Enterprise-Enbridge in Pipeline JV

Midstream service providers, Enterprise Products Partners L.P. (EPD - Analyst Report) and Enbridge Inc. (ENB - Snapshot Report) have entered a joint venture agreement to build a pipeline –– Wrangler –– connecting the oil-storage hub of Cushing, Oklahoma, to refiners on the Gulf Coast.

With the initial capacity of 800,000 barrel a day (BPD), Wrangler is expected to be the largest pipeline connecting the region, replacing two competing proposals. The project will likely cost about $1.5 billion to $2 billion and will compete with a 500,000 BPD pipeline being planned by TransCanada Corp. (TRP - Snapshot Report) and Magellan Midstream Partners L.P.'s (MMP - Analyst Report) Longhorn pipeline.

The 36-inch diameter proposed line, likely to commence in mid-2013 pending regulatory approvals, will initiate from Enbridge's Cushing terminal and travel 500 miles south to Enterprise's ECHO crude oil storage terminal in southeast Harris County, Texas. The line would be the largest in the series that will serve Canadian and U.S. producers to supply crude to the premium Gulf Coast market. The venture also involves a new 85 mile pipeline to the Beaumont/Port Arthur refining center.

A bottleneck in shipping crude oil from Cushing to the Gulf Coast refineries has formed due to insufficient pipeline capacity. Increasing U.S. Mid-continent and Canadian onshore production has created a surplus at Cushing. Additionally, the development of Bone Springs/Avalon, Bakken, Niobrara and Barnett shale plays are ramping up. The pipeline is anticipated to be the key outlet for the Gulf Coast market, thereby easing a surplus of oil that has depressed prices in the Midcontinental U.S.

Earlier, Enterprise had proposed a 450,000 BPD line –– Double E –– with Energy Transfer Partners L.P. (ETP - Analyst Report), but has scrapped the contract as the group was unsuccessful in securing sufficient terms for making the project commercially viable.

Enterprise Products Partners is a leading master limited partnership engaged in providing a wide range of midstream energy services to producers and consumers of natural gas, natural gas liquids and crude oil. The partnership also highlighted that the newly proposed line is designed to accommodate surging production and has gained significance from shippers looking for long-term commitments.

We maintain our long-term Neutral recommendation on Enterprise.

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