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Ethanol Transportation & Distribution

Governors Ethanol Coalition

Mike MearsSenior Vice Presidentmike.mears@magellanlp.com918 574 7400

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Presentation Outline

Introducing Magellan Midstream Partners (formerly Williams Energy Partners / Williams Pipeline)

Our experience with the distribution of ethanol

The prospect of transporting ethanol and ethanol blends via pipelineCommercial opportunitiesTechnical Challenges

What is Stress Corrosion Cracking? Industry researchCongressional action

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Magellan Midstream Partners, L.P. (NYSE: MMP)

Petroleum Products Pipeline

System

Magellan Midstream Holdings, L.P.(NYSE: MGG)

Magellan’s StructureA Publicly Traded Partnership

Marine and Inland Terminals

Ammonia Pipeline System

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Magellan’s Asset PortfolioPetroleum products pipeline system

Longest pipeline in U.S. (8,500 miles)

Access to greater than 40% of refinery capacity in continental United States

Total of 81 petroleum product terminals in 22 states

45 terminals connected to Magellan Pipeline, 27mm barrels storage

Marine terminals

7 locations with 22 million barrels storage

Inland terminals

29 locations with 6 million barrels storage; connected to 3rd party pipelines

Ammonia pipeline system (1,100 miles)

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Magellan Pipeline – Refined Products

Significant Market PresenceOklahoma, Missouri, North Dakota, Kansas, Nebraska, Iowa, Minnesota and South Dakota

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Pipeline FundamentalsPipelines are the most cost efficient and safest method of

transporting liquid fuelsTariff from Houston to Kansas City about 6 cents per

gallonCommon Carrier vs. Proprietary Pipeline

Magellan’s open stock systemProduct batching…gasoline / diesel / jet fuelBoutique fuels require incremental infrastructure and

creates capacity limitations due to scheduling inefficiencies

Today, ethanol is transported via truck, rail, barge and ship. Blending takes place at terminals

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Ethanol Blending at Terminals

We have ethanol blending at 35 terminals today (and planning for more)

Ratio Blending Gasoline and ethanol

blended proportionally as the blended fuel enters the truck

Sequential Blending Ethanol enters the truck first

followed by gasoline Ratio & Sequential systems

promote quality blends Total ethanol blending

infrastructure costs $2 to $3 million per terminal

Railcar offloading infrastructure substantially higher

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Ethanol & Pipelines

As domestic and international ethanol production continues to increase, the economic viability of domestic pipeline shipments increase as well

The introduction of ethanol into the pipeline system brings challenges and opportunities

Commercial opportunities include the potential shipment of 10% ethanol blends as well as fuel grade ethanol

The challenge is related to the potential incompatibility of fuel grade ethanol with the existing pipeline infrastructure Unknown short and long term risks to the operation and system

integrity of the pipeline

Urgent need to study the viability of transporting low level ethanol blends (10%) via our existing pipeline system

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Technical Issues

Technical factors regarding transportation of ethanol by pipeline Moisture Materials compatibility

Stress Corrosion Cracking (SCC)SCC is the formation of brittle cracks in a material that

occurs as a result of corrosion processes and stressSCC historically found in pipelines and tanks

that are in dedicated ethanol service Cracks develop around steel construction with

high bendsWelds with high stress

Historical data suggests SCC appears at distribution terminals (not ethanol plants)

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SCC Example – Magellan’s Omaha Terminal

Leak

Photo

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Ethanol Transportation via Multi-Products or Dedicated Pipeline

Other important factors

Economics A pipeline from the Midwest to the east coast could be a

multi-billion dollar project Pipeline transportation rates for a Midwest to East/West

Coast pipeline would be competitive with rail transportation rates. A 12” line could move up to 100,000 barrels per day (4.2 million gallons per day)

Commercial Viability Our ability to secure long-term shipper commitments

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Ethanol Pipeline Logistics

Individual production facilities are small relative to volumes necessary to support a pipeline

Average ethanol plant produces 3,417 barrels per day*

Aggregation facility of up to 100,000 barrels per day (supply from 30 average size ethanol plants)

Distribution terminals at the terminus of the pipeline

Regulatory Authority Which federal agency will

have oversight authority over ethanol pipelines?

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50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

1980

1983

1986

1989

1992

1995

1998

2001

2004

May-07

barrels per day

*123 ethanol plants with 6.444 billion gallons of capacityRenewable Fuels Association 7/23/07

Ethanol Production

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Study Underway

Association of Oil Pipelines (AOPL) and the API working with the Pipeline Research Council International (PRCI)

Mulitple research projects underway to resolve the technical issues associated with pipelining ethanol Short term (6 to 12 months) - what level of ethanol blends

are compatible with existing pipeline systems with little or no modification

Long term (36 to 48 months) – • identify the environmental factors that produce SCC in ethanol

pipelines and terminals• SCC susceptibility in existing batched pipeline systems• Design requirements for new, dedicated ethanol pipelines

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House and Senate Energy bills include a provision which provide funds to study the feasibility of an ethanol pipeline

The Senate Finance Committee passed its Energy Tax title which include a provision to allow the transportation of ethanol and biodiesel blends as “qualifying income” for publicly traded partnerships Important to maintain partnership status

Congressional Action

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Pipelines remain the most reliable, safe and economic mode to transport large volumes of liquid energy

Because of the increasing domestic and international ethanol production base, pipelines may provide an economic method of transportation for ethanol

SCC challenges must be resolved Magellan is actively involved with other pipeline

industry leaders in finding technical solutions AOPL and API members are funding research to address

SCC Congress may provide funding for additional study

Transportation of ethanol blends via pipeline may be feasible in the short term Would eliminate the need for costly rail offloading

infrastructure at terminals

Takeaways

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Magellan Midstream Partners, L.P. (NYSE: MMP)

www.magellanlp.com

Magellan Midstream Holdings, L.P. (NYSE: MGG)

www.mgglp.com