Permian crude driving storage expansion
North American crude output is exceeding storage capacity and driving a storage construction boom
The major trend in North American storage markets this year has been the focus on handling the continent's burgeoning crude oil production. It is in a unique position among the world's centres, with storage hubs in Asia-Pacific and Europe largely driven by market backwardation—when spot prices are above futures prices—and concerns over the implementation of the International Maritime Organisation's (IMO) stringent new sulphur regulations for maritime fuels.
By August, crude oil storage volumes at the key price-setting hub of Cushing, Oklahoma, were up an extraordinary 83pc from August 2018 at 48.1mn bl, according to oil storage specialists at Genscape. It found that crude volumes stored along the Texas Gulf Coast were up 13pc at 27mn bl and West Texas crude storage volumes were up 53pc at 19.8mn bl.
The boost in volumes in storage is a result of the continued rise in US light tight oil (LTO) output. According to the Energy Information Administration (EIA), US crude oil production in May stood at 12.1mn bl/d, up from 11.9mn bl/d in January and from only 10mn bl/d in January 2018. Oil industry officials say this output increase has reached the current limit of the US refinery configuration to process the LTO and both field and waterborne export infrastructure—including increasing port storage capacity—needs to be built out to handle the increased volumes.
Further pressure is being put on US midstream capabilities by the closure of the 335,000bl/d Philadelphia Energy Solutions (PES) refinery in Philadelphia in July, which was a major offtaker of crude from the Bakken field in the US northern plains states. With no demand for crude from PES, volumes which would have gone to that refinery are now being rerouted to the US Gulf Coast for refining and export, oil industry officials say. Genscape analysts say they believe that partly as a result of the PES shutdown US exports of oil are likely to remain at their recent record highs of around 3mn bl/d.
Market participants say the key midstream bottleneck in the US continues to be transport from the Permian Basin, where production is expected to reach 4.5mn bl/d in August. It is expected to have risen by 1mn bl/d by the end of 2019, year-on-year, and pipeline constraints have limited offtake to Gulf Coast refineries or for export by sea. As a result, the volume of crude in storage has skyrocketed.
The opening of two new pipelines from the Permian to Corpus Christi, which is becoming a key US crude oil export port, is expected to ease constraints on the region: Plains All American's Cactus II pipeline system came onstream in August and is expected to transport approximately 300,000bl/d, largely for export, before capacity ramps up to 670,00bl/d by the second quarter of 2020. Meanwhile, Epic Midstream Holdings' Epic pipeline is expected to begin operations in the fourth quarter of this year, at a rate of 400,000bl/d from the Permian Basin, before increasing to 600,000bl/d and adding 200,000bl/d of capacity from Texas' Eagle Ford upstream play in the first quarter of 2020.
Corpus Christi itself is undergoing a storage construction boom to support its burgeoning oil export activity. While the port currently has less storage capacity than two other key Texas storage areas, Houston and Beaumont-Nederland, local capacity under construction is more three times that of the other two. Corpus Christi has an estimated 15.2mn bl of storage capacity under construction, compared with a combined 4.6mn bl at the other two ports. "This new tankage is springing up primarily as a result of Corpus Christi's location—it is the nearest region to Permian production," says Alex Geisler, oil storage analyst at Genscape.
US export capacity
But in the medium term, oil industry officials say a new bottleneck may emerge as export capacity is limited. Up to 12 new oil export facilities, mostly single-buoy mooring (SBM) points between 25 and 80 miles offshore, are under development on the US Gulf Coast, but none are currently operational and exports via very/ultra large crude carriers often require lengthy lightering procedures.
While crude oil storage and pipeline capacity have been the focus of much midstream activity, the growth in US natural gas liquids (NGL) and refined product exports have also encouraged new projects. According to the EIA, US oil product exports in the first five months of 2019 have averaged 8.3mn bl/d, compared with 7.6mn bl/d in 2018, and volumes are expected to rise further.
Kinder Morgan announced in August that it would increase capacity at its Pasadena and Galena Park terminals on the Houston ship channel, including additional liquefied petroleum gas (LPG) storage and blending facilities, supported by a 2mn bl products storage contract at the terminal. On the US Atlantic coast, where infrastructure is being built to improve the NGL export capacity of the prolific Marcellus shale, New Fortress Energy is developing export capacity of 30,000bl/d of LPG in New Jersey along the Delaware river. Analysts expect that the closure of the Philadelphia PES refinery, the key US East Coast plant, may also lead to additional products storage facilities along the coast if the refinery itself is not converted to a terminal.
In Canada, pipeline constraints on the export of Alberta's Western Canadian Select (WCS) crude—which caused widening price differentials to US West Texas Intermediate (WTI) crude—led to the provincial government imposing production limitations on producers in an attempt to boost prices and draw down inventories. Much planned additional storage was also completed. Capacity under construction in Canada is currently 5.9mn bl, compared with 11.4mn bl in January 2018. New pipeline construction is also underway, with the currently government-owned Trans Mountain Pipeline Expansion project under development and expected to add up to 600,000bl/d of export capacity to Canada's West Coast.
Meanwhile, pipeline operators including Plains All American's Canadian unit, TC Energy, and Enbridge are reportedly planning expansions of existing lines that could total up to 450,000bl/d of additional capacity. With current Canadian pipeline constraints reportedly totaling about 350,000bl/d of capacity, the additions should provide space for further exports from Canadian to US and other markets.
"New tankage is springing up primarily as a result of Corpus Christi's location—it is the nearest region to Permian production" Geisler, Genscape
Mexico and Venezuela
South of the US, leading independent storage operator Vopak is continuing to develop its 120,000m³ terminal in Panama. Adrian Tolson, Senior Partner at 20/20 Marine Energy, who advises on marine energy procurement, supply and infrastructure development, says the project is a longstanding venture that is "starting to see interest" from the oil and bunkering industry.
Despite Mexico's close oil trading relationship with the US, new storage facilities that were planned to complement Mexico's downstream oil industry reforms under former President Enrique Peña Nieto are seen by analysts as having an uncertain future under his successor, Andrés Manuel López Obrador, who is backing a much greater state role int the oil industry.
An unusual development in the Americas oil storage scene over the past year has been the emergence of Venezuelan floating oil storage, as Venezuela's state oil company Pdvsa has been progressively hemmed in by falling production and US-led sanctions aimed at bringing down President Nicolás Maduro.
Oil shipping analysts say that it is difficult to quantify the amount of oil Venezuela is holding in tankers. They say that, as with Iranian oil movements that are currently subject to sanctions, Venezuelan oil shipping has become difficult to track, but that the volumes could be significant.
Analysts say that most other floating storage is currently held in the Far East by companies holding fuel oil and blending components for products meeting IMO 2020 components. US coastal waters are an Emission Control Area, and the US refining system is sufficiently sophisticated to blend IMO-compliant products, so there is no need for significant volumes of floating storage in US waters, industry officials say.