Marathon Petroleum Corp. (NYSE: MPC) has committed to funding a portion of the Sandpiper Pipeline Project being proposed by Enbridge Energy Partners L.P. (NYSE: EEP) and Enbridge Inc. (NYSE: ENB). The 610-mile long, 24-inch crude oil pipeline would transport 225,000 barrels a day of crude from Montana and North Dakota to a terminal in Minnesota and ultimately 375,000 barrels a day to a terminal at Superior, Wis.
The total estimated cost of the project is $2.6 billion, and Marathon has committed to investing 37.5% of the project cost (about $975 million) in exchange for a 27% equity stake, according to an announcement from Enbridge that was released after markets closed on Tuesday.
The Beaver Lodge, N.D., to Clearbrook, Minn., portion of the pipeline would be built in an existing right-of-way and the Clearbrook to Superior portion will be all new. None of the pipeline crosses an international border, so the permits and requirements are far less politically charged than we have seen for the Keystone XL pipeline.
What is interesting about this announcement is that it may give us a good indication of how the increase in rail transportation is affecting new pipelines out of the upper Midwest. Enbridge has not yet conducted an open season (a period when producers commit to using the pipeline) for the Sandpiper pipeline, and it is not clear from the announcement that Marathon is taking any capacity on the proposed pipeline, although that is very likely.
Pipelines that transport crude from one fixed location to another have come under increasing pressure from rail transport that is much more flexible at both ends of the supply chain. That flexibility costs something, though, and the pipeline companies’ only real advantage for crude producers is price. Shippers have to sign up for long terms, usually 20 years, and shipping contracts are very often structured as take or pay arrangements, where the shipper has to pay transportation charges regardless of whether the capacity is used. Twenty years is a long time, and while that kind of commitment was a given less than 10 years ago, there are other options now available that may be more advantageous.
Keeping an eye on the Sandpiper open season may be a good way to determine how much demand there is for massive new crude oil pipeline projects in a time when rail transport for crude expands and more rail terminals are built to supply refineries.