US producers scramble for storage
Companies are looking at creative temporary solutions as capacity fills up
Warnings over a looming oil storage crisis have left producers rushing to find short-term fixes. Several ideas have emerged, and while there is some early evidence of a gradual market rebalancing as global lockdowns begin to be lifted, additional storage capacity is likely to be highly sought after in the near term.
The US Strategic Petroleum Reserve (SPR) has featured prominently in efforts to provide producers with storage relief. An initial Department of Energy (DoE) plan to buy up to 30mn bl of crude for the SPR was cancelled after it failed to secure funding from Congress. A smaller plan for the purchase of up to 1mn bl from small and medium-sized US producers has since been unveiled.
“This crude oil purchase will serve as a test of the current conditions of physical crude oil available to the SPR,” the DoE says. At the same time, the SPR has agreed to lease an initial 23mn bl of capacity to nine companies, including ExxonMobil and Chevron. Deliveries to the reserve from these companies have already begun, according to the DoE.
23mn bl – SPR lease to nine firms
The SPR has up to 77mn bl of available storage capacity, but not all of it can be filled. “It is very unlikely that they can actually reach 100pc of the space they have,” says Paola Rodriguez-Masiu, a senior oil markets analyst with consultancy Rystad Energy. Some of the capacity will need to remain empty for safety reasons or as a contingency, she adds.
Filling the gaps
Private players are also rising to the storage challenge. Gravity, a private equity-backed water and energy infrastructure firm, announced in late April that it was offering its inventory of crude storage tanks to shale producers. Most of the tanks have a capacity of 500bl.
“We have dispatched over 1,000 tanks for crude and oil-based mud storage primarily in the Permian basin and the Anadarko basin in Oklahoma,” says Gravity CEO Rob Rice. “We have customer inquiries for over 9,000 tanks but have seen customers slow down decision-making on our offers as they consider all available options in the market.”
His comments suggest that interest is high, but the fact producers are able to take their time to review their options indicates the situation is not being treated as urgent.
“Cushing is landlocked, [but] the Gulf Coast has access to exports and also to floating storage” Rodriguez-Masiu, Rystad
Separately, US independent Hess announced in its first-quarter results that it had chartered three very-large crude carriers (VLCCs) to store a combined 6mn bl of Bakken crude produced in May, June and July, and that it expected to sell these volumes in the fourth quarter. The company hopes the move will maximise the value of its production at a time of low crude prices. Hess does not expect to shut in any of its operated production due to its marketing arrangements and VLCC storage.
Other innovative approaches to storing crude temporarily include pipelines and railcars, says Rodriguez-Masiu. However, she adds that these are “ad hoc, impromptu solutions, not really long-term ones”.
What is helping significantly, though, is volumes being moved from the storage hub at Cushing to the Gulf Coast, where there is more flexibility in terms of what can be done with the oil. “Cushing is landlocked, [but] the Gulf Coast has access to exports and also to floating storage,” Rodriguez-Masiu says. This is in addition to both commercial and SPR storage capacity, as well as capacity at refineries. As lockdowns start to be tentatively lifted in Europe and Asia, crude stored at Gulf Coast facilities has more options for reaching these markets and easing the domestic storage glut.
US crude stockpiles fell by around 700,000bl in the week ending 8 May, offering some relief and marking the first drop in 15 weeks. However, volumes remain 11pc above the five-year average for this time of year, according to the US Energy Information Administration (EIA). Stocks at Cushing fell by 3mn bl, illustrating the movement of volumes to the Gulf Coast.