Storage and Transportation Benefit From US Oil and Gas Boom


Few predicted the unprecedented levels of US oil and gas production–just this year alone, oil production broke records in January, March and May. This phenomena is creating jobs, has reduced US oil imports to the lowest levels in 29 years, and positions the US and Canada as worthy contenders to export LNG. Commercial and consumer oil and gas consumption had the greatest reported increase since 2004. Who are the winners in this oil and gas boom? Largely, storage providers and transporters of oil and gas.

Storage across the continent

Approximately 52% of the total increase in US energy production in 2014 was petroleum. 27% percent was natural gas. Growth in production requires storage at terminals and refineries. Operators have responded. In 2015, the US will add 450,000 barrels per day of light crude capacity. This is an increase of almost 25% over 2013. Two new refineries are expected to come on line by the end of 2104–the first new US refineries since 2008. Kinder Morgan is constructing a facility on the Houston Ship Channel and the second will be located at Dakota Prairie in Dickinson North Dakota.

The strategic petroleum reserve was close to capacity of 727 million barrels this fall. In Cushing, OK, capacity increased during 2014 as mid-continent oil moved to Gulf Coast refineries. US Energy Information Administration (EIA) data shows that earlier in 2014, 41.5 million barrels were being stored in the US — with total capacity to store at 72.85 million barrels, a comfortable space for increase. In April, 2014, inventory was 30 percent lower than the five-year average.

storage

In Canada, eight companies offer storage, the two most notable being Enbridge with five tanks for oil storage, each with a maximum of 550,000 barrels capacity, and TransCanada with more than 150 billion cubic feet of gas capacity, now at 40% full. What does this mean for storage operators? There is sufficient storage to respond to the increased production of petroleum and natural gas for the next several years. This is positive news for producers and should provide sustained revenues for storage facilities.

What About Transportation?

Those transporting oil and gas may also enjoy sustained revenues, bolstered by moving product throughout the continental US from production sites to Gulf Coast refineries, New York, and to and from Cushing terminals. Since 2008, while oil imports decreased by about 50%, the ports of Houston and Corpus Christi have seen growth in export activity. In fact, the Port of Houston surpassed the Port of New York in 2013 to become the US’s top export market.

In the future, both storage and transporters could benefit from the export of LNG to Europe and China; these regions pay a higher premium for natural gas over North America. Although this outlook is positive, growth and profits from LNG exports will lag immediate storage and transportation opportunities of shipping oil to refineries and natural gas to storage facilities.

Impact of Falling Oil Prices

Oil prices continue to decline in the face of increased global supply. However, production can be expected to continue. Maria van Hoeeven, Executive Director of International Energy Agency, observed that, “Crude oil and condensates from the US have a break-even price of below $80, and 82% have a break-even price of $60 or lower. Saudi Arabia is also quietly telling oil markets that Riyadh is comfortable with lower prices for an extended period; this is a dramatic change in messaging no doubt intended to slow the expansion of rival products including US shale.” The challenge in lower prices will be to producers that have based their budget projections on oil at or above $100 per barrel.

Generous increases in supply and production may result in backwardation. This, combined with additional storage capacity from new refineries and falling oil prices, means there will be no increased pressure for more storage beyond what is and will be available in North America. Demand for existing storage is expected to continue.

As the US and Canada grow more self reliant through production and export of their crude oil and natural gas, a thorn in their side will be pressure from environmental groups who staunchly decry use of fossil fuels. Policymakers will continue to face this opposition. Offset by job creation and US oil and gas self-sufficiency, production and, therefore, storage and transportation face a bright future.

Opportunities Await in China–Demand for product and storage

China has risen to the top in global energy demand as the world’s second largest oil consumer following the US. The US can benefit through exports and by constructing and/or operating storage facilities.

At nearly 1.4 billion residents, accounting for nearly 19.25% of the world’s population, China is in the process of increasing storage to support 100 days of emergency storage for nationwide use by 2020. This is building on earlier stockpile completed in 2009. In 2013, EIA shows that China’s oil consumption growth accounted for one-third of the global growth in 2013, and was projected to remain so for 2014.

Due to its growth and increasing Westernization, China’s total oil and liquids production growth has not been able to keep up with demand in the past two decades serving only its domestic needs. During this time, this production has risen by approximately 54% and has become the fourth largest in the world. As of January of 2014, the nation contained 24.4 billion barrels of proven oil reserves, an increase of 700 million barrels in one year, according to the Oil & Gas Journal (OGJ). The OGJ also noted that in 2013, China produced an estimated 4.5 million barrels per day (bbl/d) of total oil liquids, of which 93% was crude oil. The EIA expected this to rise to 4.6 million bbl/d by the end of 2014. In the long term, EIA projects that China’s oil and liquids production will top 4.6 million bbl/d in 2020 and 5.6 million bbl/d by 2040.

China’s importation needs are growing. First, its oil consumption growth has eased after a high of 14% in 2009, due largely to the global economic crisis. EIA estimates that China consumed approximately 10.7 million bbl/d of oil in 2013, up 380 thousand bbl/d, or almost 4%, from 2012. In 2009, China became the second-largest net oil importer in the world behind the US, and average net total oil imports reached 6.2 million bbl/d in 2013. Notably, for the fourth quarter of 2013, China actually became the largest global net importer of oil. The EIA projects that China is likely to surpass the United States in net oil imports on an annual basis by 2014 as US oil production and Chinese oil demand increase simultaneously. The EIA also forecasts that China’s oil consumption will continue growing through 2014 at a moderate pace to approximately 11.1 million bbl/d, and its net oil imports will reach 6.6 million bbl/d compared to 5.5 million bbl/d for the United States. There are opportunities abound for storage providers in China. It will be interesting to see which firms secure a foothold there.