Here at RBN, we frequently receive questions about our thoughts on the value of storage. Whether it be crude, natural gas, or NGLs, we answer like any good consultant, “It depends.” What operational need does this storage serve? Where is it located? Does it have optionality for receipts and deliveries? These factors and many more can affect both the strategic and tactical value of a storage asset. Those assets that are integrated into midstream systems and facilitate movements from the upstream to the downstream are generally better poised for success. Those attempting to carve out a niche in isolation or relying on uplift purely from commodity price fluctuations … well, good luck to them. Today, we begin a series examining the value of — and changing markets for — crude oil storage.
Crude oil storage is an integral part of the midstream sector, which (as its name suggests) occupies the market midway between the upstream production of crude and other hydrocarbons at the wellhead and the downstream refining or exporting of oil. As such, the role of crude storage is to facilitate the transfer of oil as it works its way down the line from the lease to the refinery or export dock. That includes moving the various grades of oil across distances, from Point A to B, over a period of time — days or a month or more — as price differentials and economics dictate. This is an important distinction because it means that midstreamers must employ different strategies to capture value in dynamic markets than buyers and sellers in the upstream and downstream sectors. Over time, upstream and downstream folks have had to adapt to manage the commodity price risk that they face. They’ve accomplished this through a variety of financial instruments and physical trades, including a combination of term contracts, spot transactions, physical forwards, futures, options and other derivatives.
Canadian crude output is rising, requiring new export routes. As traditional pathways face constraints, the U.S. Rockies—especially the Guernsey, WY hub—are emerging as key corridors for moving Canadian heavy crude to downstream markets, including the Gulf Coast.
In contrast, the midstream sector — by its nature as an intermediary — has less outright exposure to crude oil price risk. Rather, the challenge for midstreamers has been to serve the upstream and downstream sectors as efficiently as possible so they can generate capital to be reinvested in their businesses. Traditionally, the midstream industry’s best-known, most talked about components — pipelines — have utilized long-term agreements with their upstream and downstream counterparties to monetize the value of their assets. And so it has been with crude storage capacity, where the pricing of incremental months of storage that producers, shippers, marketers and refiners expect to need to conduct business efficiently has generally been based on multi-year contracts that underpinned the initial development of that capacity. The obvious reason for this is that long-term infrastructure investments require long-term commitments to attract capital.
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About the song
"For What It's Worth" was written by Stephen Stills, and released as a single by Buffalo Springfield. Stills wrote the song about the Sunset Strip riots that took place in Los Angeles in November 1966. The police in Los Angeles had started a 10 o'clock curfew on juveniles that culminated with a massive protest in front of Pandora's Box, a popular rock and roll nightclub at the corner of Sunset and Crescent Heights in West Hollywood. Many arrests occurred there, including Jack Nicholson and Peter Fonda, who ironically enough would star together a few years later in an iconic picture (“Easy Rider”) about disenchanted youth. The city would close down and demolish Pandora's Box less than a year later. Stills and Buffalo Springfield would record and release "For What It's Worth" less than a month after the riots happened, a feat that was repeated later when Neil Young wrote — and Crosby, Stills, Nash and Young recorded — "Ohio" and released it less than a month after the tragedy of the Kent State massacre in May 1970.
"For What It's Worth" was released as a single in December 1966, and went to #1 on the Billboard Hot 100 chart. It was recorded at Columbia Studios in Hollywood and produced by Charlie Greene and Brian Stone. The song was not on the original pressing of Buffalo Springfield's debut album, released before it was recorded. After it became a hit, it was added as the lead-off tune in future pressings beginning in March 1967. Stills claims that the song's title came from a conversation with ATCO records president Ahmet Ertegun. When Stills presented the song to him, he said, "I have this song here, for what it's worth, if you want it.” "Stop, Hey What's That Sound" was added to the title of early pressings of the single to more easily identify it to potential buyers who had heard it on the radio. Personnel on the record were: Stephen Stills (lead vocal, guitar, keyboards), Neil Young (background vocals, guitar, piano), Richie Furay (guitar, background vocals), Bruce Palmer (bass), and Dewey Martin (drums).
Buffalo Springfield was a Canadian American rock band formed in Los Angeles in 1966. They released three studio albums and nine singles before breaking up in 1968. Retrospective, a greatest hits album released in 1969, has been certified Platinum by the Recording Industry Association of America. Stephen Stills would go on to form Crosby, Stills and Nash with David Crosby and Graham Nash. Neil Young would join the group later. Richie Furay would form the country rock band Poco. All three would go on to have successful solo careers and are still recording and touring to this date. Bruce Palmer passed away in 2004, and Dewey Martin in 2009. Buffalo Springfield was inducted into the Rock and Roll Hall of Fame in 1997.
Comments
Of course, you have to think about the market use of starage and value for it. But maybe a helpful analysis in addition, would be the cost of storage. Capex and operating cost of the tank farm. For example the 10 year maintenance to drain, desludge, inspect and repair tanks. To include the I guess time value of money for the inventory.