It’s that traditionally ‘safe’ investments are experiencing difficulties. European airports, for example, are now either fully or largely closed – not a downside scenario that could have been anticipated. Likewise, ferries, toll roads, motorway services and equipment leasing companies are experiencing a difficult trading environment as lockdown measures across the country persist.
With the sharp reduction in demand for transportation fuels, crude oil prices (WTI) recently reached unprecedented minimum barrel prices, including negative prices for a short period of time. Power prices have also decreased across Europe, with most manufacturing grinding to a halt. The lower electricity demand benefited existing renewable energy power plants, but has made the business case for new plants more challenging.
LIQUID STORAGE TAKES CENTRE STAGE
However, these market dynamics have driven one bright corner in the energy infrastructure world: liquid storage. As the oil markets enter the biggest contango since the global financial crisis, traders (both strategics and speculators), are busy buying cheap commodities (such as refined oil products), to store in tank storage facilities, with the expectation that the commodities value will recover and offset their storage costs for a healthy profit. The marketplace is currently full of anecdotes about remote storage facilities in the Baltics or Scandinavia which have been empty for years until the first few weeks of March 2020, when they were contracted for 100% of their capacity for the next few years. The current demand for liquid bulk storage is so large that traders are even renting rail cars and containers to store products – a good sign for oil storage terminal owners.
NOT ALL STORAGE TERMINALS ARE CREATED EQUAL
However, not all storage terminals will benefit from this market dynamic. Infrastructure investors continue to have long-term investment horizons (in some cases up to 25-30 years) and appreciate stable and predictable cash flow profiles. The current spike in profits is unlikely to change investors’ appetite for acquisitions outside of their focus criteria, such as terminals which:
• Facilitate trade flows
• Rely on economic activity rather than short-term trading profits
• Are integrated in their customers’ supply chains
• Are in strategic locations, such as: – Close proximity to customers’ petrochemical plants and refineries; or – Major ports / rail connections
• Facilities with diverse modalities.
COVID-19 HAS DEALT ANOTHER BLOW TO EUROPEAN REFINERIES
For the above reasons, Europe is an attractive market for liquid bulk storage investors. Despite EU governments’ containment of the supply/demand imbalance, local refining capacity continues to shrink, driving demand for short-term storage solutions. This is a stark reminder of the post-2008 Global Financial Crisis, where a number of European refineries either closed (Wilhelmshaven in Germany, La Mede in France and Coryton in the UK); operated at reduced capacity (UK’s Stanlow and Lindsay), or converted to alternative plants (Porto Marghera and Gela in Italy).
The reduction in European refinery activity was already evident pre- COVID-19, however, with pressure from increased competition from newer, more modern refineries in the Persian Gulf and India. In addition, the shale oil boom in the US has made US refineries more competitive than their European peers. In the last decade, European refineries have been squeezed between US and Middle- Eastern competitors driving refinery activity to the brink. Furthermore, there is a significant build-up of refining capacity in China. According to the IEA, China registered the highest growth in refining capacity in the period 2016-17 adding c.30mt1, and Chinese total refining capacity is expected to exceed that of the US by 2025.
The growth in China is expected to displace refining capacity in the rest of the world, with the Mediterranean region likely to be the most impacted in Europe. In short, the supply/demand imbalance in Europe is likely to outpace the drop in demand for transportation fuels even in the most optimistic forecast for EV implementation.
According to S&P Global Platts, since 2009, Europe has lost some 2.2 million barrels per day worth of crude oil refining capacity across the continent, and, according to FuelsEurope, out of the 100 refineries operating in Europe, 18 mainstream refineries were closed.
Despite efforts to diversify sources and grades of crude, as well as maximise margins and flexibility, Europe is expected to see further closures going forward. As above, the shrinking refinery production has driven demand for storage tanks – and with IMO 2020 and EU Renewable Energy Directive regulations in mind – the range of liquid bulk products, as well as the demand for blending capabilities, have increased significantly. Therefore, one could conclude that liquid bulk storage has an attractive future in the European market.
THE INVESTOR VIEW
Infrastructure investors have already begun to act – proactively investing in the sector over the last few years with examples including:
• JP Morgan’s infrastructure fund acquiring Koole
• IFM acquiring a stake in VTTI
• Aberdeen Standard Investments (ASI) acquiring Oikos
• ASI and DIF Capital Management acquiring UniTank
• First State Investment acquiring some three of the Vopak terminals, and more recently, Caldic.
This trend could well continue as COVID-19 places storage under the Microscope, with investors taking shortterm measures to increase returns. However, environmental and social governance (ESG) concerns have recently driven a paradigm shift in investors’ attitude towards investing in liquid bulk storage facilities. It is understood that some investment committee members and fund LPs see storage terminals as investment into ‘dirty’ oil assets and at odds with a greener future. Commercial due diligence advisers should take the lead in explaining the role of liquid bulk storage terminals in the overall energy transition – this will play an essential part in allowing the smooth transition to a green future, and in an economically viable manner.
THE FUTURE IS BRIGHT FOR LIQUID BULK STORAGE
• The supply/demand imbalance in European market is likely to continue widening as a result of the closure of several European refineries
• Storage facility demand is set to increase following the rise in maritime fuel varieties. The process of blending different oils and renewable-based fuels requires more storage capacity, and is a trend supported by new regulations including IMO 2020 and the EU Renewable Energy Directive
• However, investors should realise that storage facilities play a significant role in the wider energy transition theme and have an attractive investment case.
2 www.plattsinsight.com/insight/ commodity/oil/european-oil-refineryclosures-modernizations/
3 www.fuelseurope.eu/wp-content/ uploads/SR_FuelsEurope-2019-32.pdf
This article was written by Martin Krastev, DC Advisory UK’s energy expert: www.dcadvisory.com