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Gulf Coast operators benefiting from surge in US exports

Independent oil storage operators in the US are mostly experiencing difficult times but business is good on the Gulf coast

Trends in the US oil market have not been favourable to independent storage operators in recent years – except for those on the Gulf coast, which are benefiting from the surge in US exports. While refined product storage volumes are down generally, new terminal capacity is being constructed on the Gulf coast.

US storage operators have experienced a dual attack on their business for the past several years. Because US oil use is declining, smaller volumes are moving through the distribution system and commercial stocks do not have to be so large. Meanwhile, product prices have moved into backwardation – forward prices lower than prompt – so speculative storage has evaporated and volumes have been reduced further.

US oil consumption peaked in 2005 at 20.802 million barrels a day (b/d), according to the US Energy Information Administration (EIA), and by 2012 had lost 11.1% to reach 18.490m b/d. There are signs that 2013 will see the decline checked – figures for the first eight months show that consumption averaged 18.718m b/d, compared with 18.555m b/d in the same months of the previous year – but a large volume of throughput has been lost in recent years.

Capacity rising

While consumption has been declining, storage capacity overall has been increasing. EIA figures show that storage capacity in bulk terminals for petroleum products (including natural gas liquids and fuel ethanol) totalled 950.9m barrels in March. The volume was 2.1% up on the total of a year previously, of 931.4m barrels.

Yet US terminal capacity was only 34% utilised in March, according to the EIA’s data. Utilisation rates for main products were 49% for motor gasoline (including blending components), 35% for distillate fuel, 44% for kerosene and jet fuel and 43% for residual fuel oil. Fuel ethanol capacity was 49% utilised.

For storage operators near the big refining centres, there is a more encouraging statistic. US exports of refined products, which had crept up to 1m b/d in the early-1990s, and maintained that level until the middle of the last decade, have suddenly escalated. From 1.165m b/d in 2005, exports have increased year-on-year almost to triple by 2012, when they ran at 3.205m b/d. With shale oil production escalating but crude oil exports banned, with a few exceptions, under federal law, the new oil is being refined and the products exported.

The main beneficiaries are the refiners and terminal operators on the Gulf coast, whose facilities handled 73% of US exports in 2012, or 2.354m b/d. Facilities on the west coast handled 344,000 b/d, while 248,000 b/d flowed out from the east coast, 244,000 b/d from the mid-west and 14,000 b/d from the Rocky mountain area. The growth in the flow of products through Gulf coast facilities over the past few years has been breathtaking – there were year-on-year increases of 8.8% in 2012, 20.8% in 2011, 25.2% in 2010 and 22.1% in 2009.

Not surprisingly, new terminals are being planned and built. In July, two large operators in the Houston area – Vopak and Magellan Midstream – launched a feasibility study for a new terminal with deep-water access on the Houston Ship Channel. The companies plan to construct a facility to handle crude oil, refined products and ethanol, on land already owned by Vopak at Deer Park – adjacent to the Channel with its 13.7-metres draft. Vopak already has 8m barrels of capacity in the Houston area while Magellan has 20m barrels in the area.

Enterprise Products Partners, with 12m barrels of capacity at its Southern Complex in southeastern Texas, is adding new port facilities to provide additional export capacity. The company’s Beaumont terminal is due to be able to handle Panamax size vessels from first-quarter 2014, and by mid-year the firm’s Houston Ship Channel terminal will be able to accommodate vessels of Aframax size.

In October, operations started at the Kinder Morgan-controlled Battleground Oil Specialty Terminal (Bostco), on the Houston Ship Channel – which the company says is “fully subscribed”. By end-March the first phase is due to be complete, with the second phase starting up in the fourth quarter to give a total capacity of 7.1m barrels.

According to Andrew Lipow of Lipow Oil Associates, a downstream consultancy, the market should support the new Gulf coast capacity. There is “significant construction” he says, but crude capacity is needed for logistics and distribution while clean products capacity is needed to support the export boom. Traders and refiners require additional gasoline and diesel tankage to aggregate cargo volumes for export, and for blending, Lipow says.

But he says business in New York Harbor and in west coast locations is under pressure, pinned down by the decline in gasoline consumption and backwardation in gasoline and diesel prices. With users having a choice of available tankage, advantaged locations are preferred.

US fee indications

Trends over the past year have led to downward pressures on independent storage fees at the main US locations, according to Petroleum Economist’s discussions with terminal operators and larger users in November. Although there is strength on the Gulf coast, financial reporting from the larger terminal operators points to a competitive market.

One terminal manager said when long-contracts come up for renewal, fees fall by 10-20%. “Customers know we have 15% of unleased capacity”, the manager said, “and we know they are operating in a backwardated market”. But he said some renewals had been done at an increased fee – the storage and terminal business is highly location-specific, and users will pay for favourable logistics.

Escalating exports from the Gulf coast have led to the start-up of new storage capacity over the past year, but fees for clean products have firmed. Gulf coast capacity for clean products is attracting $0.60-$0.70 a barrel per month (equivalent to $3.77-$4.40 a cubic metre), according to Petroleum Economist’s soundings. A year previously, some capacity in the area was being renewed at $3.15/b.

Crude capacity on the Gulf coast was attracting $0.60/b at the best locations but $0.50/b at less advantaged locations, with fees viewed as under pressure.

On the east coast, it was said that clean products capacity in the most advantaged locations was attracting $0.70/b or even $0.75/b, but there was also talk of renewals done at under $0.60/b. In New York Harbor – always busy, but with plenty of capacity – clean products storage was renting at $0.60-$0.65/b.

Fees are monthly and include one fill and discharge per month.

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