Washington (Platts)--11Sep2012/442 pm EDT/2042 GMT

Energy Transfer Partners' plan for converting its 770-mile Trunkline system from natural gas to crude oil and then reversing its flow from northbound to southbound tells the story of the new US energy landscape.

It echoes the declining need to send natural gas from offshore fields into the shale-rich center of the country and the growing need for oil pipeline capacity from the Midcontinent to Gulf Coast refineries.

But it deviates from recent high-profile proposals for new oil pipelines in that Energy Transfer has yet to publicly announce the project, which would carry crude from Illinois to Texas.

The company has restricted its comments about its plans to a regulatory docket at the Federal Energy Regulatory Commission, and an Energy Transfer spokeswoman declined to answer any questions about the proposal.

"This is going to be a huge project to reverse this line -- hundreds of millions if not a billion dollars," said an equity analyst who covers Energy Transfer and recently talked to the company about the project. "So you're going to have to ship enough barrels so that your cost per barrel is reasonable, competitive."

The analyst, who asked not to be identified, estimated the converted crude pipeline would have to carry 150,000 b/d to justify the cost and could hold as much as 400,000 b/d, given its 30-inch diameter. He said it could conceivably carry diluted bitumen from the Alberta oil sands or light sweet crude from the Bakken or Utica shale plays.

Before it switches Trunkline to oil, Energy Transfer first has to persuade FERC that ending part of its natural gas service would not leave Illinois and Michigan customers stranded. The pipeline currently flows from Buna, Texas, just north of Port Arthur, to Tuscola, Illinois, about 160 miles south of Chicago. Because it is looped, the pipeline would still carry natural gas on part of the system after the conversion.

If Trunkline clears the regulatory hurdle, oil analyst Harold York of Wood Mackenzie thinks it will carry a big advantage over other oil pipeline proposals that must start from scratch.

"It's time advantage. The pipe is already in place," York said. "If you're a brand-new pipeline, you have to go through a regulatory process, an environmental process, an engineering process and a construction process. That's one long timeline."

The US needs to add about 1.4 million b/d in oil pipeline capacity from the Midcontinent by 2020, York estimated. Not all of it would have to flow to the Gulf Coast, if proposals to the east or west crop up.

Raymond James analyst Paul Jacob said the firm's modeling of movements in and out of the Midwest finds that the current inventory glut would disappear by 2014 if all existing pipeline proposals apart from Trunkline get built.

Those include the 700,000 b/d southern segment of Keystone XL, which the Raymond James model pegs as starting in late 2013, and a 450,000 b/d twin pipeline built to run alongside the 500-mile Seaway pipeline to give that system a total capacity of 850,000 b/d in the third quarter of 2014.

"Supposing you have another 400,000 b/d pipeline hitting at the same time, then you're definitely going to have more than enough capacity at Cushing to move barrels south," Jacob said. "Just looking at my model right now, you don't need it."

RACE AGAINST OTHER PROPOSALS?

Energy Transfer hopes to put the new Trunkline into service by April 2014, which Wood Mackenzie's York said could indicate the company sees itself in a race against later proposals like the 450,000 b/d Seaway expansion.

"If this goes through, it's conceivable there's a pipeline project on the back end that falls off," he said.

Raymond James' Jacob said the "race-to-beat-Seaway" theory could make sense, depending on how quickly Energy Transfer indicates its intent to go through with the Trunkline oil conversion and whether that sways Seaway's owners, Enbridge and Enterprise Products Partners.

Enterprise spokesman Rick Rainey, who was not aware of the Trunkline proposal, said the company has found solid market support for the three major upgrades to Seaway: the 150,000 b/d reversal completed in May, an expansion to 400,000 b/d expected by early next year and a bigger expansion with the 30-inch-diameter twin pipeline to 850,000 b/d by mid-2014.

Rainey said the final expansion did well in a binding open commitment period with terms ranging from five to 20 years.

"We did receive commitments sufficient enough to support it," he said.

Tanjila Shafi, who watches Energy Transfer for Standard & Poor's Ratings Service, called the Trunkline proposal a positive move for the company as it expands its oil focus and limits exposure to low natural gas prices. Like Platts, S&P is owned by McGraw-Hill.

Shafi said she does not expect the proposal to encounter the same risks that TransCanada has with Keystone XL, which became the focus of environmental protests by opponents of oil sands production.

Lorne Stockman, research director for Oil Change International, which fights the fossil fuel industry, said opposition to Trunkline would depend on what kind of oil it transports.

"I'm not sure they're going to come up against KXL-like protests unless it's absolutely clear that what they're proposing is moving dilbit," Stockman said, using the industry slang for diluted bitumen. "And then they will find the tar sands movement will oppose this vigorously."

--Meghan Gordon, meghan_gordon@platts.com 
--Edited by Kevin Saville, kevin_saville@platts.com

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