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COMMENT
ROSALIE STARLING
EDITOR
T
he oil and gas industry is much like
a puzzle, in the sense that you must
tactically fit together each portion of
the supply chain, from exploration to
production, transportation to processing, and
storage to distribution, to make up the whole
picture. Naturally, storage tanks and terminals
play an integral role in this puzzle, securely housing our industry’s notoriously
‘hard to handle’ products, such as natural gas, crude oil, petroleum and
chemicals, and acting as important safety and product quality control points.
While, at the best of times, the industry simply could not operate without
tanks and terminals, the currently oversupplied market has caused storage to
become more and more fundamental to the efficient operation of the supply
chain. International crude oil and petroleum product inventories have been
growing since mid-2014, when a large oversupply of oil developed and prices fell,
driving the product into storage. Demand for storage space has been increasing
ever since, as industry players expected, or hoped, that future prices would
improve over spot prices.
And supply, it seems, is not going to dwindle anytime soon. In fact, inventories
are continuing to build across the globe. US crude production has risen sharply
over the past couple of years, predominantly as a result of unconventional
shale oil in the Bakken, Eagle Ford and Permian plays. Although production is
projected to decrease from an average of 9.4 million bpd in 2015 to 8.7 million bpd
in 2016 and 8.5 million bpd in 2017, inventories remain high. On 29 January, the
US Energy Information Administration (EIA) reported total US commercial crude
oil inventories of 503 million bbls, marking the first time ever that inventories have
exceeded 500 million bbls. Distillate and motor gasoline inventories were also
reported to be above the five year and historical averages, respectively.
Over in the Middle East, in spite of the current market situation, OPEC, led by
Saudi Arabia, is continuing to pump oil in order to protect its market share – and
there is the potential for even more supply to enter the market. January witnessed
the lifting of nuclear-related sanctions on Iran, which had limited the country’s
ability to sell its oil on the global market since late 2011. This will, naturally, lead to
an increase in OPEC’s oil production and exports.
Douglas-Westwood (DW) recently noted that a ‘critical turning point’ is
approaching, when a barrel no longer finds spare capacity within existing onshore
storage. Floating storage, although expensive, has been deemed the most suitable
alternative if this situation should arise. However, the market would need to be in a
state of ‘super-contango’ in order to make this economical – meaning that the front
few crude spreads would need to be wide enough to cover the costs of storage
in tankers, and that prices may need to remain lower for longer than previously
expected. According to DW, widespread filling of offshore storage is likely before
significant depletion of supply takes place, and the market begins to rebalance.
Market oversupply is, indeed, an issue for the oil and gas industry; however,
the opportunities it presents for the storage sector are bountiful. How will
equipment suppliers, terminal operators, engineering companies and service
providers alike choose to capitalise on these opportunities? And what storage
solutions will best make use of the current market environment? Now that will be
a puzzle worth piecing together.
