UPDATE 2-Shutdown of Texas-Indiana fuel pipeline can proceed -court
* Shutdown likely to cause fuel scarcity in parts of Midwest
* Court ruling allows Enterprise to ship ethane on line
* Trader says customers scrambling to keep supply coming
HOUSTON, July 24 (Reuters) - Enterprise Products Partners will move forward with the shutdown of a Texas-to-Indiana distillate pipeline that shippers say is critical to supply after a federal judge on Wednesday dismissed a dispute that had held up the company's plan.
Traders and petroleum marketers say the shutdown will cause shortages and higher prices for diesel and jet fuel in areas along the pipeline as shippers scramble for supply and pay more to have it sent by barge, rail or truck to customers.
"Not good for the home team," said Steve Ferren, executive vice president of the Arkansas Oil Marketers Association. The state includes a U.S. Air Force base and the Bill and Hillary Clinton National Airport in Little Rock, which depend on the Enterprise pipeline for jet fuel.
Without the TE Products pipeline, the base and airlines would have to truck in fuel at a higher cost.
For Enterprise, the court ruling, which threw out an injunction blocking the pipeline shutdown, means the company can move ahead with its $1.5 billion plan to convert and reverse the pipeline to move Pennsylvania ethane to Texas petrochemical plants as part of its $1.5 billion Appalachia-to-Texas (ATEX) project.
"As this injunction is no longer in place, we have the authority to move forward with our plans to discontinue that service," Enterprise spokesman Rick Rainey said of the distillate pipeline.
SHORTAGES AMID BOOM
The expected fallout from the shutdown comes despite healthy overall fuel supplies in the Midwest as refiners run full-out and increasingly tap booming U.S. oil production that was unheard of just a few years ago.
Distillate production in the Midwest region from Oklahoma to Michigan is at a record high, up nearly 9 percent since 2007, while demand has fallen 8.6 percent, according to U.S. Energy Information Administration data.
But traders in the region say that overall trend is irrelevant to the corridor served by the 806-mile (1,297-km), 230,000 barrel-per-day Enterprise pipeline. It runs from southeast Texas through northern Louisiana, through the center of Arkansas, to south or southeast Missouri, Illinois, and Indiana.
Some areas can access supply via barge or rail. But others, like the Air Force base and airport in central Arkansas, will have to rely on more expensive truck transport to bring it in.
Steve Mosby, a veteran Midwest refined products trader, said on Wednesday that customers had already accepted that the pipeline would be shut despite Murphy Oil Corp's lawsuit filed in June that sought to block the shutdown.
Murphy was one of many opponents to the shutdown, a list that included Chevron Corp and the Arkansas Attorney General's Office.
Now customers need help navigating other means of getting supply - so much so that Mosby said he will teach a class to potential Arkansas clients next month.
"Guys I've never talked to in Arkansas have been calling me," Mosby said. "They're struggling with how to source barrels."
The pipeline was under court order to keep shipping at least some distillates during the duration of the injunction, which was imposed in late June and lifted with the case dismissal on Wednesday.
Ferren said Arkansas marketers squeezed as much diesel and jet fuel as possible during that time. By late next week, they will have to find other ways to fill their coffers, he said.
POSSIBLE NEW PIPELINE
Enterprise decided months ago that the pipeline would be converted to move ethane to Texas, feeding a petrochemical boom that has emerged with the shale gas revolution.
The company could have upgraded a parallel gasoline and natural gas liquids pipeline to also move diesel and jet fuel, but the distillate volumes were too low to justify the $50 million cost, according to Rainey.
Magellan Midstream Partners is considering building a 75,000 bpd pipeline extension connecting its network in Fort Smith in far west Arkansas to its own terminals in central Arkansas that had been served by the Enterprise line.
The company has yet to announce whether it will move forward on gauging shipper interest in such a plan.