While tank storage will always remain an integral part of the supply chain, the long-term growth of the industry in Europe remains uncertain, writes Ellen Ruhotas
Where oil producers have been sweating on oil price fluctuations, storage terminal operators have been rubbing their hands. The market contango and the record oil surpluses has resulted in strong demand for storage tanks in the European region. Like all good things though, they don’t last forever. Changes in market demand for refined products, pressures from environmental mandates and fundamental changes in global production centers all cast a shadow on the future of growth in European bulk liquid storage.
HAVE WE FINISHED DANCING THE CONTANGO?
Since mid-2014, the forward price for crude oil and refined products has been higher than the current price. This contango position in the market incentivises traders to buy product at the cheaper price and store for sale at some future time, at a higher price. In these market conditions, storage terminals with spot storage capacity and vessel owners are the winners, with increased demand for land-based and marine storage. The spread has narrowed over the past six months, and currently sits at around $0.50 per barrel. At the recent Platts Storage Conference in Amsterdam, key commentators forecasted a narrowing of the contango, with the marketing returning to backwardation by mid-2017.
FOSSIL FUELS – ENEMY #1
Despite the clamouring voices of the global warming denialists, the facts are irrefutable – the Earth’s average surface temperature is increasing at unprecedented levels. Scientific consensus is focused on the increase in carbon dioxide concentrations arising from the burning of fossil fuels as one of the main contributors. Recent international agreements have focused on the mitigation of climate change, setting targets to reduce greenhouse gas emissions. Nations have responded accordingly. The EU’s Renewable Energy directive sets a binding target of at least 27% of final energy consumption from renewable sources by 2030, which includes at least 10% of transport fuels from renewable sources by 2020. A study released in February 2017 by the Imperial College London noted that by 2035 electric vehicles could make up 35% of the road transport market, and two-thirds by 2050. Under such
a scenario oil demand would peak in 2020.
Global trends indicate a long-term push towards sustainable energy. Recent statistics highlighted by Morgan Stanley show the largest increase in history in renewable power generating capacity in 2016, while divestment in fossil fuels reached approximately $3.4 trillion globally in 2016. The trend in fossil fuel divestment is gaining momentum with key governments, pensions funds, universities and charitable foundations such as the Rockefeller Fund all reviewing their investment criteria. Fossil fuels are ‘on the nose’ and given that the majority of liquids in storage are derived from fossil fuels, this is a ‘must watch’ development.
VESSEL EMISSIONS – THE FUEL OIL STORY
On a typical day, there are thousands of vessels plying the seas. Estimates by the European Parliament indicate that if left unregulated, maritime transportation would contribute over 17% of global CO2 emissions by 2050. In October 2016, the International Maritime Organisation (IMO) announced that by 2020 all vessels must reduce their emission of sulphuric oxide compounds (SOx) to 0.5% of total emissions to air whilst at sea. More stringent requirements of 0.1% are mandated whilst sailing in Emission Control Areas in the Baltic and around the ports of Amsterdam/Rotterdam/Antwerp.
Historically, the shipping industry has depended on the lower priced, higher sulphur content fuel oils. Bunker fuel traders and terminal operators work hand in hand to blend various grades of product to produce a cost effective shipping fuel. To meet these new emission limits, vessel owners will need to
move to better specification fuels, with an emphasis on gasoils. JBC Energy forecast that to meet this change, refiners will, over time, improve their fuel oil refining, producing a low sulphur fuel oil, but this requires significant capital investment. But ship owners won’t stand for increased pricing of fuels.
JBC Energy forecast that by 2030, 25% of vessel owners will have fitted emission scrubbing technology to their vessels, giving them the ability to burn the cheaper fuel oils.
Traders will be looking to terminals to provide additional tankage to facilitate the additional grades of fuel oil and gasoil which the shipping
industry will demand. Will LNG displace fuel oil? There has been much hype around LNG as the panacea for vessel emissions. The world’s first purpose
built LNG bunkering vessel was delivered in February 2017 to Zeebrugge, Belgium and is designed to service a variety of LNG fuelled ships. To date, the cost and space requirements for LNG based propulsion systems are prohibitive on conventional cargo vessels. JBC Energy forecasts that only 6% of the
world’s shipping will convert to LNG by 2030. For storage terminals, they will see changes in their fuel oil mix, but it will be some time before they see a decrease in the demand for fuel oil tankage.
EUROPEAN REFINERIES – TO CLOSE OR NOT TO CLOSE?
The European refining landscape has had a new lease of life with the fall in crude oil prices. But this has masked the underlying inefficiencies of the sector as compared to the cost effective facilities in the US, Middle East and Russia. A recent study by Clingendael International identified 13 refineries in North West Europe which are exposed to this external competition and are not constrained by high barriers to exit. Refinery rationalisation holds mixed opportunities for storage terminal operators. The increased demand for storage of imported production in key locations is inevitable, but may be offset by the trend in converting refinery tankage to storage for imported product. Such conversions are not speedy. Similar conversions have taken anywhere from 6-10 years to fully retrofit existing facilities to service the requirements of customers for independent storage.
NORTH AMERICAN REFINERY REVOLUTION
To the consternation of OPEC, the shale gas and tight oil phenomenon is here to stay. With reserves in competition to Saudi Arabia, and a flexible and cost effective approach to extraction, this industry is producing refinery feedstock at record low prices. The US competitively exports finished products, which, as noted above is a real threat to European refiners. Cheap feedstock gas in the US has spurned a rush of investments in petrochemical crackers. These are producing huge quantities of petrochemicals which have the potential to displace European production. Though petrochemical storage is a much smaller part of the independent storage scene, the demand for chemical shortage is under pressure.
WHAT DOES THIS ALL MEAN FOR THE EUROPEAN BULK LIQUID STORAGE INDUSTRY?
Storage tanks are like statues on the horizon. They are fixed on the landscape of sea ports and at airports as we come in to land. For Europe, the question is, will we continue to be a growth industry, or will these key drivers alter our presence? For however long there are vessels carrying bulk liquids, there will be continued demand for storage – tanks are integral to the supply chain. But with the fundamental changes in demand for fossil fuels, the plateauing of European demand for energy and the competition from more efficient producers, the long term growth of our industry appears uncertain.