Magellan to accept crude from more Permian pipelines at benchmark MEH terminal

Houston — Magellan Midstream Partners said Sept. 10 it will start accepting crude from certain third-party Permian Basin pipelines at its Magellan East Houston terminal that also serves as a US Gulf Coast pricing benchmark.

The decision by Magellan comes as a bevy of new Permian pipelines have come online in the last couple of years and as the coronavirus pandemic has triggered a reduction in Permian crude volumes. Historically, only crude oil transported on Magellan's Longhorn and BridgeTex pipelines from the Permian has qualified for the MEH-WTI pricing designation.

MEH also is a key price assessment point for WTI in the Houston marketplace by S&P Global Platts, Argus and ICE's Permian WTI futures contract.

Magellan said the change will allow for increased liquidity at MEH for select Permian barrels without diluting Magellan's quality commitment. That means that only direct Permian crude, which hasn't been blended, and meets certain Magellan specifications will be accepted.

The expanded MEH-WTI service offering is expected to be available in early October. To participate in this new program, Magellan said it must verify the crude oil as meeting its stringent quality standards.

The decision by Magellan also comes as USGC-based pricing assessments have sought to upend the longtime reliance on traditional NYMEX WTI after the historic negative pricing event in April that was triggered by landlocked crude storage concerns at the Cushing, Oklahoma delivery point.

The new Platts American GulfCoast Select (AGS) that launched on June 26 focuses on Permian Basin crude set for export and is designed to better reflect pricing after a hodgepodge of Houston-based or waterborne assessments released in the last few years never truly caught on. Competing price reporting agency Argus Media launched a similar assessment on June 26, also called American GulfCoast Select.

Platts AGS reflects light, sweet crude supplied from the Permian on specified, long-haul pipelines, including BridgeTex, Longhorn, Midland to ECHO I and II, Cactus I and II, EPIC, Gray Oak and Permian Express. Additional crude grades, such as from the Bakken Shale, may eventually be added to the Platts AGS basket based on market feedback.

Unlike the new Platts and Argus pricing benchmarks, Magellan's MEH terminal is not focused only on waterborne crude exports. MEH also has connectivity to nearly all the refineries in the Houston and Texas City region, representing more than 2 million b/d of crude capacity. The USGC refineries rely much more on heavier crude grades, but many still use some Permian barrels for blending purposes.

Crude in the time of corona

During the pandemic this year, Permian crude production fell by about 1 million b/d from an all-time high of about 4.8 million b/d. Permian volumes have partially rebounded and were back above 4.1 million b/d in August and early September, according to the US Energy Information Administration.

However, Permian crude takeaway capacity is now close to 6 million b/d and will soon rise to about 6.5 million b/d when Enterprise Products Partners' new Midland to ECHO III pipeline to Houston comes online later in September. The new pipeline eventually will link in next year with the ExxonMobil-led Wink to Webster crude system that will push capacity to above 7.5 million b/d.

That's why Enterprise on Sept. 9 announced it would cancel its planned Midland to ECHO IV pipeline project that would have raised Permian crude takeaway capacity to about 8 million b/d.