Explorer rethinks strategies in changing market: Tulsa pipeline

Journal Record, The (Oklahoma City), May 21, 2007 by Kirby Lee Davis

For perhaps the first time in its 36-year history, Explorer Pipeline Co. is rethinking its fundamental strategy.

The Tulsa-based transporter of gasoline, diesel and jet fuel connects Gulf Coast refineries to Houston, Dallas, St. Louis and Chicago distributors through a 1,400-mile, one-way network of 28- inch pipelines and huge storage tanks. Since it makes only two to three pennies per gallon transported, Explorer must move hundreds of thousands of barrels daily to pay for its operating and infrastructure costs.

As proof of its success, President and Chief Executive Timothy C. Felt said Explorer stands on course toward a record $240 million annual revenue, up from $200 million last year.

While several factors play into that, including its own expertise, Explorer always drew support from a fundamental economic reality: 47.4 percent of total U.S. refining capacity operates along the Gulf, according to the U.S. Energy Information Administration. Explorer serves 22 such refineries, transporting refined products with more than 72 different specifications for more than 60 different shippers.

But several years of rising crude oil futures and peaking refinery output have not only renewed exploration across North America (and spurred a multitude of refinery expansion or construction plans expected to come online within three years) but made domestic oil far more competitive. Felt now sees a great potential for Canadian crude prices to undercut imports over the next few years, reflecting Canadian Association of Petroleum Producers projections of output doubling by 2020.

That seismic shift would prove a boon to Chicago and Midwest refineries, and to consumers, but a potential long-term blow to Explorer - especially as West Coast imports rise, further reducing dependence on the Gulf.

That potential "balloon effect" has forced Felt and company to seek ways to serve planned or expanding Midwestern refineries. A myriad of options lie before Explorer, from finding ways to reverse the flow at some pipeline areas, or building small 10- to 40-mile connecting segments. Each option involves complications, not the least being staying ahead of competitors considering their own pipeline expansions, some of which may never materialize.

"We don't know what the answer is, but we have to be prepared," said Felt. "If we guess wrong, we could be spending hundreds of millions of dollars chasing the wrong thing."

Fronting their growth strategies, Explorer has entered negotiations to buy an extensive set of pipeline assets. For a company built on organic growth, that marks a dynamic change.

"This would be our first acquisition," said Felt, declining for competitive reasons to disclose the target. The company has already lined up banks to finance the deal, which could happen this summer or fall.

Such moves present their own challenges, like refitting older pipeline systems to carry fuel or expanding their capacity to meet Explorer's needs. But even with those costs, such deals may save money over new construction, which can run in the hundreds of millions of dollars.

Felt said Explorer will enhance each of its pipeline segments, but its greatest needs lies in fixing a "bottleneck situation" in Dallas, where the company intends to expand its capacity by 50 percent.

Fresh from completing a 20,000-barrel-a-day capacity expansion into Dallas (by adding pumping stations and tanks), Explorer has completed conceptual engineering and design plans to further expand its Houston/Dallas/Tulsa line capacity by 230,000 barrels a day. The employer of 160, with about 100 of those in Tulsa and Glenpool, also will add a spur line into the Dallas/Fort Worth area to handle 100,000 barrels daily.

As its fuel mix has changed in the Metroplex, with dominance by jet fuel changing to gasoline, Felt said Explorer has identified an underserved sector in the Dallas marketplace. It hopes to seize on that opportunity ahead of its competitors.

Explorer also has taken steps to tighten its operations and lower its operating costs, from reducing transmix wastes to further expanding its pipeline capacity through added pumping stations (which speed the flow of fuel), added storage or use of friction- reducing chemicals.

"We always look at any change asking, where's the opportunities in that?" he said. "We always do things in parallel, planning two, three, four things at a time, knowing that maybe only one is going to go through."