UPDATE 2-Magellan, Buckeye study U.S. ethanol pipeline

(Adds details about pipeline corrosion from ethanol)

By Timothy Gardner

NEW YORK, Feb 19 (Reuters) - Two U.S. oil products pipeline companies said on Tuesday they have launched an assessment on whether to build what would be the first dedicated ethanol pipeline from agriculture centers in the Midwest to the heavily populated U.S. Northeast.

The companies, Magellan Midstream Partners LP (MMP.N: Quote, Profile, Research, Stock Buzz) and Buckeye Partners LP (BPL.N: Quote, Profile, Research, Stock Buzz), said the proposed pipeline -- with a preliminary cost estimate of more than $3 billion -- would span about 1,700 miles (2,740 km) and take several years to build. The assessment could be completed later this year.

U.S. ethanol output capacity has jumped about 45 percent to nearly 8 billion gallons per year since this time last year as Washington offers producers millions of dollars in incentives. The new energy law of late last year calls for the blending of 36 billion gallons per year of biofuels like ethanol by 2022.

Todd Alexander, a climate change partner at law firm Chadbourne & Parke LLP, who is not connected with the proposal, said a pipeline from the Midwest could lower costs for both ethanol producers and consumers because sending fuel by pipe is cheaper than sending it by truck, rail or barge -- the current methods for transporting ethanol from the Midwest to the coasts.

Pipelines have struggled to obtain new right-of-ways in recent years amid community opposition, but the proposed ethanol pipeline would hook into an existing Buckeye right-of-way in Indiana that runs to Linden, New Jersey, according to a map of the proposed project.

Bruce Heine, a spokesman for Magellan, said obtaining right-of-ways from the agricultural states to Indiana should be feasible as it could benefit farmers.

He said the pipeline could be built within three or four years, once the companies made a decision. Several hurdles would need to be cleared first, such as securing federal loan guarantees and ensuring that ethanol was taxed in the same way oil products are, he added.