Skip to main content

Editorial comment

The 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.

Register for free »
Get started now for absolutely FREE, no credit card required.

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.