Channoil Consulting's Charles Daly provides an overview of some of the key factors investors look for when considering a terminal transaction
The logistics of the oil industry depend, to a material extent, on the location and capacity of oil terminals.
These can be sea-fed by oil tankers or inland and fed by block train, road tanker or pipeline. No matter where they are located they have a value in the supply chain. These installations therefore have an intrinsic value both to the current owner and to potential entrants into the supply chain, either as traders or marketers. Nowadays we have seen this interest extend to investment funds and pension funds.
In this process the financial advisors and the technical and commercial advisors will be involved in establishing a fair value for the target.
Most people will have heard the expression 'location, location, location' as applied to the purchase of residential property. This applies equally, if not more so, for oil terminals. In supply chain logistics for other businesses you will note that location of distribution warehouses is critical to the overall profitability of the whole concern. In oil logistics a terminal may not be as easily sited strategically, primarily due to environmental concerns and the desire to keep oil installations away from centres of high population density.
The size of the terminal is critical to the valuation. If the terminal is for local market distribution, where there is usually no spare capacity to allow for growth, an evaluation of the potential for acquiring additional land must be made. A terminal that is only used for supplying a given market has limited flexibility and therefore can only be evaluated in the context of the local market. The durability of that demand therefore governs the value.
For an independently operated international warehouse, the size becomes more of an issue. Today cargo sizes have become bigger and bulk building and bulk breaking are an important function of an oil terminal. Given this, in order to satisfy the demand of more than one customer, such a terminal will need to be of a minimum size. Current sizing of terminals is from about 350,000 m3 to 1,200,000 m3. This size of terminal needs enormous tracts of land and waterfront. To give you an example, a terminal of about 350,000 m3 will need a minimum land area of 10-15 hectare (25-38 acres), and at least three or four jetties.
A coastal terminal will require jetty capacity based on the estimated utilisation. If it is to be a local market depot, then there will be only a one-way traffic in by sea and out by rail or road tanker or even pipeline. There is an exception for terminals that supply their markets further inland by river barges, since these will require barge berths to operate.
If the terminal is large, such as at a refinery or an independent international warehouse, then there will be a number of jetties of different sizes for the various services.
The jetties are the aortas of the terminal and any restriction here would diminish the value considerably.
The size of the current and forecast market is one of the most critical pieces of information required to assess the value of an oil terminal.
The age of the terminal will naturally have an impact on the value. Age will be reflected in the amount of pollution in the land due to spillage and leakage in the past. The other aspect of age will be the corrosion to the tank and pipeline walls. Petroleum products tend to have relatively high acidity content; older terminals tend to suffer correspondingly higher levels of corrosion due to higher sulphur contents in the past. Ultrasound testing measures the thickness of the tank and pipe walls and will therefore give a fairly accurate estimate of the useful life of the terminal.
Health & safety
Following on from the age of the terminal, the safety equipment in place would probably need upgrading in the case of an old terminal. All terminals must meet the appropriate legislation in the territory they are located in. Although regulations may be less onerous in certain countries, it usually behoves the terminal owner to meet the most stringent regulations existing in the international oil industry, as any lesser standard will make them unacceptable to the major users, thus giving limited flexibility for resale and use.
As stated before, oil terminals are usually sited as far away from residential areas as is possible. There are two reasons for this, one is the obvious one of fire hazard and the other is noxious smells. Oil terminals are usually subject to an operating licence and this licence must be renewed periodically.
Daly will be talking more about what investors looks for in a terminal on the second morning of the Tank Storage Germany conference on November 29 and 30. For more information, visit www.tankstoragegermany.com.
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