As Permian booms, competition for pipelines, storage picks up

Magellan Midstream Partners isn’t a household name in Houston, but the Tulsa business is growing as one of the top players in funneling crude from the suddenly booming Permian Basin to Houston-area storage tanks and Gulf Coast refineries.

Now that the oil sector is rebounding in West Texas, there’s a renewed rush to build out pipeline systems from the Midland region to Houston, where the oil can move to refiners, processing plants or other continents as the crude export market picks up, probably in 2018. More storage hubs and export terminals along the Houston Ship Channel are getting built by Magellan and others.

The only business with a larger terminal and storage hub in Houston is the local company, Enterprise Products Partners, which recently opted to build its own pipeline network to maximum capacity from Midland to its ECHO — Enterprise Crude Houston — terminal. Enterprise, Magellan and other companies are competing in every aspect of the transportation, storage and processing of the crude in order to reap as much profit and market share as possible, said Sandy Fielden, Morningstar’s director of oil and products research.

“It’s getting crowded and everyone is jockeying,” Fielden said. “The pipeline companies are trying to control as much of the volume as they can from the wellhead all the way to the refinery or even the export dock.”

U.S. oil production peaked in mid-2015 at 9.6 million barrels a day and fell to 8.4 million barrels this past July. As oil prices and drilling activity have risen again, oil production has rebounded to about 9 million barrels and growing. Drilling rigs are still being added to West Texas fields at a steady pace; the Permian is home to more than half the nation’s active drilling rigs.

READ: Oil workers who stayed help Midland bounce back

A good share of that production is likely headed for export, since more oil is coming to the Gulf Coast than the region’s 10 refineries can process, analysts said. Congress lifted the 40-year ban on crude exports at the end of 2015, but the timing coincided with a global oil glut that only now is getting slowly reduced.

Enterprise has already emerged as a leader in the nascent export market. It bought Oiltanking Partners for nearly $6 billion in 2015 to greatly expand its crude storage and terminal footprint in Houston.

Magellan is just a bit behind with its existing East Houston terminal recently expanded, and its new Seabrook terminal southeast of Houston coming online mid year. Magellan and its partner, Belgium-based LBC Tank Terminals, are already preparing to expand the terminal, in December announcing a project scheduled for completion in mid-2018.

Magellan has teamed up with Houston-based pipeline company Plains All American to get the oil to Houston. Magellan and Plains said in January they’ll expand the capacity of their jointly owned BridgeTex pipeline from Colorado City through eastern Houston and into Texas City to reach the Gulf Coast’s refining network.

READ: Plains All American to expand major Permian Pipeline System

Plains separately said last month that it is paying $1.2 billion to buy a pipeline gathering and storage network that will take oil from the Permian into southeastern New Mexico and back into the BridgeTex network and other pipelines.

These expansions are creating turf battles in the sprawling Houston area that still has limited land when it comes to prime terminal and pipeline locations, Fielden said.

Houston-based Fairway Energy Partners is building oil storage in underground salt caverns in southern Houston, while Houston’s Moda Midstream has formed a partnership Netherlands-based Royal Vopak to develop a Houston Ship Channel terminal project. Fairway is backed by Houston-based Haddington Ventures.

Fairway Chief Commercial Officer Dana Grams said the project is on track to begin operations on April 1.
“As exports become much more prolific as the Permian Basin builds out,” Grams said, “we think there’s going to be fundamental demand for more storage, especially along the Houston Ship Channel.”

But Magellan, which is competing with these firms for terminal locations and storage business, is blocking them from tying into Magellan’s pipeline system. Fairway already has connections with Enterprise and Kinder Morgan pipelines and has filed complaints against Magellan with the Texas Railroad Commission, which oversees pipelines.

Grams contends a ruling in Magellan’s favor would alter the future of Houston oil markets, allowing established players to thwart new competitors. Magellan declined comment, citing the pending nature of the legal matters.