In emerging Houston crude oil hub, an enterprising king arises

By Catherine Ngai and Kristen Hays

NEW YORK (Reuters) - The buzzing Texas Gulf Coast crude market, heralded as the oil trading hub of the future as the shale boom turns U.S. oil flows upside down, has found its first king.

Enterprise Product Partners LP announced on Wednesday a $4.4 billion deal to buy Oiltanking Partners LP, giving it control over a lion's share of the region's commercially available crude oil storage tanks.

Enterprise stunned the energy industry earlier this year with news it had won rare U.S. approval to export lightly processed oil.

Armed with unrivaled logistical assets and its regulatory coup, the Houston-based company has placed itself in pole position to profit from an expected gradual easing of the four-decade-old U.S. ban on exporting crude oil.

"Everybody wants to come to the Gulf Coast. We are a true believer in what is going on in crude oil and condensate in the U.S.," Jim Teague, the company's chief operating officer, told analysts on Wednesday. He said the deal would help grow its petroleum product export business, which includes processed condensate. The first several cargoes have set sail.

Other pipeline and logistics companies, such as Kinder Morgan Energy Partners and Magellan Midstream Partners, also are spending hundreds of millions of dollars to expand pipelines, storage and docks to handle the influx of Texas shale oil now flooding into Houston.

Few will come close to Enterprise's scale. The Oiltanking acquisition will give the firm 11 million barrels of crude oil storage capacity on the bustling Houston Ship Channel and another 6.2 million barrels planned for Beaumont if Enterprise carries out Oiltanking's plan to build it.

Coupled with a crude storage complex it is already building south of Houston, known as ECHO, Enterprise may hold some 26 million barrels by 2016, surpassing Sunoco Logistics Partners' 22 million barrels in nearby Nederland.

That compares to just over 60 million barrels of commercial crude oil capacity available in the area, according to a Reuters survey of projects. Tank farms across the entire Gulf Coast states region can only hold just over 200 million barrels, according to Energy Information Administration data.

For oil traders in the region, the deal marked the rise of a daunting counterparty in an area dubbed "the new Cushing," after the Oklahoma oil storage hub that sets the price for U.S. oil futures. With more oil now flowing south, rather than imported crude flowing north, Cushing is rapidly becoming a pipeline pit-stop rather than a destination for crude.

"The Gulf Coast is going to be the place for having any storage. That's where the money is," said Amrita Sen, chief oil analyst at Energy Aspects.

As pipelines and rail terminals expand, as much as 4 million barrels per day of crude may be flowing through Houston within a few years, Oiltanking estimated in a 2013 regulatory filing.

IN THE MIDDLE

Unlike Oiltanking, which earns revenues solely from fees paid by customers who use their infrastructure, Enterprise is both a toll-taker and a trader. Its crude oil marketing division acts as a middleman, often buying crude from producers at the wellhead and then selling it to refiners or other traders.

Enterprise is already Oiltanking's largest customer with 30 percent of its capacity. But other large Oiltanking customers include Exxon Mobil Corp, BP Plc and Royal Dutch Shell, each with just under 10 percent of capacity, the company said in its 2013 annual report.

It was not immediately clear what percent of capacity Enterprise would lease to third parties, but it may have limited flexibility. The average remaining contract term for leases in Houston was 7.9 years as of last December, Oiltanking has said.

Even so, the concentration of capacity with an active market participant gave shivers to some traders.

"It looks like they're going to export condensate and crude - and they'll know who else is too," said one trader.

CONDENSATE AND EVERYTHING

For the moment, with exports of unprocessed crude oil still off limits, the deal may most immediately benefit Enterprise's growing exports of processed condensate, a very light form of crude increasingly showing up in major U.S. oilfields, including the Eagle Ford shale and Permian Basin in Texas.

Earlier this year, the U.S. Department of Commerce gave Enterprise and producer Pioneer Natural Resources approval to export condensate that had been minimally processed, opening the door to partial shipments.

Oiltanking's marine terminals with 12 docks will give Enterprise more opportunity to ship out those exports, as its Morgan's Point dock on the ship channel is now largely dedicated to ethane exports, Teague of Enterprise told analysts.

All this builds on Enterprise's longstanding dominance in natural gas liquids, including the vast Mont Belvieu facility - another product that is being exported in record volumes.

"All the pieces are coming their way," said Sandy Fielden, an analyst with consultancy RBN Energy.

(Editing by Lisa Shumaker)