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.
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.