Lars Sörensen and Stephan Krause look at how tank storage is emerging to become a new asset class for investors
Looking at the recent developments within the industry in relation to current transaction activity it is obvious that multinational oil companies are disposing a number of their assets. Meanwhile traders and independent storage companies are consolidating and midstream companies are extending their vertical integration, while financial investors are increasingly buying shares into the asset class. Of 15 transactions stated in this magazine, all mentioned players had their (statistical non viable) share:
Just ten years ago, infrastructure financing was mainly focusing on established asset classes like roads, water and gas grids, and increasingly airports. Since then markets have moved fast to widen the infrastructure definition and its financing base.
This went along with new investors approaching this specific market and the inflow of more and more capital from all over the world (pension funds, infrastructure funds, sovereign wealth funds, insurances etc). The trend accelerated after the financial crisis, when institutional investors realised they were missing opportunities (and return) in an asset class that is deemed to produce stable and predictable cash flows.
Just add servicing basic needs for the population (safety of supply), high barriers to entry (high investment costs, as well as environmental restrictions) and lack of, or at least limited, local competition – and a new infrastructure asset class is born.
Giving a recent example, a consortium comprising Ardian, alongside EDF, acquired a majority share from Total in the Marseille-based underground storage and pipeline business Géosel.
Transactions like the acquisitions of Tanquid, Pisto, STR and currently Koole demonstrate that tank storage is becoming an attractive asset class for infrastructure investors. Its defensive character, defined by high barriers to entry – investment costs reaching up to three-digit million USD figures and high HSE levels (health, safety and environmental) – and the ability to produce strong stable cash flow make it attractive for all stakeholders. This brings it close to an energy grid or a national motorway – assets for which financing is fiercely competitive amongst financing parties.
Oil storage assets have always been part of the energy supply chain, more so when they form part of governments’ strategic oil reserve facilities. Operators charge customers for ‘through-put’ fees for moving the product from barges to pipelines and road or rail networks, while the technical ability to heat, mix and blend the products provides additional sources of income. Increasingly storage assets are built to store alternative products, such as chemicals, and may be refitted for the storage of bio-fuels or vegetable oil.
However, it would be too easy to blindly finance the next best storage opportunity. Crucial for considering an investment is the location, the connectivity (pipeline, barge/ship, road or rail access) and the track record of the management to achieve a low churn rate and high HSE levels. Contracts for leasing tank capacity are often based on take-or-pay, yet varying in length from less than one year to 20 years.
Banks feel comfortable with long lasting contracts, as they reduce the volume risk – although, unlike with strategic oil reserve managers, it is difficult to lock in such contracts with most market participants. Also, the storage manager may miss some short term market opportunity if they are bound by long contracts.
Therefore it is essential for storage operators to be experienced in managing such contracts and provide services that diversify cash flow risks. The location of storage assets is key; global trading hubs, such as Singapore or Rotterdam, are obvious locations. All access points to the main pipeline networks and/or strategic storage facilities like Pisto, Tanquid and French salt caverns will benefit from the current development and are likely to maintain a high level of utilisation.
Investors and banks will find plenty of future opportunities to invest in and finance storage assets, given the strong market outlook for storage capacity. There will be further investment and financing opportunities in the market from different sources:
a) Oil majors are putting up assets for sale
b) Independent traders and storage companies are looking to realise asset value to finance expansion and vertical integration;
c) Refineries are closed in one region of the world and replaced by refinery capacity on a different continent;
d) Midstream companies try to grow along the supply chain;
e) Institutional investors are looking for stable cash generating assets;
f) Global trade volumes will concentrate even more at exit and entry points to global oil and gas shipping routes, requiring larger storage capacity; and
g) Almost all countries are increasing the volume of their strategic oil and gas reserves.
Taking a global view the strongest capacity growth is expected in Asia, where an estimated 45 million m3 of crude oil storage capacity is to be added between 2015 and 2017. This comes predominantly from Asian governments trying to build up strategic oil reserves, but also the need for many Asian countries to import oil products.
Despite all positive developments and the obvious establishment of tank storage as an infrastructure asset class, some obstacles remain and force all stakeholders to consider their investments carefully:
a) Massive global development of additional storage capacity
b) Shift in global trade routes
c) Closure of refinery capacity versus import/export of products
d) Low global GDP growth
e) Tightened HSE standards
f) Increase in interest rates and/or movement in USD exchange rate
g) Concentration process within the storage and trading industry
Banks have established a good track record in successfully financing tank storage and it is likely that they will continue to provide large funding for storage projects going forward. The increased competition amongst banks and institutional investors is good news for investors, who will benefit from low costs of capital.
Sörensen will be speaking on the second day of the Tank Storage Germany conference at the Hamburg Messe on November 25 and 26 about the financing of tank terminal projects