Special Report: US Gulf storage boom peaks

Lane Kelley

30-Jan-2015

The US Gulf Coast has seen a rapid expansion in bulk storage thanks to shale and rising exports, but activity appears to have peaked just as the oil price has collapsed

The boom in bulk storage construction in the US Gulf region may have peaked at just the right time, before the money funding the build-out dried up. So says Houston energy analyst Sandy Fielden of the boom that began in 2011-2012, prompted by the huge gains in US and Canadian oil production from the shale play.

Led by mid-stream logistics companies expanding existing terminals and building new delivery, storage and blending facilities in Houston and throughout the US Gulf Coast, activity reached its zenith before the oil price plunge began in late 2014.

 

Shale gas has created export opportunities in the US, prompting terminal expansions

Copyright: Rex Features

“No one’s shovelling money at them now,” says Fielden, director of Energy Analytics at RBN Energy, referring to big players in the terminal boom – Kinder Morgan, Enterprise, Magellan Midstream Partners, and Oiltanking. “No one’s going to stick their neck out when [oil] is not the flavour of the month.”

That is because oil plunged in the second half of 2014. NYMEX futures based on benchmark West Texas Intermediate (WTI) crude hit $105.74/bbl in late June, but have dropped 57% since then. A new 52-week low of $44.78/bbl came in January this year.

Consider some simple arithmetic: Revenues from US shale oil production this year would be a whopping $66bn lower at $50/bbl than when oil was at $100/bbl in June 2014. Crude arithmetic may cause some oil and chemical firms to back away from building new cracker and chemical plants, but Fielden says most of the new terminal projects are finished or getting close to it at this point. If oil prices keep falling, companies can store the oil and wait for prices to go up. “They’re pretty happy right now if they’ve already got it underway,” Fielden says of new or expansion terminal projects.

Since the decline in oil prices snowballed in December, no company has announced plans to cancel a terminal project in the US. Ethane terminal projects have gone too far for companies to abandon them now, argues Daniel Lippe, president of Petral Consulting in Houston. Lippe says that the economics of oil are undoubtedly worse than they were a year ago. “On the other hand, you have to think beyond today,” Lippe says.

DEMAND REMAINS FOR US NGLS
Sunoco Logistics will start operations at its east coast ethane terminal in Marcus Hook, Pennsylvania, around the middle of this year. The Marcus Hook terminal will export ethane to the INEOS cracker in Rafnes, Norway.

Enterprise Products is building the world’s largest ethane export terminal on the Texas Gulf coast near its Mont Belvieu complex. The terminal will have a loading rate of up to 240,000 bbl/day and begin operating in the third quarter of 2016. Mont Belvieu is the main US hub for natural gas liquids (NGLs) and is connected not only to Gulf coast producers, but also to growing NGL supplies in the Marcellus and Utica shales in the northeast US.

The development of the two terminals shows how quickly companies have found destinations for growing supplies of US NGLs. Currently, Enterprise estimates that US ethane production exceeds demand by 300,000 bbl/day. That excess, according to Enterprise, could easily double by 2020 considering the wave of new ethylene plants and expansions announced by companies.

Enterprise is also expanding its Enterprise Crude Oil Houston (ECHO) storage and distribution complex in south Houston with connections to southeast Texas refineries that provide a fifth of US refining capacity.

At least one big merger deal has been announced involving storage companies and Enterprise is at the centre of it. Enterprise agreed in late 2014 to buy Oiltanking Partners, the US affiliate of Germany-based oil and chemicals storage firm Oiltanking, for $6bn. Scheduled for completion in the first quarter this year, the deal’s exchange ratio calls for Oiltanking unit holders to get a 5.6% premium for their shares.

Part of Oiltanking’s appeal to Enterprise is a $340m expansion project with 6.2m bbl of additional storage capacity that would raise total storage at Oiltanking’s Beaumont, Texas, terminal to 11.7m bbl. The project targets growing demand from Oiltanking customers in the Beaumont-Port Arthur market.

That market currently has a refining capacity of 1.5m bbl/day, the company said. The first tanks from the expansion are expected to be ready in the third quarter of 2015. A small part of the project involves 12 internal floating-roof crude oil storage tanks being built at a site in Houston by CB&I for more than $49m.

Another terminal deal announced in late January calls for a giant of the business, Kinder Morgan, to sell 31 US terminals spread out from California to New York, to Kansas-based Watco Companies for an undisclosed amount. Watco will operate the locations, which include 14 traditional rail-to-truck transload and switching facilities, 13 operations on inland waterways servicing bulk and break-bulk customers to and from barge, truck, and rail, three sites providing deepwater stevedoring with material handling activities and one inland river tank farm. Kinder Morgan claims to be the nation’s largest independent terminal operator, with liquid terminal capacity of 125m bbls for refined petroleum products, chemicals and ethanol, among other products.

TAKING THE LONG VIEW
Lippe says that, while the economics of oil now are undoubtedly worse than they were a year ago, companies need to take long views and consider such projects over 20-30 years. “It is not something they are building to take advantage of a short-term aberration in the market,” Lippe adds.

LPG terminals have also become popular projects because of growing US supplies. Lippe has tested LPG exports under a scenario of low oil prices. The terminals will still likely be built because there is nowhere else for the LPG to go. “In the next 10 years, even taking into account significantly slower growth in crude oil production in the US, we will have to export twice as much propane and butane as we do now,” Lippe explains. “So we pretty much have to build LPG export terminals.”

But the oil plunge has persuaded some companies not to build terminals. In late December, the world’s largest independent tank storage company, Vopak, said that after three years of planning and research it had decided not to develop a 23-acre unused terminal site in Perth Amboy, New Jersey, as previously announced.

Vopak bought the unused oil terminal and site in 2011, planning to demolish the facility that had been closed since 1994 and build a new terminal for storage of refined petroleum products and biofuels. But the company wrote off $13.15m for the project in 2013. Then came growing US crude production, higher US refining margins and sluggish gasoline import flow. Vopak explained what was hardly a mystery at that point, that the project had weakened because of changed market circumstances in North America from unconventional oil and gas developments.

What propelled the boom is new oil ­economics brought about by fracturing ­drilling techniques and the shale revolution. US crude production averaged 8.6m bbl/day in August 2014, up 72% from 2008, according to the US Energy Information Administration (EIA).

Production could rise another 50% according to some projections. Energy consultancy Turner Mason & Company projects that US output will reach about 12m bbl/day early in the next decade.

While Houston and the Gulf Coast region are the crude and petrochemical hub of the US, there is storage activity outside the region. US Oil, the petroleum and renewable energy distribution division of US Venture, acquired six terminals from Denver-based Noble Petro in December. The new terminals added 1.75m bbl of additional capacity and expanded US Oil’s existing distribution network from 13 to 19 terminals in North America.

The acquisition included three Texas terminals, but also included sites in Wisconsin, Iowa and Michigan. The non-Texas terminals offer access to the Great Lakes and Mississippi River. An executive with US Oil’s parent, US Venture, said it was the company’s fifth acquisition in three years.

Noble Petro, a subsidiary of Singapore listed Noble Group, is a commercial supplier and distributor of refined petroleum products mainly serving the Midwest, Texas and Southeast regions in the US. In New York Harbor, NuStar Energy acquired full ownership of a 4.3m-bbl refined products terminal earlier this year. The Texas-based independent liquids terminal and pipeline operator had operated the terminal at Linden, New Jersey as a 50% joint venture partner with Linden Holding Corp. NuStar paid $142.5m for the remaining interest. NuStar already owns the Linden NuTop terminal, so the company said the deal would strengthen its presence in New York Harbor.

At least one new US terminal has been announced since oil prices took a dive. US start-up company American Ethane announced in December that it planned to build an ethane export terminal in Louisiana, with part of the ethane to be used as fuel to power an alumina plant in Jamaica.

SHALE GAS HEADS TO JAMAICA
The 8m tonne/year facility on the Mississippi River at Shady Grove, Louisiana, would get its gas from the Marcellus shale and from the Mont Belvieu natural gas hub in Texas, according to American Ethane’s website, with startup scheduled for late 2016. In Jamaica, the ethane would be used to power an alumina plant that was closed five years ago, partly because of high production costs. The plant used oil for its energy.

Not all of the storage activity is focused on oil and chemicals. CHS and Northern Partners Cooperative plan to build a fertilizer warehouse with product blending capabilities in Illinois, the companies announced recently. The largest US farmer-owned cooperative, CHS said construction of the warehouse will begin in early 2015 and when finished in the spring of 2016 have capacity for 42,638 tonnes of fertilizer.

The warehouse will be operated by Northern Partners Cooperative and the companies also will build and operate a grain loading facility in Louisiana. That venture will be a grain barge-loading facility to handle corn, soybeans and wheat for export through the CHS terminal at Myrtle Grove, Louisiana.

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