More Rule-Skirting Crude Facilities on Tap

Kinder Morgan tied up with BP to build a “splitter” that refines crude oil just enough to export it, now Magellan Midstream is set to build one, too.

Apr 9, 2014 at 10:05AM

You can't export crude oil from the United States, a relic of the 1970's oil crisis. However, you can export crude oil that's been processed, even if it's just a little bit processed. That's a bandwagon that Kinder Morgan Energy Partners (NYSE:KMP) has already jumped on with BP (NYSE:BP). Now Magellan Midstream Partners (NYSE:MMP) is getting in on the act, too.

Totally processed...
Crude oil and natural gas exports are heavily restricted. However, processed crude or gas can be exported. That's one of the reasons why oil and natural gas refining byproduct propane exports have rocketed over the last couple of years, going up from around 100,000 barrels a day to almost 400,000. Although most pure-play propane options are domestically oriented, about 15% of NGL Energy Partners' (NYSE:NGL) business is in the propane logistics space.

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So, if you are looking to invest in propane's export growth, NGL is just about the closest you'll get. Its propane terminals and storage facilities are essentially the infrastructure needed to support the fuel's export. That said, NGL is also in position to benefit from changes in the oil industry. After its nearly $900 million acquisition of Gravilon, crude logistics will make up about half of the partnership's business. The deal more then doubles the number of NGLs Gulf Coast terminals.

Just barely touched
That's not such a bad position to be in, particularly if the Kinder Morgan Energy Partners' $370 million condensate processing facility starts a trend. International oil giant BP is taking all of the plant's 100,000 barrels a day of capacity. The rub is that the facility isn't really refining oil; it's splitting it. Kinder Morgan Energy Partners' CEO Richard Kinder explained in the partnership's fourth quarter conference call that, "It's not refined products, but it will facilitate..." the ability to, "...move the split product out."

In other words, Kinder Morgan Energy Partners and BP are doing just enough to get around the oil export ban. In fact, the plant's output will likely undergo additional processing wherever it goes before it's used. And now Magellan Midstream Partners is set to spend $250 million to build a 50,000 barrel a day splitter.

Magellan's project is in conjunction with commodity trader Trafigura Beheer. Magellan can double the plant's capacity if there's enough demand. Kinder Morgan Energy Partners can double its capacity, too, for that matter. And if the demand for propane is any indication, such growth is highly likely.

More on the way?
Valero (NYSE:VLO) is another company looking to the export market for growth and a name that's been mentioned alongside Kinder Morgan and Magellan in the splitter space. Valero notes that because of a , "...continued shift toward exports, U.S. net exports of petroleum products have increased from 335 MBPD in 2010 to 1,797 MBPD in 2013." The company's, "...share of U.S. exports has averaged 20% to 25% over the past few years."

Aerial

(Source: Brooks O. Hubbard IV via US Army Corps of Engineers from USA, via Wikimedia Commons)

With international demand "pulling" products from the U.S. market, Valero is already taking advantage of exporting refined products, notably diesel fuel going to Latin America and Europe. Getting on the splitter bandwagon would give it yet another refined product to export. And part of the allure is that such plants are relatively inexpensive to build, costing as little as 10% of the amount to build a full-scale refinery.

Expansion on the way
Watch the news for more splitters. The United States' role in the world is changing and the oil industry has found a way to get around rules that seem out of date in today's market. If Kinder Morgan and Magellan find success, they'll be at the forefront of a potentially big industry shift. And they'll have built in growth prospects at the new plants, too. Valero, meanwhile, is already big on the export front and could use splitters to get even bigger at a relatively low cost.

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Reuben Brewer has a position in Kinder Morgan Energy Partners. The Motley Fool recommends Magellan Midstream Partners, L.P.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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