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Magellan Midstream shifts sights to trading oil for first time

NEW YORK – Magellan Midstream Partners LP , one of the ten largest U.S. oil pipeline companies, is considering opening an oil trading operation for the first time to enter a business that generates hundreds of millions of dollars a year for some of its rivals.

Magellan may hire traders and acquire other assets related its existing pipeline and oil storage services, Chief Executive Officer Michael Mears told Reuters, a move that could help it take advantage of wide price gaps that have become a fixture of the shale oil revolution.

Five years into the U.S. shale oil boom, pipeline companies are finding few new projects to build and are seeking other engines for growth. Two of Magellan’s rivals, Enterprise Product Partners and Plains All American, have been trading oil for years, adding over $1 billion to their books annually. Magellan mainly makes money by charging oil producers fees to use its more than 10,000 miles of liquids pipeline and 47 million barrels of storage.

Mears, 52, said that while the company is considering trading oil, which often includes speculative or proprietary trading, the company is first looking at supporting a service that would buy barrels at the wellhead from producers, provide logistics to get it to a long haul pipeline or to a delivery hub in Cushing, Oklahoma, and then sell it in bulk. Traders would manage the price risk.

“We’re evaluating whether we want to add those pieces,” Mears said. “We haven’t been in trading and marketing, and we don’t have people buying at the wellhead. Not that those are extremely difficult to put in place, but it hasn’t been our core focus.”

In the past, Magellan declined to run its own trading operation because that would compete with its own oil-drilling customers, who often also trade. As a result, the company has been handing off potential profits to traders making a large margin off market inefficiencies.

Midstream companies generally own infrastructure including rail, pipelines or storage that help upstream companies – like oil producers – connect to downstream players – like refineries.

These companies are often shielded from market swings because they own the infrastructure, and not the oil or gas that passes through it. That also means they are shut out from profits that could otherwise be gained on market bets. While industry analysts say that midstreams should be among the most profitable in the energy industry because of access to infrastructure and understanding storage opportunities, they are often the first squeezed because they don’t own or sell the oil.

In December, Canadian operator TransCanada Corp said it was looking to set up a crude oil trading desk to add value to its North American pipeline network. Canada’s largest pipeline company, Enbridge Inc, already trades through its subsidiary, Tidal Energy Marketing.

Magellan’s move may cause some anxiety among existing customers already complaining about growing market competition.

“It doesn’t mean we can’t do it (trade) in a way that’s not threatening to our customers in the future,” Mears said.

In related news, Magellan Midstream, TransCanada to develop Houston pipeline.

FEW OPPORTUNITIES

Oil trading is an attractive option for pipeline companies that have few opportunities to expand in their traditional business. In the past 12 months alone, U.S. operators have started up more than 2 million barrels of new pipeline capacity, including the 600,000 barrel per day Flanagan South pipeline and the 450,000 bpd Seaway Twin. All together, these new lines have helped alleviate major bottlenecks for getting crude to market. That has sated shippers’ needs, making building new pipelines less attractive.

While these new projects have reduced the range of opportunities, “it hasn’t gone to zero,” Mears said.

Now, the company is setting its sights on the Eaglebine formation in Southeast Texas, an area still lacking proper takeaway infrastructure.

That’s one reason why Magellan is looking to expand its 300,000 bpd BridgeTex pipeline, which came online last fall, by an additional 70,000 bpd. The pipeline transports oil from the Permian Basin to East Houston, going through the Eaglebine, and Mears said that while the company is still in negotiations, he feels “pretty good” about it.

Still, the seven-month price rout that slashed global prices by nearly 60 percent last year made some shippers more hesitant to sign off on new projects, Mears said.

“During this time of $50-$60 crude, producers who typically make commitments are less likely to do that. It’s delaying some opportunities,” he said.

This article was from Reuters and was legally licensed through the NewsCred publisher network.

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