Kinder Morgan Bolsters Gulf Logistics Infrastructure

To capitalize on a flood of domestic and Canadian crude into the U.S. Gulf Coast, logistics giant Kinder Morgan (KMI) Energy Partners is spending more than $1.5 billion in Houston to build the most flexible oil and fuel transport hub in the country.

The company's expanding infrastructure smorgasbord includes a bit of almost everything at the increasingly crowded Houston Ship Channel - all next door to the biggest concentration of refiners in the country.

The buildout, executives say, responds to the increasingly dynamic world of physical crude trading in North America, where the variety of available crudes is growing, and is aimed at securing their central position in moving oil from the U.S. shale boom to market.

Customers want multiple options to switch delivery modes on a dime and snag the best price for refinery feedstocks. They need more dock and storage space to handle surging volumes of fuel being shipped overseas.

"More of them are producing more than they can consume in the United States. So they want to take it to water, either for movement up and down the coast ... or to export because you see a tremendous amount of growth," John Schlosser, president of Kinder Morgan's terminal division, said of refiners.

Schlosser, who spoke to Reuters on a tour of the company's facilities, said the company was doubling down on its core business.

"Our bread and butter is the midstream - that's where we're making all of our investments," he said. "It's like connecting the dots."

Kinder's latest push is to add storage and pipeline connections to final domestic destinations, a huge oil-by-rail offloading operation, and a wider export platform.

The company recently acquired U.S.-flagged tankers that can move crude and products between domestic ports as required under the Jones Act. Docking space it added opens customer opportunities to export refined products and coal internationally.

"It gives us the opportunity to touch customers in an additional way beyond just the terminal or the pipeline footprint," Schlosser said.

Growing Competition
Kinder's spending in Houston is a piece of hundreds of millions of dollars in pipeline, storage, distribution and ship berthing investments being made across the Gulf Coast in the oil and chemicals industries.

Those include Enterprise Products Partners' and Enbridge Inc's $2 billion expansion of the Seaway Oklahoma-to-Texas crude oil pipeline, Oiltanking Partners LP's $340 million oil storage expansion in Beaumont and Magellan Midstream Partners' $1 billion BridgeTex pipeline joint venture with Occidental Petroleum Corp.

"It's about creating a nimble and adaptable infrastructure. When everything is in flux and in constant change you have to have the ability to be flexible, to adapt to new streams and to new requirements," Javier del Olmo, Oiltanking's vice president of engineering, recently told analysts.

Enterprise also is expanding its Enterprise Crude Oil Houston (ECHO) storage and distribution complex in south Houston with connections to southeast Texas refineries that provide a fifth of U.S. refining capacity.

Brent Secrest, vice president of onshore crude oil pipelines and terminals for Enterprise, said the key is the so-called "last mile" - getting incoming crude to its final stop.

"Ultimately the barrels are going to have to clear the market, and (Enterprise's) vision is to build the most comprehensive distribution system on the Gulf Coast," he said.

U.S. crude production averaged 8.6 million barrels per day (bpd) in August, up 72 percent from 2008, according to the U.S. Energy Information Administration. Energy consultancy Turner Mason & Company projects that U.S. output will reach about 12 million bpd early in the next decade.

"The impetus is on us to find places to put it," Enterprise's Secrest said.

Kinder's Projects
Kinder is widening its crude handling, with a major 300,000- bpd crude and condensate pipeline stretching from the Eagle Ford shale to Houston, as well as a 210,000-bpd oil-by-rail joint venture with privately held short-line railroad operator Watco Companies that started up this summer.

Some of that condensate, a very light form of crude oil that makes up about half of the Eagle Ford's output, will feed a 50,000-bpd condensate splitter Kinder aims to start up in November and a second one next year to double that output.

Splitters perform more complicated processes than oilfield condensate stabilizers that remove natural gas liquids from crude, but are more simple than a refinery. It "splits" condensate into naphtha, a element of gasoline, diesel, jet fuels and other petroleum components that BP Plc will buy and then sell.

Kinder is also adding docks and pipelines to its two major complexes in Galena Park and Pasadena along the ship channel, including a coal and petroleum coke export facility.

And this year's $962 million acquisition of American Petroleum Tankers and State Class Tankers brought U.S.-flagged oil shipping in house, another option requested by customers.

"The reality is, (customers) don't know where their markets are going to be tomorrow, or 10 years from now, or even two years from now," Schlosser said. "They want to know that they can go to A, B, C, D or E, depending on what makes the most sense."

By Kristen Hays and Terry Wade