Product flows again in the US

OVER THE WORST

MARKET • LAST YEAR WAS A STRANGE ONE FOR US ALL BUT TERMINAL OPERATORS, BY AND LARGE, DID REASONABLY WELL. THERE ARE SIGNS OF SOME RETURN TO NORMALITY

IN ITS REVIEW of the tank storage market in 2020, storage broker Odin-RVB said that, while the volatility induced by the Covid-19 pandemic had both positive and negative effects on the oil, gas and petrochemical industries overall, most of those active in bulk liquids storage, whether as terminal operators or commodity traders, reported good or stable turnover for the year as a whole. This, it said, is a “good sign that the industries active in the tank storage market are resilient and will be there for the years to come”.

The storage market for the year was set by the strong contango that emerged as a result of falling oil prices after the sharp slump in demand for fuels in the February to April period made abundantly clear just how over-supplied the oil market already was. As traders and refiners jumped on the low prices, they met desultory downstream demand, meaning that a lot of product all along the supply chain was looking for somewhere to be stored – and this included floating storage.

Odin-RVB describes the situation like this: “As countries worldwide strongly advised all to work from home offices, cars idled in the streets and gasoline and diesel consumption collapsed leaving the majors with refineries no other option than to quickly adapt and try to shift production to products with the highest possible margins.”

Even after the major oil exporting countries brought supplies into line with demand and prices began to recover, there was still plenty of oil in stock and the ongoing ‘super contango’ sent tank occupancy rates soaring. Odin-RVB reports that traders were looking for any tanks going, noting that diesel was being put into tanks designed for low-flash chemicals, and also that terminal operators have been able in some cases to lock in lease commitments at good rates over the longer term. STEADY AS SHE GOES While the contango was most evident in the petroleum product markets, the chemicals sector faced some sharp shifts in the type of demand. For instance, Odin-RVB says, the most sought-after tankage was for the storage of ethanol, which was in short supply. In addition, there was significant growth in demand for capacity to store bio-feedstocks and, again, a limited supply of suitable tankage. Terminal operators have responded to those changes, with some new tankage coming onstream during 2020 and more expected this year, especially in the ARA region. This may result in some customers switching terminals, the broker forecasts, especially as some construction projects have been delayed by Covid-19 restrictions.

Odin-RVB also mentions that the effects of the pandemic have made many players in the market aware of their dependability on and vulnerability to a single country, product or trade, prompting changes to business models and the reconsideration of planned investment. That has also come at a time when the oncoming energy transition and the need for decarbonisation has also switching their focus towards sustainability and CO² emissions reduction.

Odin-RVB expects that, absent a recurrence of last year’s strong contango, the market will become easier over this year, with more

sub-lease opportunities coming along. Nevertheless, given the volume of expansion and construction activity needed to meet the changing demands of customers, terminal operators look likely to be facing another busy year.

KINDER SURPRISE But in this time of unprecedented volatility, cash has suddenly become king again and many terminal operators are cutting back their capital expenditure plans. That is especially true in the US, where a number of midstream operators have an exposure to upstream weakness. While take-or-pay contracts provide some protection against lower throughput volumes at storage terminals, many midstream players also have pipeline and transport assets that are not earning as much as they did previously.

Kinder Morgan, for example, reduced its expansion capital expenditure plans for 2020 by some $680m, or roughly 30 per cent. In addition, running expenses and sustaining capital expenditures were cut by some $175m against the original budget, despite spending $12m on personal protective equipment, enhanced cleaning protocols, temperature screening and other measures designed to protect its operational staff.

The company reported in its third quarter figures that volumes on its crude and condensate pipeline network were down by 17 per cent on the previous year, despite some recovery compared to the second quarter, while refined products throughput at its terminals was off by 22 per cent. On the other hand, storage demand remained high.

Some projects already in hand were completed, including at the Pasadena terminal and Jefferson Street truck rack on the Houston Ship Channel. Work concentrated on increasing flow rates on inbound pipeline connections and outbound dock lines, tank modifications to add butane blending and vapour combustion on ten tanks, and expansion of the existing MTBE storage and blending platform. At the nearby Galena Park terminal, construction continues on a new 30,000-bbl butane sphere and inbound pipeline connection, as well as tank and piping modifications to expand butane blending capabilities, with the work due for completion in the first quarter. All this work is supported by long-term agreements.

Kinder Morgan also reported that work is substantially complete to expand the Argo ethanol hub, spanning the Argo and Chicago terminals and including 105,000 bbl of additional ethanol storage capacity and enhancements to rail loading and unloading and barge loading facilities. Work was also nearly complete on an upgrade of the Battleground Oil Specialty Terminal Co (Bostco) terminal on the Houston Ship Channel, in which Kinder Morgan has a 55 per cent interest, to allow for the segregation of high- and low-sulphur fuel oils.

ENTERPRISING PEOPLE Enterprise Products Partners had a similar story to tell, though AJ ‘Jim’ Teague, co-CEO of the general partner, put a positive spin on things. Operating income in the third quarter was slightly below the year earlier level, though net income and adjusted EBITDA were up marginally. Perhaps more tellingly, free cash flow dropped by more than half and cash flow from operations fell from $1.64bn in third quarter 2019 to $1.10bn.

Similarly, pipeline volumes were 9 per cent below the previous year and marine terminal volumes fell from 1.9m bpd to 1.5m bpd. On the upside, there was a significant improvement over the second quarter, with Enterprise’s petrochemical services segment recording a $124m quarter-on-quarter increase.

Enterprise has also pulled back on some planned investment, in particular by cancelling an $800m pipeline project, with budgeted growth capital expenditure for 2020 and 2021 cut by some $1.5bn. That was enabled by discussions with customers about their changing demands and industry dynamics and will, Teague says, enable the partnership to “better allocate capital during the current economic cycle while retaining long-term, fee-based volumes and revenues for our assets”. Cutbacks have been evident elsewhere, with operating costs for the first nine months of 2020 some $260m below budget and total sustaining capital expenditure down by around $100m.

Teague is also confident that the rebound from the worst effects of the pandemic is already in place and that, with continued population growth, demand for “reliable US energy, petrochemicals and related products” will continue to recover and resume long-term growth.

“This recovery in demand will also ultimately result in a price signal for crude oil,” Teague adds. “Given the combination of the record retrenchment in drilling and completion activities by US producers, refocused capital allocation and the effects of steep decline curves resulting in a decrease in shale production, we believe this price signal for higher crude oil prices could occur as early as the second half of [2021]. In the interim, we believe the midstream industry will be challenged in its producer-facing businesses. The challenges and opportunities will be different for each producing basin.”

OPERATORS IN THE US (OPPOSITE) ARE CONCENTRATING

ON ENERGY EXPORTS, WHILE ARA TERMINALS ARE