* Line to supply distillates after separate Enterprise line shuts
* Magellan to finish review of cost and timing by mid-summer
By Kristen Hays
HOUSTON, May 23 (Reuters) - Magellan Midstream Partners LP may build a pipeline extension connecting its network to its terminals in central Arkansas, where the imminent shutdown of a separate distillate pipeline has raised serious concerns about supply in the state.
Magellan said on Thursday that the company was "exploring the feasibility" of building a new pipeline to connect its network in Fort Smith, at the western edge of Arkansas, to its terminal in Little Rock. The 10- to 12-inch (25-30 cm) wide line would move up to 75,000 barrels per day of gasoline, diesel and jet fuel into the area.
Magellan's announcement comes five weeks before Enterprise Products Partners plans to shut down interstate shipments on its 230,000 bpd TE Products distillate pipeline that runs through Little Rock.
The 806-mile (1,297-km) line, which carries ultra-low sulfur diesel and jet fuel from Texas through Arkansas to southeast parts of Missouri, Illinois and Indiana, will be converted to move ethane from Pennsylvania to Texas to feed petrochemical demand as part of Enterprise's $1.5 billion Appalachia-to-Texas (ATEX) project.
Enterprise says distillate flows on the line are too low to justify spending $50 million that would be needed to modify a parallel gasoline and natural gas liquids pipeline to carry distillates as well.
The company's plan emerged at a time when overall fuel supplies in the broader Midwest area are healthier than ever, with refiners running full-out on a glut of cheaper inland domestic and Canadian crude that pumps up profits.
But the Arkansas Attorney General's office is challenging the shutdown, saying it will have a "significant, damaging effect" on business in the state.
Other challengers include airlines that operate at the Bill & Hillary Clinton National Airport in Little Rock, and the Arkansas Oil Marketers Association (AOMA).
Those challenges are before the U.S. Federal Energy Regulatory Commission.
Steve Ferren, executive vice president of the AOMA, welcomed news of Magellan's potential project.
"We hadn't been able to identify how much the shortage would be with the Enterprise change, but if there is a shortage, that would mean an opportunity for someone to come in there," he said on Thursday. "I'm glad to hear Magellan's looking into it."
Magellan would not specify whether the company was considering the project in response to the pending Enterprise line shutdown.
However, Magellan noted that its terminal complex in Little Rock is currently supplied by a third-party pipeline, and that the expansion of its system to include a new line would give customers "flexibility to adapt to changing market conditions" in Little Rock.
Magellan said the company was evaluating cost and timing of the project may launch an open season by mid-summer to formally gauge shipper interest.
The Arkansas Attorney General's office did not respond to requests for comment on Magellan's announcement. But the office has asked the FERC to direct Enterprise to keep shipping distillates on the line or suspend the shutdown for seven months so the state can investigate potential fallout.
"The proposed cessation of transportation service for the identified fuels would have a significant, damaging effect on the markets in Arkansas that are currently served by Enterprise," the attorney general's office said in a filing with the FERC earlier this month.
In a letter to the FERC filed last week, the Arkansas State Chamber of Commerce said the line "serves as the backbone for supply" of diesel and commercial and military grade jet fuel, and the shutdown "will have a catastrophic impact to Arkansas."
In response, Tom Zulim, Enterprise's group senior vice president of regulated businesses and refined products, said in an affidavit filed with the FERC on Tuesday that demand for interstate shipments on the line had declined significantly in recent years.
The affidavit said that from 2010 to 2012, non-Arkansas demand for distillates fell by more than 40 percent, and demand for jet fuel declined by 42 percent. The affidavit did not specify actual volumes, which Enterprise will not disclose.
Zulim said in the document that intrastate shipments within Arkansas from the single refinery in the state - Delek U.S. Holdings' 83,000 bpd plant in El Dorado - to in-state terminals will continue on the 20-inch line in addition to gasoline and NGLs.
However, that refinery makes gasoline and diesel, but not jet fuel - leaving the Bill & Hillary Clinton National Airport and the Little Rock Air Force Base to truck in more fuel at a higher transportation cost.