New York (Platts)--3Mar2011/546 pm EST/2246 GMT

US refiner CVR Energy is building 1 million barrels of new crude storage on property it owns in Cushing, Oklahoma, CEO Jack Lipinski said Thursday.

CVR bought 183 acres of land in Cushing -- delivery point for the NYMEX crude contract -- in 2006.

"We're now proceeding to build 1 million barrels of storage" on the land, Lipinski said during a conference call on the company's fourth quarter earnings.

Article continues below...

Request a complimentary issue of: Oilgram News
	Oilgram News brings fast-breaking global petroleum and gas news to your desktop every day. Our extensive global network of correspondents report on supply and demand trends, corporate news, government actions, exploration, technology, and much more.

The $25 million project will be finished in the first quarter of 2012, adding to the 2.7 million barrels of storage CVR now leases at Cushing.

Lipinski, speaking about the reason for the new capacity, cited the steep crude contango, which makes it worthwhile to store barrels for future sales when prices are expected to be higher.

He said the 2011 year-to-date contango average has been about $2/b per month.

"We believe contango, given this market, will be around for a while," Lipinski said. "Maybe not at these current levels, but certainly enough to pay out the steel that we would put down there."

The NYMEX crude curve remains in contango through the end of 2011, but that contango has tightened in recent weeks. The front-month -- currently April/May -- spread settled at minus $1.25/b on Wednesday, compared with a front-month -- then March/April -- settle of minus $2.82/b on February 2.

And the spreads have tightened out along the curve. The April/December spread settled at minus $2.96/b Wednesday, compared with a March/December spread of minus $9.35/b on February 2.

Stocks at Cushing hit an all-time high of 38.57 million barrels last week, according to the US Energy Information Administration.

Several Cushing storage operators have released plans to expand capacity this year from their current combined 52 million barrels to over 66 million barrels, according to analysts at Raymond James.

"Plains All American, Enbridge, and Magellan Midstream Partners have all announced substantial additional capacity additions for this year," they said in a recent report. "In total, we would expect Cushing capacity to increase 28% (or about 15 million barrels) over the course of 2011."

The analysts attributed the moves to a market that is "looking ahead to the pipeline takeaway bottleneck that is likely to become an acute problem this year."

The Keystone XL pipeline, which is still seeking the permits it needs, is seen as the most viable way to unlock Cushing crude and send it to US Gulf Coast refiners.

In the short term, railroads and trucks will "bridge the gap," said the Raymond James analysts.

"People can actually truck crude from Cushing with a $20 differential and take it down to the Gulf Coast, as you can with unit trains and frankly we are even looking for unit train options for ourselves," said Lipinski, adding that he did not expect pipeline reversals, even though "it's quite economic to do so."

"The way [the Cushing bottleneck] will get resolved is with pipe, not with trucks or with rail, and we don't see anything in the immediate future that's going to alleviate that," he said.

--Beth Evans, beth_evans@platts.com --Jeff Mower, jeff_mower@platts.com