tex project is completed, Magellan will be able to provide direct access to the following refineries and facilities:

  • East Houston Terminal
  • Magellan’s Galena Park Terminal via Holland Avenue Junction – offering waterborne access to the Houston Ship Channel (subject to sufficient shipper interest in utilizing the facility)
  • Speed Junction – connecting to Houston Ship Channel refineries (Shell Deer Park, Lyondell, Valero Houston, and PRSI’s Pasadena refinery).
  • Genoa Junction – connecting to the Enterprise ECHO terminal
  • Valero and Marathon (formerly BP) Texas City Refineries via Genoa Junction
  • Shell’s Ho-Ho pipeline with 200 Mb/d capacity to refineries East of Houston in Beaumont, Port Arthur and St James, LA (see Oh-Ho-Ho It’s Magic)

Bridge Tex will also offer indirect access via XOM pipelines to Exxon Mobil’s Baytown refinery.

Corpus Christi
Magellan is developing a 100 Mb/d pipeline to transport Eagle Ford condensate production from Three Rivers to the Texas Gulf Coast at Corpus Christi (see Knocking on Heaven’s Door Part III for more details on the project). The Double Eagle Pipeline is a joint venture between Magellan and Copano Energy that is expected in service during the first quarter of 2013 and delivers condensate to Magellan’s Corpus Christi marine terminal. The existing Magellan marine terminal and storage facility at Corpus has 3 MMBbl of heavy oil and refinery feedstock storage capacity. Magellan is adding 500 MBbl of new condensate storage as well as a dedicated dock delivery pipeline. As we have detailed in recent blogs, condensate is being delivered from Corpus to Texas and Louisiana Gulf Coast refineries and petrochemical plants by coastal barge (see Good Year for the Barges) as well as by Jones Act Vessel to refineries on the East Coast (see also 50 Shades of Condensate Part IV for more on condensates and The Sea And Mr. Jones for more about the Jones Act).

Conclusion
Magellan’s strategic investment in crude oil assets at Cushing and pipelines in Houston over the past two years has allowed the company to quickly become an important provider of crude storage and pipeline infrastructure to handle the influx of crude into the Houston area that will ramp up significantly in 2013. By the end of 2014 Magellan will have pipeline assets moving 0.5 MMb/d of crude from the Permian through their East Houston Terminal that they can distribute throughout the Gulf Coast refining complex. During 2013 an additional 1 MMb/d of crude will be flowing from Cushing to Houston and Magellan can leverage their huge storage facility in Cushing to help producers and shippers navigate the Midcontinent crude hub towards Gulf Coast or Midwest markets. Magellan will also complete the Double Eagle project in 2013 that gives them a strategic role in the movement and storage of Eagle Ford condensate. The company’s investment emphasis on crude oil assets underlines how important the crude storage, blending and distribution business will be in the coming years. Magellan’s assets will provide their customers with flexible alternative paths to refinery gates.

 

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