Plains to build $900 million pipeline across Arkansas

Texas-based Plains All American announced Thursday that it plans to build a 440-mile, 20-inch crude oil pipeline across Arkansas, running from the company’s terminal in Cushing, Okla., to the Valero Corp.’s 195,000 barrels per day refinery in Memphis.

Plains said it will invest nearly $900 million in the so-called Diamond Project, which will provide capacity of up to 200,000 barrels of domestic sweet crude per day. The pipeline, which will also give the Texas midstream operator access to Valero Energy Partner’s pipeline system in the Memphis area, is expected to be completed in late 2016.

Since acquiring the Memphis refinery from Tulsa-based Mapco in 2005, refinery giant Valero said it has invested more than $245 million to upgrade the facility. The refinery primarily processes low-sulfur content, light, sweet crude oil that produces regular and premium gasoline, diesel, jet fuel and petrochemicals.

With a direct connection to Plains’ Cushing in central Oklahoma, Valero gains access to the nation’s largest crude oil storing facility. Cushing is one of the world’s largest trading hubs for West Texas Intermediate, the highly sought-after light sweet crude that serves as the benchmark for oil pricing on the New York Mercantile Exchange.

Plains said the Diamond Pipeline project is strengthened by a long-term shipping pact it has with Valero and a related contract for storage and terminal services at the company’s Cushing facility. Valero also holds an option until January 2016 to become a partner in the Diamond Pipeline and purchase a 50% stake in the project.

Construction of the pipeline will also enhance the refinery’s long-term ability to produce gasoline, diesel and jet fuel for the greater Memphis and eastern Arkansas area, Plains officials said.

Plains announces this deal at a time when Wall Street is closely watching pipeline companies and other midstream operators that transport or are involved in the transportation, storage, and wholesale marketing of crude or refined petroleum products. The increased production of crude oil and natural gas from U.S. shale plays, including Marcellus, Eagle Ford, Bakken, Woodford and Fayetteville development in Arkansas, has put huge pressure on U.S. pipeline and midstream operators to keep up with capacity.

For instance, the U.S. Energy Information Administration forecasted last week that U.S. total crude oil production will averaged an estimated 8.5 million barrels per day (bbl/d) in 2014 and 9.3 million bbl/d in 2015. The 2015 forecast represents the highest annual average level of oil production since 1972. Natural gas plant liquids production is expected to increase from an average of 2.6 million bbl/d in 2013 to 3.1 million bbl/d in 2015.

The increased domestic production of crude oil and natural gas from U.S. shale plays has also contributed to a significant decline in U.S. dependence on imported oil from places like Saudi Arabia, Iraq and Venezuela.

The total share of U.S. petroleum and other liquids consumption met by net imports fell from 60% in 2005 to an average of 33% in 2013, the EIA said. The Department of Energy statistical arm said it expects the net import share to decline to 22% in 2015, which would be the lowest level since 1970.

In addition, Kinder Morgan announced a recent $70 billion tax-friendly deal to bring all of its energy assets under one corporate umbrella. Like Plains, Kinder Morgan is a public traded, master limited partnership that owns and manages midstream energy infrastructure across the U.S.

Kinder Morgan said its deal will “be a valuable acquisition currency and have a significantly lower hurdle for accretive investments in new energy infrastructure.”

“In the opportunity-rich environment of today’s energy infrastructure sector, we believe this transaction gives us the ability to grow KMI for years to come,” company chairman and CEO Richard Kinder said.

Like rival Kinder Morgan, Plains also owns an extensive network of pipeline storage and gathering assets in key crude oil and natural gas producing shale plays, transportation corridors and major market hubs in the U.S. and Canada.

Once its deal is completed at the end of the year, Kinder Morgan-owned subsidiaries will have a stake in or operate nearly 80,000 miles of pipelines and 180 terminals across the U.S.

Plains said it moves over 3.5 million barrels per day of crude oil and natural gas products on its pipelines.

Both pipeline giants are based in Houston.