Magellan Midstream Partners said on Monday it had signed a joint agreement with Poet, the largest U.S. ethanol producer, to study building a dedicated pipeline to carry the biofuel from the U.S. Midwest into the Northeast.

The proposed $3.5 billion pipeline system would gather ethanol from distilleries in Iowa, South Dakota, Minnesota, Illinois, Indiana and Ohio to serve terminals in major Northeastern markets.

Amid U.S. mandates calling for greater amounts of ethanol to be blended into the gasoline pool through 2022, companies are boosting efforts to see if shipping ethanol through pipelines can be a less expensive, safer alternative to sending it on trucks and trains. Unlike petroleum products ethanol absorbs water.

For example, Kinder Morgan Energy Partners LP, one of the largest energy pipeline companies in North America, has been sending batches of ethanol through a 105-mile petroleum products pipeline in Florida.

Magellan, which owns and operates a major oil products pipeline in the Midwest, had originally announced in February 2008 it would work with Buckeye Partners LP to jointly study a large alternative fuel pipeline project. Buckeye recently decided to discontinue its role with that project.

Poet, which produces more than 1.5 billion gallons of ethanol a year from 26 plants across the Midwest, and Magellan said federal legislation revising the U.S. Department of Energy's loan guarantee program is critical for the project, which would span 1,700 miles, to move forward.

A prime concern about sending oil through pipelines is that the fuel can absorb excess oxygen causing a problem called stress corrosion cracking.

But Raymond Paul, the government affairs director at the Washington, D.C.-based Association of Oil Pipelines, has said companies have found ways to control that problem as well as water absorption.

In addition, high profile train and truck accidents involving ethanol occurred last year in Maryland and Pennsylvania.

Florida Energy