Is Seaway One Pipeline Too Many?

Back in 2012, when crude oil inventories at the hub in Cushing, OK were rising, the Seaway Pipeline project made sense. Enterprise Products Partners  (NYSE: EPD  ) and Enbridge  (NYSE: ENB  ) set about reversing the line's flow back toward the U.S. Gulf Coast and doubling its capacity. The new pipeline is complete, but is it flowing in the right direction? More importantly, is it still needed?

On July 3, the companies announced the mechanical completion of the 512-mile loop of the Seaway Pipeline system from Cushing to the Jones Creek storage and terminal facility near Freeport, TX. The new 30-inch twinned line should more than double the capacity of the Seaway system to 850,000 barrels per day (BPD).

The line is a 50/50 joint venture of Enterprise and Enbridge. On May 17, 2012, the companies finished the flow reversal of the original Seaway Pipeline, redirecting crude from the then-bottlenecked Cushing hub to refineries near Houston. The addition of pump stations in 2013 increased the line's capacity to 400,000 BPD, and now the completion of the twinned line in the same right-of-way will double that.

A tale of two hubs
Times change, and now it almost looks like the Seaway Pipeline may be flowing the wrong way once again. That's because the Cushing hub is no longer experiencing a glut. In fact, as this chart from the U.S. Energy Information Administration (EIA) shows, the inventories at Cushing have dropped precipitously since the beginning of the year.

The chart only shows levels through March, but the latest EIA figures show that inventories are now down to just 20.5 million barrels at the Cushing hub. According to the EIA, mid-continent oil production growth and insufficient takeaway capacity had been raising Cushing's inventories over the past few years. However, several factors led to the recent decline.

One factor is that TransCanada  (NYSE: TRP  ) is now transporting crude from Cushing to the Gulf Coast through its Marketlink Pipeline. Another is sustained high crude oil runs at refineries in the Midwest and Gulf Coast, which are partially supplied from Cushing. Finally, shipments by rail and via other pipeline networks are bypassing the Cushing storage area on their way to the Atlantic and Pacific coast states.

The lion's share of the U.S.oil stockpiles are on the Gulf Coast, though. Those are rising, as this EIA chart shows.

The EIA's recent figures show that Gulf Coast inventories rose to record levels of over 215 million barrels by the end of April before dropping back below 205 million barrels. The EIA again attributes this glut to TransCanada's Marketlink pipeline, along with a drop in crude oil inputs at Gulf Coast refineries due to seasonal maintenance. EIA weekly inventory figures include oil stored at tank farms, refineries, and in pipelines.

Although oil inventories typically rise during the beginning of each year, the EIA says that this year's buildup on the Gulf Coast has been particularly notable. TransCanada's Marketlink pipeline, with a capacity of 700,000 BPD, is the main driver of the Gulf Coast glut, according to the EIA. Experts expect Marketlink to average 525,000 BPD in 2014.

That's not all, either. Local oil production in the Gulf Coast region has been rising in recent years, adding to the overflow. All this has created logistical challenges, requiring more storage capacity in the region. The new Seaway pipeline can only exacerbate the oil glut on the Gulf Coast.

The zen of Foolishness
It's notoriously hard to make predictions, especially about the future. That's how the old joke goes, but that's particularly troublesome for companies like Enterprise and Enbridge. Such companies must anticipate economic conditions in the years ahead. We Fools don't pretend to be able to predict the future either, so this is not to say that the new Seaway pipeline won't be competitive with TransCanada's existing line.

When looking at a pipeline company, just remember that it deals with a very inflexible transport model, unlike shipping and trucking companies. Shifting conditions can drastically alter the viability of a pipeline project.

Keep an eye on the revenues of these companies, and see how changing conditions such as inventory levels affect them. You don't have to be Nostradamus, just an alert and flexible investor.

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