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US oil-storage dips on price trends

Unfavourable futures prices have taken the steam out of the US independent oil-storage business, but physical flows of fuel components continue as a volume driver at refinery-hub terminals

Backwardation in refined oil-product prices – futures prices lower than prompt – has led traders to walk away from booked storage capacity at many US locations, with tank volumes falling and storage fees coming under pressure. But at locations where physical business is strong, the long-term growth in imports and exports of transport fuel streams has given the larger operators confidence to press on with capacity expansions.

At physically driven locations, the fundamentals of the US oil market have been favourable to independent terminal operators. The slide in oil consumption since the peak of 2005 reversed in 2010 with an increase of 2.2%, according to US Energy Information Administration (EIA) statistics (see Figure 1). The increase saw an additional 409,000 barrels a day (b/d) of products moving through the distribution infrastructure.

There has also been a substantial increase in exports of petroleum products from the US. In 2010, exports ran at 2.353 million b/d – an increase of 16.3% from the previous year and double the flow of 2005 (see Figure 2). Finished products – 2.025 million b/d last year – account for most of the export flow. Imports have declined in recent years after growing strongly to 2005, but still ran at 1.352 million b/d of unfinished streams and 1.049 million b/d of finished products in 2010. Motor-gasoline blending components accounted for 741,000 b/d of the unfinished total.

The import and export trade benefits the independent terminals, as does the proliferation of components needed to make gasoline and diesel – although the need to hold relatively small volumes of many different components had also prompted investment decisions. Accordingly, capacity has been increasing: the EIA says US storage capacity in bulk terminals for petroleum products, including natural gas liquids and fuel ethanol, amounted to 922.4 million barrels in March 2011, up from 910.5 million barrels six months previously. Additionally, there is 633.6 million barrels of storage capacity at refineries.

Kinder Morgan, north America’s largest pipeline and terminal operator, is adding capacity faster than most: the firm was founded as recently as 1997, but now holds 107 million barrels of tank capacity for petroleum products and ethanol. In October, it struck a deal to acquire El Paso, expanding its pipeline network to nearly 130,000 km.

Also in October, Kinder Morgan reached an agreement with TransMontaigne – the operator of 22.0 million barrels of storage capacity – to build a new terminal on the Houston Ship Channel. The new 6.6 million barrels terminal, due to open in 2013, will handle exports of black oils – residual fuel oil, vacuum gasoil and slurry oils – although capacity for distillates and crude might be added later.

Although pipeline and terminal businesses are sometimes viewed as similar to utilities, they have performed well for the Kinder Morgan master limited partnership: compound annual returns to the firm’s partners have averaged 26% since it was set up. Stable fee-based businesses can generate good returns regardless of market conditions, Kinder Morgan says, and there is minimal exposure to commodity-price volatility because the company generally does not own the products in its tanks and pipelines. Contracts for terminal capacity are usually long-term and require the customer to pay regardless of whether the capacity is used.

NuStar shines bright

NuStar, the US number-two independent storage operator, with 97 million barrels of capacity, is also positioning for an expanding market. Investments in storage are due to rise from the $159 million of 2010 to $205 million in 2011, with $340 million projected for 2012. NuStar says 95% of its tankage is leased, yet it continues to receive approaches from present and new users. Contracts tend to be long-term in the US: the company says 39% of its revenues derive from contracts of one to three years duration; while 21% comes from contracts of three to five years; and 12% from contracts of more than five years. Contracts of up to a year account for 28%.

A recently completed expansion at the St James, Louisiana, terminal has raised capacity to 8.0 million barrels, and NuStar says "multi-year contracts" are in place for the entire 3.2 million barrels addition. The additional capacity is for crude and trading companies are the users. A second expansion at the same terminal, of a similar size, is being planned with a start-up target of the turn of 2012-13, most of the additional capacity being for crude. At Linden, New Jersey, 850,000 barrels of new capacity is planned, with start-up targeted for third-quarter 2013.

NuStar is also building 1.0 million barrels of new capacity at its St Eustatius terminal in the Caribbean, to hold distillates and to be used entirely by an unspecified national oil company. The new capacity, due to be in use by the end of 2012, could be followed by another expansion, still under study.

The driver for crude oil storage expansions is logistical needs: with the increase in production of US domestic shale oil, there is a need for more pipeline and terminal capacity to move crudes from the Cushing, Oklahoma, hub to the Gulf coast refining hub. In November, Oiltanking said it would go ahead with a project to build new pipelines to and from its Houston installation , which links with refineries on the Houston Ship Channel. The company’s storage capacity at Houston – 11.1 million barrels – will be raised by 1.0 million barrels of crude capacity, in addition to the 1.0 million barrels of crude capacity already under construction, on completion in first-quarter 2013.

US fee indications

Independent storage fees at high-volume US locations have been under downward pressure for most of 2011, driven by reduced imports and price backwardation – futures prices lower than prompt – making speculative storage unattractive for traders. Terminal operators report traders handing back booked capacity, despite a minimum lease period of 12 months at many locations.

While backwardation has cut volumes, capacity has been increasing. Expansion projects launched in 2010, in happier times, have been completed and some refinery closures have released storage capacity to the independent business. The gasoline trade has been particularly affected: speculative storage has been cut as a result of gasoline prices being in backwardation for much of 2011, while imports volumes are down.

Petroleum Economist’s soundings in November point to fees for clean products in the Gulf coast area in the range $0.50-0.70 a barrel a month (equivalent to $3.15-4.40 a cubic metre). One large user said there was pressure on the upper figure. A year previously, capacity in the area was attracting $0.60-0.80/b.

In New York Harbor, distillates capacity was assessed as renting at $0.60-0.80/b, although there was talk of fees at the lower end of the range and possibly below it for large users taking a substantial volume.

Crude oil in land terminals, and fuel-oil storage for the export market, appear to have withstood the downward pressures better than distillates. The range $0.60-0.75/b was indicated.

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