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Magellan sees heavy demand for U.S. Gulf condensate splitters

By Kristen Hays and Terry Wade

HOUSTON (Reuters) - The U.S. Gulf Coast may need more than half a dozen facilities to turn condensate - a very light form of crude oil - into exportable products and handle a growing glut of output from the Eagle Ford field in Texas, Magellan Midstream Partners LP Chief Executive Michael Mears said.

Splitters, or very basic distillation towers, give condensate a minimal level of processing. Without that processing, condensate is considered crude oil under U.S. law and therefore cannot be exported.

Mears told Reuters that Magellan - the country's largest refined products pipeline system - has its eye on building a splitter in Corpus Christi, Texas, a coastal city with plenty of infrastructure for handling Eagle Ford output.

"We think there could be the need for up to six to eight splitters on the Gulf Coast to process all the condensate that's projected to come out of the Eagle Ford," he said.

Nearly half of the Eagle Ford's oil output is condensate. It can be blended into the crude supply or used by Gulf Coast refiners, most of which are configured to run heavy oil, but they have limited demand for it.

Petrochemical companies can use it as a feedstock, but it is much more expensive than other, abundant choices, such as ethane.

While it can dilute heavy Canadian crude so it will flow in pipelines, its quality varies and may not meet specifications that other diluents meet.

So the Gulf Coast increasingly faces incoming condensate with no place to go unless it can be exported, Mears said.

"We're interested in that just from a standalone investment standpoint."

"We think the Eagle Ford is going to be significantly long on condensate, and you can't export it unprocessed today."

Magellan is a 50/50 partner with Kinder Morgan Energy Partners in the 100,000 barrels per day Double Eagle pipeline that started moving Eagle Ford condensate to Magellan's marine and storage terminal in Corpus Christi in May this year.

Mears said the company hopes the majority of condensate that would feed a Magellan splitter would come from that line already connected to its terminal.

"But that's not the primary driver," he said, referring to Magellan's splitter consideration. "The primary driver is that it's a good investment in its own right."

Other companies agree. Kinder Morgan is building a $370 million 100,000 bpd, two-unit splitter near its Galena Park terminal on the Houston Ship Channel to process condensate. The first 50,000 bpd unit is slated to start up in the first quarter of 2014, and the next will come online in the second quarter of 2015.

Kinder Morgan started up a 300,000 bpd pipeline in June last year that carries Eagle Ford crude and condensate to the Galena Park complex, and an expansion of the line will start up next year.

BASF and Total Petrochemicals have a 75,000 bpd condensate splitter in Port Arthur, Texas, and Targa Resources executives have told analysts they are looking at condensate splitting projects.

Mears said Magellan envisions a project similar to Kinder Morgan's, in that the company would build and operate the splitter, while a third party would secure supply, pay a fee and market the processed product.

"Our analysis suggests there is a very healthy appetite for condensate splitters on the Gulf Coast."

CRUDE EXPORTS

Mears also said companies should prepare for an eventual lifting of the government's ban on exporting domestic crude, though he cautioned there is no certainty the rule will be lifted.

"I think it would be wise to be prepared for that," he said. "I think we and other folks want to make sure that we've got access through the distribution systems and tankage and dock capacity to be able to put crude oil on the water if exports were allowed."

But they do not want to over-invest or over-prepare, he said. If the ban were to be lifted now, export infrastructure would be lacking, and that would give an investment opportunity to Magellan and other companies.

Mears also said he is open to investing in crude-by-rail assets, but so far Magellan has deemed available assets too pricey.

"We're not opposed to crude by rail. We believe in certain instances it's here to stay. We just haven't found the right opportunity to invest."

Many companies are increasingly using rail to move crude from booming domestic oil fields because pipeline infrastructure is lacking. Refiners say crude-by-rail offers flexibility when choosing what types of crude to run through their plants.

(Editing by Matthew Lewis)

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