Saving All My Crude For You – Changing Gulf Coast Crude Storage Requirements

Back In the 1980s and 90’s, significant crude imports began to make up for declining US domestic production. During that era supertankers delivering crude to the Gulf Coast provided a kind of floating storage buffer that could absorb downstream disruptions in supply and demand. Nowadays Gulf Coast refineries are increasingly being supplied with domestic crude by pipeline.  Today we begin a new deep dive series looking at the evolution of Gulf Coast crude storage needs in the shale era.

Benefits of Storage

Storage serves a number of critical needs at each stage of the crude production, distribution and refining cycles. In production areas storage is used to settle water and sediment, acts as a gathering operations buffer if there are transport constraints and allows for blending to meet quality specs. In the midstream, pipeline operators use storage to provide queue capacity to build up crude batches before shipping, as a safety valve during pipeline outages and to allow for efficient transfer of batches between pipeline systems. Downstream in the market area, storage gives refiners security of supply, allows them to manage the impact of refinery throughput swings, allows waterborne supplies to be loaded quickly and facilitates feedstock blending. Without storage, production shut-ins would be more frequent and refineries would potentially run out of crude or be overwhelmed by too much supply. The key logistics challenge for refiners is to maintain supplies so that they do not run out of crude and have to shut down unintentionally or end up with too much crude that has to be sold at “fire sale” prices when the market discovers their predicament.

Most refineries have working storage - 5 to 8 days on average – that keeps them from running out of crude in the short term. They also prefer to have supplies delivered under contract on a regular basis – so many barrels a day on a pipeline or a waterborne shipment every couple of days. These regular supplies are generally managed under a term contract with the supplier if the barrels do not come from their own production. Often such long-term contracts have a take-or-pay clause meaning the refiner must receive regular monthly volumes or pay a penalty. However, without adequate storage, such regular deliveries can be problematic when refineries suffer unexpected outages or shut down for planned maintenance. When such hiccups occur, refiners have to deal with additional supplies coming down the line and at such times, access to additional storage is invaluable. 

Historically the types of crude oil storage available to US refiners on the Gulf Coast have varied based on where supplies have been sourced. We’ll take a wander down memory lane and look at some of these historical alternatives next.