Bulk Storage Terminals
Date May 2020
- The collapse of oil prices due to COVID-19 combined with a price war between Saudi Arabia and Russia in early March 2020 has brought oil prices to lows not seen for decades.
- During 2020, global crude oil inventories are forecast to increase 1.6 billion barrels, close to estimated full capacity levels, which will have a positive impact on the liquid storage industry.
- Modest long-term growth in global liquids storage capacity is forecast, with the largest capacity growth anticipated in Asia.
Gordon Brothers by the numbers
global impact of covid-19: While still evolving as of mid-April 2020, the COVID-19 pandemic is expected to significantly alter energy fuel supply and demand patterns. Specifically, the economic contraction and corresponding demand reduction resulting from the pandemic, when combined with the increase in crude oil supply following the suspension of production cuts, which had previously been agreed upon by the Organization of the Petroleum Exporting Countries (OPEC) and its partner countries, translated into substantial declines in crude oil prices.
growing short-term Capacity needs: In an effort to increase market share and target refiners of Russian oil in Europe and Asia, Saudi Arabia flooded the crude oil market at prices as low as $25 per barrel during March 2020. In response to OPEC efforts to target market share, the U.S. Energy Information Administration (EIA) forecasts OPEC crude oil production will average 28.8 million barrels per day (b/d) for the remainder of 2020, representing an increase from the average of 28.1 million b/d during the first quarter of 2020. In contrast, energy consulting firm Rystad Energy estimates global oil supply will exceed demand by six million b/d this year, or an implied storage increase of 2.0 billion barrels for 2020. This estimated growth in storage demand compares with the total of 7.2 billion barrels of oil and related products currently in storage, inclusive of 1.3 to 1.4 billion barrels currently stored on oil tankers.
short-term demand disruption: The EIA estimates global petroleum and liquids fuel consumption averaged 94.4 million b/d during the first quarter of 2020, representing a decrease of 5.6 million b/d as compared to the first quarter of 2019. In addition, EIA expects global petroleum and liquid fuels demand will decline by 5.2 million b/d in 2020 before growing by 6.4 million b/d in 2021. This short-term reduction in petroleum and liquids fuel demand led EIA to anticipate a global oil inventory buildup of 1.6 billion barrels in 2020, which would place it close to estimated full storage capacity levels. In contrast, the EIA expects the global oil market to realize greater balance in the absence of additional storage facilities in 2021.
declining crude price expectations: In light of increased supply and reductions in demand, the EIA forecasts Brent crude oil prices will average $33 per barrel (bbl) in 2020, down from an average of $64/bbl in 2019. As anticipated, the most significant monthly pricing decline took place in March 2020, when crude prices decreased from $56/bbl in February to $32/bbl in March. With the benefit of greater distance from the supply disruption during the first quarter of 2020, the EIA anticipates pricing to return to normalized levels. Specifically, while the EIA forecasts second-quarter 2020 Brent prices to average $23/bbl, pricing is forecast to increase to $30/bbl during the second half of the year. Consistent with anticipated balance in the global oil market during the year, the EIA forecasts average Brent prices will rise to $45.50/bbl in 2021.
Local Versus Globalized Function: In some respects, tank terminals maintain localized operations, with conditions in the local market impacting the performance of each property. However, from a macro perspective, global factors influence terminal markets, with the most significant including cash flows and commodity price dynamics. In general, a tank terminal serves multiple purposes, including a logistics function, a trading platform, and strategic storage. However, commercial clients’ operational requirements generally lead operators to focus on the logistics and trading functions.
alternative legal entity structure: Traditionally established for investors who seek passive income from real estate, real estate investment trusts (REITs) are exempt from corporate income taxes if they generate at least 75 percent of their income from rents from real property and similar real estate-oriented activities and realize at least 95 percent of gross income from passive income such as interest and dividends, and distribute a minimum of 90 percent of taxable income to investors each year.
On March 15, 2019, the Internal Revenue Service released Private Letter Ruling 201907001, which indicated that service fees collected by a REIT from an end user for the right to use platforms, pipelines, and storage tank facilities may be characterized as rents from real property for purposes of the REIT rules under certain conditions. Based on the conclusions reached in the Private Letter Ruling, it would appear that, with the proper conditions in place, a REIT or one of its subsidiaries can operate the midstream assets itself and charge service fees to the end user, leading to qualifying rents from real property.
industry structure and prospects: Chinese national oil companies represent the largest players in the global tank terminal operators segment. In contrast, the United States has a large number of midstream operators that, combined, rival the Chinese in tank capacity. Overall, tank terminal capacity is expanding, signaling a favorable business environment, especially in China, the European Union, the United States, and the Middle East. Approximately 190 terminals were under expansion globally in June 2019, with another 49 under construction. Of the global terminal expansions, the largest markets include China and Houston, Texas, with the Middle East having the highest number of new terminals.
positive outlook: In light of these trends, the storage industry is expected to return to steady growth over the next several years. This expected growth is supported by domestic demand for crude oil and petroleum products, which is forecast to continue to grow at a slow, steady rate in light of robust economic activity around the world. Significantly, the price of oil and petroleum products is expected to return to consistent growth, and oil exports are expected to rise as more pipelines and other oil transportation infrastructure are built and as global oil demand rises.
Note: This publication is provided for informational marketing purposes only. The material contained herein should not be regarded as advice, nor relied upon to make financial, operational or other decisions; nor should it be used as a substitute for an asset appraisal. Actual recovery values may vary from transaction to transaction and the recovery values referenced herein are for representative transactions without regard to specific key factors. This material may be redistributed only in its entirety, including notice of copyright. All rights reserved. ©2020 Gordon Brothers, LLC.
Reference sources: U.S. Energy Information Administration, marketwatch, vinson & elkins, tank storage, ibisworld