Magellan Midstream Partners LP Chairman, President and CEO Michael Mears told investors that the company determined that the fate of the proposed Voyager pipeline project would depend on making major cost reductions that could see the project take on a different form.
Mears said efforts in recent months have led to a "dramatic reduction" in the estimated capital required by the project, a light crude oil and condensate pipeline that would connect Magellan's terminals in Cushing, Okla., and Midland, Texas, to Houston. But he offered few specifics beyond saying that the greatest source of cost reductions stems from plans to incorporate existing pipeline infrastructure.
"That's the primary factor that is going to make this competitive," Mears said during an Oct. 31 earnings call. "The other elements are very important, but we're not prepared to talk about those right now."
Magellan, which is developing the project with Navigator Energy Services LLC, identified the need to cut costs from its original proposal after the close of an open season in August, Mears said. The company had extended the open season three times for the project, which called for Magellan and Navigator to build 20-inch-diameter pipelines from the Cushing and Midland terminals to Magellan's Frost, Texas, terminal. Plans also included a 24-inch-diameter pipeline from Frost to Magellan's East Houston terminal.
As proposed, Voyager would allow for deliveries to Cushing from the Magellan-operated Saddlehorn pipeline serving the Rockies and Bakken regions, Navigator's Glass Mountain pipeline serving the Midcontinent production area, and other connections within the Cushing oil hub. A Midland origin point, which could provide extra supply flexibility from the Permian Basin, was proposed in late March.
Voyager would have an initial capacity of up to 400,000 barrels per day, expandable depending on industry demand.
Mears said the nature of the project remains the same but declined to say whether it involves partnering with entities that have already announced pipeline projects.
"It does involve working with partners," Mears said. "But I don't think I'm going to go any further than that."
Magellan said it now expects to spend $1 billion in 2019 on expansion projects that are already underway, before spending an additional $400 million in 2020 to complete its current slate of projects. The figures Magellan provided Oct. 31 differed from previous guidance.
That was in part because of timing. Magellan shifted about $100 million in capital spending that had been planned for 2019 to next year. But it also reflected about $150 million in costs of new projects. Mears said they do not include the Voyager project.
The revised figure of $400 million does include Magellan's share in an expansion of the Saddlehorn pipeline to about 290,000 bbl/d that was announced in August after securing volume commitments during its open season in July.
Saddlehorn Pipeline Company LLC is jointly owned by affiliates of Magellan, Plains All American Pipeline LP and Western Midstream Partners LP, a partnership formed by Anadarko Petroleum Corp., which Occidental Petroleum Corp. acquired. Magellan serves as the pipeline's operator.
As it stands, the pipeline is capable of moving 190,000 bbl/d of crude oil and condensate from the DJ and Powder River basins to storage facilities in Cushing owned by Magellan and Plains.
Magellan said the spending estimates also include pipeline enhancements for moving refined products in West Texas and additional crude oil storage in the Permian Basin.
The company also said it has identified more than $500 million of potential growth projects.
Magellan on Oct. 31 posted third-quarter adjusted EBITDA of $382.6 million, an increase from $358.7 million a year earlier. The S&P Global Market Intelligence consensus estimate of adjusted EBITDA was $368.1 million.
The partnership's distributable cash flow for the quarter was $306.8 million, an increase from $281.8 million in the year-earlier period.