Bloomberg News

Enbridge Plans to Reverse Pipe Between Cushing and Houston

November 17, 2011

(Updates with comment about Wrangler pipeline in third paragraph.)

Nov. 16 (Bloomberg) -- Enbridge Inc. agreed to pay $1.15 billion for ConocoPhillips’s 50 percent share in the Seaway pipeline and will reverse the flow on the line to carry crude from Cushing, Oklahoma, to the Texas coast.

Enterprise Products Partners LP, owner of the other half of Seaway, will partner with Enbridge on the reversal, which may help ease a bottleneck at Cushing’s storage hub that has caused U.S. oil to trade at a discount to imports.

The Seaway project will replace the companies’ previously announced plan to build a larger pipeline, called Wrangler, between Houston and Cushing, Rick Rainey, a spokesman for Enterprise, said in an interview.

“There’s minimal cost to reverse the flow,” in Seaway, he said.

Crude for December delivery rose $3.22 to $102.59 a barrel on the New York Mercantile Exchange, the highest settlement since May 31. The European contract’s premium to West Texas crude narrowed to $9.28 a barrel, the smallest spread since March 8, according to Bloomberg data.

Enterprise and Enbridge also plan to build an 85-mile extension to Seaway from the Houston area to Port Arthur, Texas, where there are more refineries that can process the kind of heavy crude produced from Canada’s oil sands, Rainey said.

The 500-mile (800-kilometer) Seaway line could begin transporting 150,000 barrels a day from Cushing to Houston-area refineries by the second quarter of 2012, Enbridge and Enterprise said in a statement. Capacity may be expanded to 400,000 barrels a day in the first half of 2013, the companies said.

Wrangler’s Capacity

The Wrangler line would have carried 800,000 barrels a day and opened in mid-2013. The companies may expand Seaway’s capacity later and plan to talk to some of the shippers who were interested in the Wrangler line about using Seaway, Rainey said.

“A Seaway reversal will provide capacity to move secure, reliable supply to Texas Gulf Coast refineries, offsetting supplies of imported crude,” Enbridge Chief Executive Office Patrick Daniel said in the statement.

Keystone XL Competition

The reversed Seaway will compete with TransCanada Corp.’s proposed Keystone XL line, which will connect through Cushing on its route carrying oil-sands crude from Alberta to Texas.

The U.S. State Department delayed a decision Nov. 10 on a permit for the Keystone line because of environmental concerns in Nebraska. The company may ask the U.S. government for permission to go ahead with construction of the Cushing-to-Texas segment of the line, TransCanada Energy & Oil Pipelines President Alex Pourbaix said in an analysts’ presentation today.

Growth in crude output from Canada’s oil sands and in tight shale-rock formations in the United States, including North Dakota, will create a need for both the Keystone XL and Enbridge’s alternative, Jackie Forrest, director of global oil for IHS Cambridge Energy Research Associates, said in a Nov. 11 analysis.

Both projects are needed “in order to create enough takeaway capacity to prevent bottlenecks,” she said.

Enterprise fell 0.2 percent to $45.02 at the close in New York, and ConocoPhillips dropped 3.1 percent to $69.76. Enbridge increased less 0.3 percent to C$34.91, and TransCanada rose less 0.4 percent to C$40.95 in Toronto.

Cushing Glut

Technology to produce crude from U.S. shale-rock formations and Canadian oil sands has increased production and led to a glut at the storage hub in Cushing. A lack of pipeline capacity to move the petroleum to refineries on the Gulf Coast has caused the price of West Texas Intermediate crude, the U.S. benchmark, to trade as much as $27 less per barrel than imported oil in the past two months.

The glut has boosted profits for refiners such as Valero Energy Corp. and Marathon Petroleum Corp. The crack spread, a measure of the difference between the cost of crude and the price at which refiners can sell fuel, averaged a record $32.54 a barrel for the third quarter of 2011, according to data compiled by Bloomberg.

Marathon Petroleum, HollyFrontier Corp. and other U.S. refiners declined on the announcement, which may boost the cost of their crude supplies and narrow profits from making fuel.

ConocoPhillips, the third-largest U.S. oil producer, is also selling its stake in the Colonial pipeline to a subsidiary of Caisse de dépôt et placement du Québec, Canada’s largest pension fund manager, for $850 million. The pipeline carries 2.3 million barrels of refined products a day between the Gulf Coast and the U.S. Northeast, according to a statement from Caisse.

$20 Billion Goal

ConocoPhillips, based in Houston, plans to sell $15 billion to $20 billion in assets over three years. The pipeline sales “strongly position us to accomplish our target by the end of 2012,” Senior Vice President Al Hirshberg said in the statement.

The wide discount on West Texas Intermediate wasn’t going to last forever, so ConocoPhillips had to take a broader view on the sale of its Seaway stake, said Brian Youngberg, an analyst at Edward Jones in St. Louis who has a “buy” on ConocoPhillips shares and owns none.

“You can’t make a long-term decision based on that short- term benefit you’re receiving,” Youngberg said. “If they can potentially sell it at what could be the peak of the market for that type of asset, it likely will turn out to be a good decision.”

ConocoPhillips plans to spin off its refining business next year to create a new company called Phillips 66, which also will include some marketing, chemical and midstream assets.

Exxon Mobil Corp. and Chevron Corp. are the largest U.S. oil companies.

--With assistance from Aaron Clark and Mark Shenk in New York, Bradley Olson in Houston and Doug Alexander in Toronto. Editors: Jessica Resnick-Ault, Jasmina Kelemen

To contact the reporters on this story: Mike Lee in Dallas at mlee326@bloomberg.net; Edward Klump in Houston at eklump@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net


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