New Crude Oil Pipeline for Chesapeake (CHK, SEMG)

Three companies are banding together to build a new 210-mile crude oil pipeline from western Oklahoma to the Cushing hub, where a new 1-million barrel storage facility will also be constructed. Chesapeake Energy Corp. (NYSE: CHK), SemGroup Corp. (NYSE: SEMG), and a subsidiary of privately held Gavilan Group LLC plan to begin construction in June, with deliveries slated for the third quarter of 2013.

The pipeline will transport 140,000 barrels/day at its inception, with a potential upgrade to 180,000 barrels/day. SemGroup will perform the design and construction of the pipeline, Gavilan will clear the barrels once they reach Cushing, and Chesapeake will provide the liquids to put on the pipeline. No cost estimate has been announced, but a price of around $5 million/mile is not out of line.

Chesapeake’s participation here is part of its strategy to get its high-value liquids to market while it waits for natural gas prices to rise. It’s a smart thing to do, especially given the current rapid rise in crude oil prices and an outlook for these prices to remain high — if not go even higher — in the next couple of years. Figuring that Chesapeake’s cash outlay will be about a third of the construction cost, the company would be investing about $300 million in the pipeline which it would recover when the first few days of supply reach Cushing next year.