HOARDING FOR A RAINY DAY
MARKET ANALYSIS l STORAGE IN THE MIDDLE EAST
HOARDING FOR A RAINY DAY Regional storage companies are exploiting the flash-growth of the crude oil spot market. Criselda Diala-McBride reports
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s the price of oil continues its downward trajectory, and the world finds itself awash with crude, traders have learned to dance the contango, shunning futures in favour of the spot market. With oil losing more than 75% of its value since mid-2014, the incentive to buy and store oil now – in the hope of making a profit later when the market eventually recovers – has become greater than ever. Meanwhile, for traders, stockpiling oil has become a necessity, despite storage fees rising in the US from $0.10 per barrel in August 2015 to $0.90 per barrel on February 9, 2016, according to Market Realist. As OPEC and other oil producers have yet to reach a consensus on whether to turn off the tap, demand for storage is expected to remain robust. The latest data from the International Energy Agency (IEA) indicates that commercial stockpiles of crude oil in countries within the Organisation for Economic Co-operation and Development was 350 million barrels above average at more than three billion barrels, as of end-December 2015, with inventories anticipated at the time to build up further in January. ‘The market is definitely oversupplied, and deliveries from Iran, exports from the USA and even the high level of storage across different parts of the world, are factors that would [make
Picture caption
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oil prices] bearish,’ comments Abhay Bhargava, associate director, energy and environment practice at Frost & Sullivan. In the Middle East, major producers’ crude oil output capacity was estimated at 24.58 million bpd during the fourth quarter of 2015, and was forecast to reach 25.05 million bpd by the first quarter of 2016, IEA figures suggest. While storage hubs, such as Cushing in Oklahoma, have reported inventories brimming to capacity, terminals in the Middle East are continuing to pour money into expanding capacity to meet the oil market’s insatiable appetite for storage. DIRTY STORAGE ON THE UP A spokersperson for Aegean Oil Terminal confirmed that the company ‘wishes to have more’ storage for dirty products in its one-year-old Fujairah facility in the UAE to meet growing demand. ‘We operate both clean- and dirty-product storage, but since launching our terminal in January 2015, we’ve seen storage demand for dirty products pick up, and this has been a strong focus for our company,’ he says. Aegean’s experience reflects a boom in dirty oil trade, where average dirty tanker freight rates increased by 3% in January, compared
with December, according to OPEC’s oil market report for February 2016. The oil bloc says the uptrend was influenced by a 25% month-onmonth hike in freight rates of Suezmax-class tankers, which are capable of carrying as much as one million barrels of oil. Aegean Oil Terminal has been one of the regional companies raking in the benefits that low oil prices and an oversupplied market have brought. ‘A contango condition has definitely contributed to higher storage demand and we expect the trend to continue well into 2016,’ the spokesperson says. Muthukrishnan Prabakaran, global head of terminal at Gulf Petrochem – a US$2-billion conglomerate based in the emirate of Sharjah – also attributed his company’s recent success to the oil market being in contango. ‘[By adopting] sound principles of inventory management and efficient risk-management policies, we were able to optimise inventory holdings, while also capturing the opportunities [emerging from] the contango impact,’ he says. Demand for bulk liquid storage in 2015 was also intensified by increased trading activity within the Middle East, as well as a shortfall in storage capacity, which was needed to absorb normal levels of production, Prabakaran notes. Gulf Petrochem – which last year announced its plan to invest $80 million in 2016 to expand its facility in Fujairah and acquire new terminals in East Africa – is bullish about the near-term prospects for the Middle East bulk liquid storage industry. ‘We remain fully committed to our principles and long-term vision. Our forecast is in line with [that of] analysts across the region and we are [geared up] to adjust to any fluctuating market conditions,’ he adds. FLOATING STORAGE SAILS AWAY With Iran entering the global oil market after
APRIL/MAY 2016 VOLUME 12 ISSUE NO.2
MARKET ANALYSIS l STORAGE IN THE MIDDLE EAST
years of international economic sanctions, Bhargava of Frost & Sullivan believes that demand for Middle East super-tankers will start to wane as the country offloads its stagnant supplies. ‘Iran is now seeking to mobilise deliveries,’ he says. ‘[The country] has been by far the largest consumer for floating storage within the Middle East. We have also seen many suppliers from Africa opt for [this kind of] storage. However, this has been on account of their inability to find buyers rapidly enough, resulting in a demand for floating storage in the broader Middle East-Africa region.’ In January, after Western economies lifted financial sanctions on Iran, the country promptly dispatched a VLCC to South Korea, carrying around two million barrels of oil. Energy market data provider Genscape, which tracks VLCC movements, says 29 million barrels of crude were monitored leaving Iran in the two weeks to the end of January, bringing the country’s total exports for that month to between 33 and 37 million barrels, compared with the 34 million barrels recorded in December. According to Reuters, Iran has over 40 million barrels of crude and condensate sloshing in 20 to 25 vessels, as sanctions dampened the appetite of buyers. Each of those super-tankers can hold between one million and two million barrels of oil. As the country takes full advantage of its new economic freedom, authorities announced a 500,000 bpd or 15 million barrels per month increase in oil production. But Iran exports are not the only factor that will have a profound influence on the Middle East bulk liquid storage sector in the coming years, according to Bhargava. ‘The downstream sector’s robust activity will also have a significant impact on the industry,’ he says. ‘[While we can’t] comment on the strategic storage in the region, what is certain is that, as the downstream sector builds up, [the market will] definitely see pressure on the existing storage capacity, which would simply not be able to keep up with the total demand for storage of crude and other hydrocarbon products.’ Low price gas feedstocks have allowed the Middle East’s petrochemical industry to rapidly grow over the past three decades, McKinsey & Company reported. ‘The Middle East petrochemical industry has come very far, very fast. From the first joint-venture plant in 1981, the industry has expanded to a total annual petrochemical production of 121 million tonnes in 2012,’ the global management consultancy wrote. ‘Capturing the gas flows associated with oil production that were previously flared, and instead channelling those flows as very lowpriced feedstock for chemical production, has made it possible to build an immense and highly profitable industry.’ With global ethylene demand projected to increase by more than 40 million tonnes per year, to reach 175 million tonnes by 2020 and
nearly 210 million tonnes by 2025, McKinsey & Company believes that the Middle East petrochemicals market is poised to grow further. CAPACITY ENOUGH TO MEET DEMAND Gulf Petrochem’s Prabakaran is confident that the Middle East and North Africa region has enough storage to satisfy market demand. ‘Considering the overall storage capacity available in the MENA region and their levels of occupancy, it is fair to assume that the inventory build-up and continuing operations will meet the region’s entire demand,’ he says, without reference to figures. In the next two to five years, the UAE-based company is eyeing a number of investments to beef up its oil and petrochemical storage capacity. According to Prabakaran, the company has commissioned its new Hamriyah Terminal in Sharjah with a storage capacity of 250,000 m3, of which 204,000 m3 will cater to other classes of petroleum products, such as petrochemicals, lubricating base oil, fuel oil and bitumen. ‘We are also augmenting our existing storage capacity in Fujairah by a further 250,000 m3, catering to all classes of products, as a result of 100% occupancy in our existing terminal,’ he confirms. ‘Upon completion of the expansion of our terminal in Fujairah, and with our existing storage facilities in Hamriyah [also in the UAE] and Pipavav in India, the group will boast a total capacity of over 1.1 million m3.’ Gulf Petrochem, he adds, is also seeking opportunities for both green- and brown-field acquisitions, as well as expansions in other regions such as Africa, Sri Lanka and Malaysia. MORE PROJECTS UNDERWAY In other parts of the GCC, Oman is building an ambitious bulk-liquid berths terminal project at its eastern region of Duqm. The Oman Daily Observer reported that the estimated $1 billion contract will serve as an ‘outgo port for the Duqm Refinery’, which is a 230,000-bpd-capacity greenfield project being developed within the Special Economic Zone Authority at Duqm (SEZAD). In January, the SEZAD started accepting prequalification bids for the project, which will include the construction of a liquid terminal, with handover expected in early 2019. The Duqm Terminal will cater to the petrochemical industries and other liquids-related trade activities in the region. State-owned Oman Oil Refineries and Petroleum Industries Company (Orpic) announced that it is also planning to invest around $80 million in the development of a national fuel storage terminal at Al Jinain, which is 20 kilometres from Muscat International Airport. The facility will be adjacent to the existing crude oil pipeline route that connects two refineries located in Mina Al Fahal and Sohar. In the UAE, Fujairah, which is vying to be one of the world’s most important oil trade routes,
APRIL/MAY 2016 VOLUME 12 ISSUE NO.2
is expected to expand its oil storage capacity by 75% in 2020. The Fujairah port, which lies along the Strait of Hormuz – an important oil export route in the Gulf region – has seen storage-facility building increase since 2009, Reuters reported. By 2020, the port’s capacity is expected to rise by 6 million m3 to reach 14 million m3. The European Bank for Reconstruction and Development also announced that it has extended a $94 million loan to Egyptian company Sonker to finance the construction and operation of a bulk-liquids terminal for the import and storage of gasoil, liquefied petroleum gas and liquefied natural gas in the third basin of Ain Sokhna Port. ‘The new infrastructure will accommodate the docking of two floating-storage and regasification units, and the handling of LNG imports to the nearest national gas grid,’ EBRD says. The entire project will cost $341 million, with the remaining funding to be provided by the International Finance Corporation, which is a member of the World Bank Group. EXPANDING FOOTHOLD Meanwhile the Abu Dhabi National Oil Company said in February that it will store six million barrels of oil in Mangalore and Andra Pradesh in India. As part of the deal, ADNOC has agreed to give two thirds of the stock to the Indian government. Bhargava of Frost & Sullivan clarifies that ADNOC’s decision is not a reflection of storage capacity utilisation in the UAE. ‘It is a strategic move on the part of a supplier – in this case, the UAE – to gain proximity to a large buyer [in this case] India,’ he explains. ‘To understand this, we need to first examine how oil flows transpire – a large percentage of this flow is essentially from the Middle East, in particular oil-producing countries in the GCC, Iraq and Iran, to Asian countries such as India, Japan, China and South Korea.’ Bhargava says similar arrangements have been done in the past. He cited a move by the UAE and Saudi Arabia to store over 6 million barrels of crude in Japan for free, ‘while holding a first-right-of-refusal arrangement’ with the country. A similar deal was also struck between Kuwait and South Korea. The Frost & Sullivan analyst says there are two major sources of growth opportunities in the MENA bulk-liquid storage sector. ‘The first would come from the considerable developments in the downstream refining and petrochemicals sectors,’ he says. ‘This is expected to result in an increased demand for storage space for liquids, both for feedstock [and] finished products, prior to their export.’ Bhargava believes the unabated oil production of regional producers, in a bid to protect market share, will lead to greater demand for storage. ‘In these scenarios, we see an emergence of a well-rounded opportunity landscape for storage solutions, across multiple product types, ranging from crude to chemicals,’ he says.
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HOARDING FOR A RAINY DAY Regional storage companies are exploiting the flash-growth of the crude oil spot market. Criselda Diala-McBride reports
A
s the price of oil continues its downward trajectory, and the world finds itself awash with crude, traders have learned to dance the contango, shunning futures in favour of the spot market. With oil losing more than 75% of its value since mid-2014, the incentive to buy and store oil now – in the hope of making a profit later when the market eventually recovers – has become greater than ever. Meanwhile, for traders, stockpiling oil has become a necessity, despite storage fees rising in the US from $0.10 per barrel in August 2015 to $0.90 per barrel on February 9, 2016, according to Market Realist. As OPEC and other oil producers have yet to reach a consensus on whether to turn off the tap, demand for storage is expected to remain robust. The latest data from the International Energy Agency (IEA) indicates that commercial stockpiles of crude oil in countries within the Organisation for Economic Co-operation and Development was 350 million barrels above average at more than three billion barrels, as of end-December 2015, with inventories anticipated at the time to build up further in January. ‘The market is definitely oversupplied, and deliveries from Iran, exports from the USA and even the high level of storage across different parts of the world, are factors that would [make
Picture caption
2
oil prices] bearish,’ comments Abhay Bhargava, associate director, energy and environment practice at Frost & Sullivan. In the Middle East, major producers’ crude oil output capacity was estimated at 24.58 million bpd during the fourth quarter of 2015, and was forecast to reach 25.05 million bpd by the first quarter of 2016, IEA figures suggest. While storage hubs, such as Cushing in Oklahoma, have reported inventories brimming to capacity, terminals in the Middle East are continuing to pour money into expanding capacity to meet the oil market’s insatiable appetite for storage. DIRTY STORAGE ON THE UP A spokersperson for Aegean Oil Terminal confirmed that the company ‘wishes to have more’ storage for dirty products in its one-year-old Fujairah facility in the UAE to meet growing demand. ‘We operate both clean- and dirty-product storage, but since launching our terminal in January 2015, we’ve seen storage demand for dirty products pick up, and this has been a strong focus for our company,’ he says. Aegean’s experience reflects a boom in dirty oil trade, where average dirty tanker freight rates increased by 3% in January, compared
with December, according to OPEC’s oil market report for February 2016. The oil bloc says the uptrend was influenced by a 25% month-onmonth hike in freight rates of Suezmax-class tankers, which are capable of carrying as much as one million barrels of oil. Aegean Oil Terminal has been one of the regional companies raking in the benefits that low oil prices and an oversupplied market have brought. ‘A contango condition has definitely contributed to higher storage demand and we expect the trend to continue well into 2016,’ the spokesperson says. Muthukrishnan Prabakaran, global head of terminal at Gulf Petrochem – a US$2-billion conglomerate based in the emirate of Sharjah – also attributed his company’s recent success to the oil market being in contango. ‘[By adopting] sound principles of inventory management and efficient risk-management policies, we were able to optimise inventory holdings, while also capturing the opportunities [emerging from] the contango impact,’ he says. Demand for bulk liquid storage in 2015 was also intensified by increased trading activity within the Middle East, as well as a shortfall in storage capacity, which was needed to absorb normal levels of production, Prabakaran notes. Gulf Petrochem – which last year announced its plan to invest $80 million in 2016 to expand its facility in Fujairah and acquire new terminals in East Africa – is bullish about the near-term prospects for the Middle East bulk liquid storage industry. ‘We remain fully committed to our principles and long-term vision. Our forecast is in line with [that of] analysts across the region and we are [geared up] to adjust to any fluctuating market conditions,’ he adds. FLOATING STORAGE SAILS AWAY With Iran entering the global oil market after
APRIL/MAY 2016 VOLUME 12 ISSUE NO.2
MARKET ANALYSIS l STORAGE IN THE MIDDLE EAST
years of international economic sanctions, Bhargava of Frost & Sullivan believes that demand for Middle East super-tankers will start to wane as the country offloads its stagnant supplies. ‘Iran is now seeking to mobilise deliveries,’ he says. ‘[The country] has been by far the largest consumer for floating storage within the Middle East. We have also seen many suppliers from Africa opt for [this kind of] storage. However, this has been on account of their inability to find buyers rapidly enough, resulting in a demand for floating storage in the broader Middle East-Africa region.’ In January, after Western economies lifted financial sanctions on Iran, the country promptly dispatched a VLCC to South Korea, carrying around two million barrels of oil. Energy market data provider Genscape, which tracks VLCC movements, says 29 million barrels of crude were monitored leaving Iran in the two weeks to the end of January, bringing the country’s total exports for that month to between 33 and 37 million barrels, compared with the 34 million barrels recorded in December. According to Reuters, Iran has over 40 million barrels of crude and condensate sloshing in 20 to 25 vessels, as sanctions dampened the appetite of buyers. Each of those super-tankers can hold between one million and two million barrels of oil. As the country takes full advantage of its new economic freedom, authorities announced a 500,000 bpd or 15 million barrels per month increase in oil production. But Iran exports are not the only factor that will have a profound influence on the Middle East bulk liquid storage sector in the coming years, according to Bhargava. ‘The downstream sector’s robust activity will also have a significant impact on the industry,’ he says. ‘[While we can’t] comment on the strategic storage in the region, what is certain is that, as the downstream sector builds up, [the market will] definitely see pressure on the existing storage capacity, which would simply not be able to keep up with the total demand for storage of crude and other hydrocarbon products.’ Low price gas feedstocks have allowed the Middle East’s petrochemical industry to rapidly grow over the past three decades, McKinsey & Company reported. ‘The Middle East petrochemical industry has come very far, very fast. From the first joint-venture plant in 1981, the industry has expanded to a total annual petrochemical production of 121 million tonnes in 2012,’ the global management consultancy wrote. ‘Capturing the gas flows associated with oil production that were previously flared, and instead channelling those flows as very lowpriced feedstock for chemical production, has made it possible to build an immense and highly profitable industry.’ With global ethylene demand projected to increase by more than 40 million tonnes per year, to reach 175 million tonnes by 2020 and
nearly 210 million tonnes by 2025, McKinsey & Company believes that the Middle East petrochemicals market is poised to grow further. CAPACITY ENOUGH TO MEET DEMAND Gulf Petrochem’s Prabakaran is confident that the Middle East and North Africa region has enough storage to satisfy market demand. ‘Considering the overall storage capacity available in the MENA region and their levels of occupancy, it is fair to assume that the inventory build-up and continuing operations will meet the region’s entire demand,’ he says, without reference to figures. In the next two to five years, the UAE-based company is eyeing a number of investments to beef up its oil and petrochemical storage capacity. According to Prabakaran, the company has commissioned its new Hamriyah Terminal in Sharjah with a storage capacity of 250,000 m3, of which 204,000 m3 will cater to other classes of petroleum products, such as petrochemicals, lubricating base oil, fuel oil and bitumen. ‘We are also augmenting our existing storage capacity in Fujairah by a further 250,000 m3, catering to all classes of products, as a result of 100% occupancy in our existing terminal,’ he confirms. ‘Upon completion of the expansion of our terminal in Fujairah, and with our existing storage facilities in Hamriyah [also in the UAE] and Pipavav in India, the group will boast a total capacity of over 1.1 million m3.’ Gulf Petrochem, he adds, is also seeking opportunities for both green- and brown-field acquisitions, as well as expansions in other regions such as Africa, Sri Lanka and Malaysia. MORE PROJECTS UNDERWAY In other parts of the GCC, Oman is building an ambitious bulk-liquid berths terminal project at its eastern region of Duqm. The Oman Daily Observer reported that the estimated $1 billion contract will serve as an ‘outgo port for the Duqm Refinery’, which is a 230,000-bpd-capacity greenfield project being developed within the Special Economic Zone Authority at Duqm (SEZAD). In January, the SEZAD started accepting prequalification bids for the project, which will include the construction of a liquid terminal, with handover expected in early 2019. The Duqm Terminal will cater to the petrochemical industries and other liquids-related trade activities in the region. State-owned Oman Oil Refineries and Petroleum Industries Company (Orpic) announced that it is also planning to invest around $80 million in the development of a national fuel storage terminal at Al Jinain, which is 20 kilometres from Muscat International Airport. The facility will be adjacent to the existing crude oil pipeline route that connects two refineries located in Mina Al Fahal and Sohar. In the UAE, Fujairah, which is vying to be one of the world’s most important oil trade routes,
APRIL/MAY 2016 VOLUME 12 ISSUE NO.2
is expected to expand its oil storage capacity by 75% in 2020. The Fujairah port, which lies along the Strait of Hormuz – an important oil export route in the Gulf region – has seen storage-facility building increase since 2009, Reuters reported. By 2020, the port’s capacity is expected to rise by 6 million m3 to reach 14 million m3. The European Bank for Reconstruction and Development also announced that it has extended a $94 million loan to Egyptian company Sonker to finance the construction and operation of a bulk-liquids terminal for the import and storage of gasoil, liquefied petroleum gas and liquefied natural gas in the third basin of Ain Sokhna Port. ‘The new infrastructure will accommodate the docking of two floating-storage and regasification units, and the handling of LNG imports to the nearest national gas grid,’ EBRD says. The entire project will cost $341 million, with the remaining funding to be provided by the International Finance Corporation, which is a member of the World Bank Group. EXPANDING FOOTHOLD Meanwhile the Abu Dhabi National Oil Company said in February that it will store six million barrels of oil in Mangalore and Andra Pradesh in India. As part of the deal, ADNOC has agreed to give two thirds of the stock to the Indian government. Bhargava of Frost & Sullivan clarifies that ADNOC’s decision is not a reflection of storage capacity utilisation in the UAE. ‘It is a strategic move on the part of a supplier – in this case, the UAE – to gain proximity to a large buyer [in this case] India,’ he explains. ‘To understand this, we need to first examine how oil flows transpire – a large percentage of this flow is essentially from the Middle East, in particular oil-producing countries in the GCC, Iraq and Iran, to Asian countries such as India, Japan, China and South Korea.’ Bhargava says similar arrangements have been done in the past. He cited a move by the UAE and Saudi Arabia to store over 6 million barrels of crude in Japan for free, ‘while holding a first-right-of-refusal arrangement’ with the country. A similar deal was also struck between Kuwait and South Korea. The Frost & Sullivan analyst says there are two major sources of growth opportunities in the MENA bulk-liquid storage sector. ‘The first would come from the considerable developments in the downstream refining and petrochemicals sectors,’ he says. ‘This is expected to result in an increased demand for storage space for liquids, both for feedstock [and] finished products, prior to their export.’ Bhargava believes the unabated oil production of regional producers, in a bid to protect market share, will lead to greater demand for storage. ‘In these scenarios, we see an emergence of a well-rounded opportunity landscape for storage solutions, across multiple product types, ranging from crude to chemicals,’ he says.
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