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Study: New Mexico’s oil and gas collapse could last years

Economic analysts are warning that New Mexico could be unable to rely on its oil and gas industry as the market continues to struggle amid the COVID-19 pandemic.

Lease fees, royalty payment and taxes from oil and gas operations accounted for about 30% of the state’s budget in recent years, according to a study from the Institute for Energy Economics and Financial Analysis. The research also found that the industry provided about a quarter of the state’s operations budget last year.

But with the price per barrel of oil declining, the study suggests the financial support the industry offers New Mexico could be weakening.

Earlier this year, lawmakers faced a $400 million shortfall in the state’s budget which many attributed to declines in the oil and gas markets.

As of Tuesday, domestic crude oil was trading at about $41 per barrel, after a historic plummet in April — when the pandemic took hold in the U.S. — pushed the price to less than $0 per barrel for the first time in history.

Before the pandemic, oil was priced at about $55 to $60 per barrel, with the study reporting an average of about $48 per barrel between 2015 and 2019. Between 2010 and 2014, the average price of oil was about $86 per barrel.

That has meant shrinking operations in New Mexico where oil and gas development is centered around the Permian Basin. Baker Hughes reported an average of 45 active rigs so far in October, marking a 60% decrease since October 2019.

Most of those rigs were lost in recent months as the health crisis grew, the Carlsbad Current-Argus reported. The year had started strong at an average of 106 rigs in January and steadily declined through the spring and summer.

Tom Sanzillo, co-author of the report, said estimates show the average price of oil will remain as low as $43 per barrel through 2022.

“It’s an improvement over the historic lows hit in April 2020, but still far below what’s needed to return New Mexico to robust fiscal health,” he said. “The situation is unlikely to improve anytime soon.”

While prices have recovered some, they would need to stay at an average of $80 per barrels for several years, the study read.

Oil and gas reserves would need to rise quickly, while companies must be able to pay off debt. At the same time, fuel demand would have to increase significantly after plummeting due to the pandemic and travel restrictions.

“These features need to be in alignment, a scenario that is highly unlikely,” read the study.

Also blocking the industry’s path to recovery are high infrastructure costs, oversupply and increasing competition from the renewable sector.

“Consequently, the industry’s future is likely to be one of long-term decline,” the study read.

Sanzillo said New Mexico should diversify its economy to survive the inevitable busts of oil and gas.

“New Mexico can no longer expect oil and gas revenues to bounce back. But the negative outlook for the oil and gas industry does not have to be a negative outlook for New Mexico,” he said.

A Sept. 30 presentation from the Legislative Finance Committee warned that the reduction in drilling activity led to less revenue through gross receipts tax, especially in Eddy and Lea counties, from April to July.

Production in the 2021 fiscal year was expected to continue its decline between 13 and 30%, the LFC reported.

New Mexico produced about 368 million barrels of oil in the last fiscal year, and the LFC predicted production would drop to 260 million to 320 million barrels this fiscal year.

Production of natural gas was also expected to decline by 7 to 10%.

James Jimenez, executive director of child advocacy group New Mexico Voices for Children, said the state’s reliance on the industry led to drops in funding for education and other social services.

“For too long, New Mexico has been whipsawed by volatile oil and natural gas markets that our policymakers have no power to control,” Jimenez said in a statement. “… We need bold and innovative solutions from our policymakers to accelerate the diversification of our state’s economy, create a more equitable and transparent tax system, and strategically invest in proven programs that deliver better outcomes for our children.”

The San Francisco Chronicle, Editor: Adrian Hedden, October 30

5 Reasons you should invest in a tank terminal

Is investing in a tank terminal something you should consider? While in most cases the answer will be a sounding ‘yes,’ it will pay dividends to first learn more about the exciting world of tank terminals. Let’s take a look at the top 5 reasons why you should invest in a tank terminal.

We often see investors flocking to lower-risk investments during economic uncertainty, such as government bonds, real estate, and infrastructure. Therefore, it’s hardly surprising that we are seeing a significant uptick in interest for tank terminals investments.

Is investing in a tank terminal also something you should consider? While in most cases the answer will be a sounding ‘yes,’ it will pay dividends to first learn more about the exciting world of tank terminals. Let’s take a look at the top 5 reasons why you should invest in a tank terminal.

1. Tank terminals have typically always been a very profitable industry, with high return of investments and a low-risk profile

When we take a look at the profitability of tank storage companies over the past decades, they show in general very positive numbers. For example, Vopak, the worldwide market leader in tank terminals, has consistently demonstrated high EBITDA and EBIT percentages over the last 15 years; an excellent track record that most companies from other sectors can only dream of.

2. Tank terminals benefit from gross trade and product imbalances

As our national economies become more intertwined, gross trade keeps growing consistently. For some sectors, this increased gross trade and consequent product imbalances cause challenges. Because tank terminals are key in facilitating gross trade and correcting product imbalances, an increase in gross trade actually presents new business opportunities.

3. By using tank terminals as ‘forward stocking’ locations, products owners can save a considerable amount of supply chains costs

Tank terminals are not just about storage; smart product owners know that they can also leverage them as forward stocking locations.

Let’s say there is a South African refinery that has contracts in place with 20 European customers, selling them 10 tons of product per year each. The refinery could choose to ship 20 times 10t of product from South Africa to its individual customers in Europe. However, a smart product owner will ship the 200t of products to Europe in a single load, rent a tank in the region, and distribute the product when the customers need it. The cost advantage of the second option is huge; keep in mind that vessel costs are much higher than storage costs.

As pressure on supply chains to become more efficient is constantly rising, this forward stocking function of terminals will only become more important in the future.

4. As GDP is expected to keep on growing, it is also likely that gross trade keeps on growing

Historically speaking, there has always been a strong correlation between GDP and gross trade. If we take chemicals as an example, we have seen that historical chemical consumption growth percentages routinely exceed the GDP growth percentages. The main reason is that chemicals are heavily integrated into our daily lives and that chemicals have replaced other materials like wood, steel, paper, and glass.

5. Tank terminals are part of the supply chain of different value chains, like oil, gas, chemicals, and vegetable oils.

The location of a terminal is a very critical factor in determining the attractiveness of a terminal; if a terminal is located close to the sea is on average more attractive compared to more inland located terminals, as it saves time from marine vessels’ perspective and larger vessels can access the terminal.

What’s next?

These top 5 reasons are just the start. To become a successful investor in the tank terminal industry, there is still much more to learn. 

Download our whitepaper “What you must know before investing in tank terminals.”

Download here

The oil market outlook: Lasting scars from the pandemic

After plummeting in April, oil prices have partially rebounded in response to a steep drop in production, particularly among OPEC and its partners. While consumption has risen from its lows in 2020Q2, it remains well below its pre-pandemic level.

The pandemic is expected to have a lasting impact on oil consumption, with demand only likely to fully recover by 2023. Oil prices are forecast to rise to $44/bbl in 2021 from a projected $41/bbl in 2020, as the gradual rise in demand coincides with an easing of supply restraint among OPEC+.

The main risk to the oil price forecast is the duration of the pandemic, including the risk of an intensifying second wave in the Northern Hemisphere, and the speed at which a vaccine is developed and distributed.

After rebounding from April lows, oil prices stabilized in 2020Q3

After plunging in March and April, crude oil prices saw a robust recovery in May and June, and averaged $42/bbl in 2020Q3. However, they remain almost one-third lower than their 2019 average.

The recovery in prices was helped by a sharp fall in global production

Especially by OPEC and its partners, known as OPEC+. The group agreed to cut production by 9.7mb/d, almost 10% of global oil supply. Supply also fell sharply in the United States and Canada. The rise in oil prices was also helped by a recovery in consumption as lockdown measures were eased and travel and transport began to pick up.

Unprecedented oil production cuts by OPEC+, strong compliance

Global oil production plummeted by 12% in May, falling from 100mb/d to 88mb/d, and has remained well below its pre-pandemic level. The fall was driven by OPEC+, which collectively agreed to production cuts of 9.7mb/d. Compliance with the cuts has been high, particularly compared with previous agreements. The group agreed to ease the restraints over two years, and this began in August with increased production of 2mb/d.

A further increase of 2mb/d is planned for January 2021, although this increase could be delayed if oil prices do not see a further recovery. One additional factor is production in Libya, which is a member of OPEC but is not subject to the OPEC+ agreement. Libya had seen production fall close to zero in mid-2020 as a result of internal geopolitical conflict, from an average of 1.1mb/d in 2019.

However, a nationwide ceasefire was announced in October and a robust recovery in oil production is possible in coming months.

Plunging output and weak activity in the United States

Oil production in the United States dropped by one-fifth in May amid plummeting demand and prices. While output has since recovered, it remains around 10% below its 2019 level. Investment in new oil production in the U.S is also very weak.

The oil rig count, a measure of new drilling activity, fell by 75% to reach an all-time low in August, although it has since seen a modest recovery. Survey results from the Federal Reserve Bank of Dallas suggest most U.S. shale companies do not expect a major increase in new drilling until the price of WTI increases above $50/bbl—$10/bbl above its current level.

As a result of low levels of new investment, oil production is expected to average nearly 3% lower in 2021 relative to 2020.

Weakness in oil consumption driven by collapse in air travel

Two-thirds of oil consumption is accounted for by transport. Of the three main transport fuels, jet fuel has been the most affected by the COVID-19 pandemic, given the collapse in air travel. Diesel, in contrast, has been the least affected , as it is used for shipping and road transport of freight, which have been boosted by e-commerce.

After reaching a trough in April, gasoline and diesel consumption in OECD countries have seen a recovery in demand and are expected to almost reach pre-pandemic levels by the end of 2020. However, the weakness in jet fuel consumption is expected to be significantly more persistent.

Oil consumption expected to be permanently affected by COVID-19

The pandemic is expected to have a lasting impact on oil consumption. Over the next few years, consumption is forecast to remain well below its pre-pandemic trend. In the longer-term, the pandemic is likely to affect oil consumption via a shift in people’s behaviors.

Air travel could see a permanent reduction as business travel is curtailed in favor of remote meetings, reducing demand for jet fuel. A shift to working from home may reduce demand for gasoline, but this could be somewhat offset by increased use of private vehicles if people remain averse to using public transport.

While the overall impact is difficult to quantify, concerns about future oil demand are already impacting corporate investment decisions. Some industry scenarios indicate that oil demand may have peaked in 2019, and several major oil producing companies have announced changes in long-term strategy, including a significant reduction in investment in new hydrocarbon projects, albeit with long horizons.

World Bank Blogs, Editor: Peter Nagle, October 30

Big profits are no longer the top priority for oil investors

For years, the oil industry drew in investors with sizable—and regular—returns. Even when oil prices fell, Big Oil found ways to keep paying dividends, even if it had to cut them, which happened only in extreme cases. Now, it is becoming increasingly clear that dividends—and profits—are no longer king. Today’s investors want other things from their oil investments.

Returns are not what they used to be

To be perfectly fair, returns are still important. They are just not the only reason for an investor to buy into or stay with an oil company. The sustainability of an oil company is garnering growing attention, too. But more on that later. Even if returns were the one and only priority of investors today, they would be unhappy.

Back in 2006, the average return on capital employed in upstream activities among Big Oil majors stood at more than 27 percent, a recent study by Boston Consulting Group revealed. In 2019, that average was no more than 3.5 percent. That’s before the pandemic pummeled oil prices and forced severe spending cuts. The oil industry’s returns, the study showed, had become much less resilient to price movements.

The difference is too stark to be brushed off as coincidental. Indeed, the authors of the study note that one marked change in the industry during the period between 2006 and 2019 was a shift in companies’ upstream asset portfolios.

The myths about shale and deepwater

Until about 2006, BCG noted in its report, up to 80 percent of Big Oil’s portfolio was made up of conventional oil and gas assets. Since then, they have gone into things such as deepwater and shale. And while investors have been hearing for years how production costs in both deepwater and shale are going down, this has not been the case for all deepwater fields or all shale plays.

Unconventional and deepwater exploration and production continue, overall, to be a lot costlier than shallow water and conventional oil wells. For deepwater, this is because of purely physical challenges such as, as the name suggests, depth. For shale, it is because of the capital intensity of fracking.

A focus has been put on the quick turnaround time of fracked wells: they take a lot less than conventional wells to start bringing in returns on the investment employed. But unlike conventional wells, they have much shorter life spans. In short, the promise of unconventional and deepwater oil has, based on the rates of investment return, fallen well short of promises.

The ESG path

Oil investors have been growing unhappy with Big Oil for a while now, ever since the environmental, sustainable, and social governance trend gathered speed. A growing number of people looking for a company to buy into now want to know that this company’s business is environmentally responsible. That’s not just out of altruistic motives. Investors are being told that climate change constitutes an existential threat for many companies, and the more environmentally responsible a company is, the greater chance of survival it has.

Obviously, oil companies are in a delicate place, to put it mildly, when it comes to environmental responsibility. But it is not as delicate a spot as many may imagine. Global demand for energy is growing, and it will continue growing for the observable future despite the pandemic. And this means that oil and gas will continue to be needed.

“On one hand, the energy transition is real and here to stay,” Bob Maguire, managing director of Carlyle Group, told the Energy Intelligence Forum as quoted by Argus Media. “On the other hand, there are 280mn cars on the road in the US today, 279mn of them running on oil, and the average lifespan of a vehicle is 12 years.”

Oil and gas will continue to be needed, but they would need to be produced differently to satisfy investors’ changing sentiment towards the industry. According to Boston Capital Group’s study, 65 percent of oil investors want companies to prioritize ESG factors over profits, even if this has a negative on said profits.

As much as 83 percent say Big Oil should invest in low-carbon alternatives to their core business. An even greater majority of 86 percent believe investments by oil companies in clean energy technology would make them more attractive for investors. That should provide a pretty clear picture of where Big Oil needs to go.

The way forward is not all green

Some would argue that Big Oil is already going in that direction, with the European supermajors leading the way with renewable energy investment commitments worth tens of billions. Others would counter that they are still only making promises but little actual work on changing their business.

Indeed, whatever Big Oil’s green ambitions, they would need to stick with their core business of extracting fossil fuels, too. They need the revenues from this core business to fund their renewable energy ambitions. But they could do this differently, too. The BCG study suggests reinforcing their focus on lower-cost production, taking steps to reduce the capital intensity, and pay more attention to risk mitigation. All that in addition to the clearly unavoidable diversification into alternative energy that should make them more resilient to oil price shocks in the future.

OilPrice.com, Editor: Irina Slav, October 30

BP warns of volatile future for oil market as it returns to profit

Firm prepares to cut thousands of jobs worldwide as pandemic creates uncertainty. BP has warned that the oil market continues to face a volatile future because of the coronavirus pandemic as it prepares to cut thousands of jobs from its global workforce within weeks.

The oil giant returned to a modest underlying profit of $86m (£66m) in the third quarter but warned on Tuesday that the effects of the Covid-19 outbreak had created a “challenging” environment for the company.

The underlying profit, which is the figure most keenly watched by the market, was better than the $120m loss predicted by equity analysts, but was a fraction of the $2.3bn reported for the same quarter last year, because of the collapse of global oil prices.

The price of Brent crude averaged $42 a barrel in the third quarter, up from $30 over the previous quarter, when BP slumped to a $6.7bn underlying loss that included a string of writedowns on its exploration assets.

BP said the “ongoing impacts of the Covid-19 pandemic continue to create a volatile and challenging trading environment”, and added that the recovery remained uncertain.

The oil company delivered the warning less than a week after its share price plunged to lows not seen since 1994.

BP is cutting 10,000 jobs from its global business at a cost of $1.4bn to weather the downturn and help shore up its finances as it shifts towards low-carbon energy. Investor jitters over the global industry, and BP’s bold climate targets, have caused the oil company’s share price to tumble to 26-year lows of 200p a share in recent weeks. It fell further, down more than 2% to just below 196p a share, following the latest quarterly results.

BP said it had reduced its headcount by about 2,800 people so far, in part through a voluntary redundancy programme. Thousands more will follow in the coming weeks with BP aiming to complete the majority of the cuts this year.

Bernard Looney, BP’s chief executive, assured investors that the company would keep its existing dividend policy in place after reducing it by half in August, the first cut since the Deepwater Horizon oil spill in 2010. He also promised that the oil giant’s move towards low-carbon energy would be based on projects which offer strong returns.

“Having set out our new strategy in detail, our priority is execution and, despite a challenging environment, we are doing just that – performing while transforming,” he said.

Looney said in May that the collapse in oil market prices triggered by the coronavirus meant he was “more convinced than ever” that BP’s low-carbon transition was necessary. The company took its first steps into the offshore wind market months later by taking a $1.1bn stake in two US offshore wind projects being developed by the Norwegian state oil company Equinor.

BP’s energy economists have said demand for oil may never recover after the pandemic, which has taken a heavy toll on transport industries, and may be on the brink of an unprecedented decades-long decline.

The company slashed the value of its oil assets this year to reflect its view that oil price forecasts would be below expectations as a result of the pandemic. The write-offs led to a net loss of $16.8bn in the second quarter, but in the absence of further writedowns BP reported a fifth consecutive net loss of $500m for the last quarter.

The Guardian, Editor: Jillian Ambrose, October 30

Adnoc’s new unit begins derivatives trading

The Abu Dhabi National Oil Company (Adnoc) said that its new trading entity Adnoc Trading has started derivatives trading as a direct market participant.

This represents a major milestone for the company, as it moves from being a traditional marketer of its products to a more sophisticated global trader.

Adnoc has incorporated two trading units, Adnoc Trading (AT), which focuses on the trading of crude oil, and Adnoc Global Trading (AGT) a joint venture with ENI and OMV that will focus on the trading of refined products. The new offices of both AT and AGT are located in Abu Dhabi’s International Financial Centre at Abu Dhabi Global Market (ADGM).

Adnoc Trading is now operational and Adnoc Global Trading is on track in establishing the required processes, procedures and systems to begin operations in the coming months. The AGT trading team are already optimizing Adnoc’s flows (crude, feedstock and product optimization), and, as its new trading systems are finalized will ramp up its activities.

By entering trading, Adnoc is able to offer a broader range of services to its customers and capture more value through new revenue streams from the sale of its growing crude and refined products portfolio. This significant step is a critical enabler of Adnoc’s 2030 strategy and its drive to become a more commercially-driven and performance-led organization.

Dr Sultan Ahmed Al Jaber, UAE Minister of Industry and Advanced Technology and Adnoc Group CEO, said: “This historic achievement is yet another important milestone for Adnoc as we become a more modern, agile and progressive energy company. Our steadfast focus is on providing a better service to our customers, while also stretching the margin from every barrel of oil that we produce, refine and trade. Our move into trading supports both of these goals.

“The opening of our trading offices at Abu Dhabi Global Market (ADGM) further reinforces its position and reputation as a leading and growing commodities trading hub for our nation and the Middle East region.”

The opening of its trading offices further demonstrates Adnoc’s resilience in overcoming the unprecedented challenges of the Covid-19 pandemic.

Khaled Salmeen, Executive Director of Adnoc’s Marketing, Supply and Trading directorate and Chairman of Adnoc Trading said: “Adnoc has continually adapted during Covid-19 to deliver on its commitments to domestic and international customers, including our landmark move to forward pricing of Abu Dhabi crudes. In 2020, our plans for Adnoc Trading and Adnoc Global Trading become a reality. In the weeks and months ahead, Trading will become integral to how Adnoc manages its business, helping us to better manage our product flows, deliver greater efficiencies, and provide our customers with a broader service and more integrated solutions.”

Safeguards are in place to oversee and track all trading activity. The trading systems used by AGT and AT have undergone thorough testing to ensure that they are ‘air-tight and water-tight’ before operations begin. In order to manage and control risk, the expert trading teams use a suite of energy trading and risk management systems that cover the full life cycle of every trade.

The establishment of Adnoc’s new trading entities is part of the company’s broader transformation in its customer-facing Marketing, Supply and Trading directorate (MS&T). Adnoc’s marketing arm is moving from a supplier that customers historically collected products from, to a more customer and market-centric, shipping & integrated logistics, storage and trading organization.

By better integrating its marketing related companies and capabilities, Adnoc will provide a broader service to its customers, better manage and optimize its product flows and ultimately deliver greater value to its customers, its shareholders and the UAE.

In shipping, Adnoc Logistics & Services (Adnoc L&S) is the largest, fully integrated logistics and shipping company in the UAE and provides highly specialized services that cover the entire oil and gas supply chain. Adnoc L&S is expanding its merchant fleet in line with Adnoc’s growing upstream and downstream portfolio and the company’s move into trading.

In storage, in addition to substantial storage in the UAE and international storage in Japan and India, Adnoc announced in 2019 a strategic investment in global storage terminal owner and operator VTTI BV (VTTI). VTTI is an independent global owner of 15 hydrocarbon storage terminals across 14 different countries, many of which are in locations that are complementary to Adnoc’s trade flows.

Finally, by entering trading, Adnoc will be able to provide a wider offering to its customers, more nimbly take advantage of changing market dynamics, and better manage its product flows, assets and risks.

Trade Arabia News Service, October 30

How long will China continue to prop up the oil market?

China has played a significant role in supporting global oil demand recovery in recent months by importing its highest-on-record crude volumes since May. Customs import data from the world’s top oil importer continue to show strong arrivals of crude as ports and customs continue to process cargoes that have waited for weeks to discharge.

However, with demand recovery in the rest of Asia still wobbling and refining margins in the region still depressed, the oil market and oil analysts have one primary concern about demand on their minds. How long can China support the fragile global oil market, when backlogged cargoes are finally processed and demand outside China is still weak, with the outlook getting weaker as the second wave of coronavirus infections is sweeping across major developed economies?

Over the past five months, China’s crude oil imports haven’t fallen below 11 million barrels per day (bpd), with June arrivals of 12.9 million bpd smashing the previous record from May by more than 1.5 million bpd.

The key reason for the record level of Chinese imports over the spring and summer was the buying spree of China’s refiners in March and April when oil prices crashed and hit the lowest in more than 15 years at the end of April. State and independent refiners rushed to stock up on dirt-cheap oil loading in the spring, which started to show up in Chinese imports as early as in May.

The Chinese recovery from the pandemic supported the global demand recovery early in the summer, while arrivals of cheap cargoes purchased in the spring continued to give the oil market hopes later in the summer when demand recovery elsewhere started to falter with the second wave of COVID-19.

China’s ports were so congested with cargoes that tankers had to wait for weeks to discharge the crude, which then clears customs and is shown in the customs import figures.

Port congestions have started to ease in recent weeks, however, suggesting that Chinese imports are on the road to return to ‘normal’ levels in the coming months.

“After growing for five consecutive months, floating storage in China fell for the first time, indicating that port congestion has started to ease,” OilX’s oil analysts Juan Carlos Rodriguez and Valantis Markogiannakis wrote in a report earlier this month.

China’s oil imports continue to grow compared with previous years, but they are easing off the record-highs seen this summer.

But what will happen once the backlogged cargoes are processed? Can the world’s largest oil importer continue to support oil demand recovery when major economies in Europe are back again under tougher restrictions on social gatherings? Will Chinese refiners have an incentive to process more crude when fuel demand in the rest of Asia is still weak?

According to Refinitiv Oil Research, reported by Reuters’ columnist Clyde Russell, China’s October oil imports will likely see the last effect of the backlogged cargoes, with some 635,800 bpd estimated to have been delayed from September to October.

After that, it’s anyone’s guess how much oil China would import at what could be the normal levels.

Some independent refiners, the so-called teapots, have reportedly already used up their government-allocated import quotas for 2020, and could be inactive on the market for the rest of the year.

On a bullish note, a large private refiner is said to be stocking up on millions of barrels of crude from the Middle East in preparations for trial runs at a new refinery, helping to absorb some of the crude oil from the Middle East amid an otherwise depressed market with stalled demand recovery.

The market could probably be fairly certain that Chinese oil imports in the coming months are unlikely to beat the records from earlier this year.

Yet, the unclear outlook about China’s import volumes in the fourth quarter adds another uncertainty for the oil market to deal with until the end of 2020, on top of the increasingly uncertain outlook about demand recovery and supply growth from Libya.

OilPrice.com, Editor: Tsvetana Paraskova, October 30

5 biggest pitfalls to burn money in tank terminal investments

The tank terminal market is very fragmented, with more than a thousand terminal operators and five thousand terminals worldwide. Furthermore, the market dynamics these terminals operate within can be quite complex, making it hard for investors to assess the true value of a prospective asset. In this blog, we’d like to present you with the 5 biggest pitfalls to burn money in terminal investments.

Tank terminals are considered infrastructure assets with a low-risk profile that generate stable revenue streams. Therefore, it’s hardly surprising that we see a significant uptick in interest for tank terminals investments during these uncertain economic times.However, we have also seen even seasoned investors getting lost in the world of tank terminals.

The tank terminal market is very fragmented, with more than a thousand terminal operators and five thousand terminals worldwide. Furthermore, the market dynamics these terminals operate within can be quite complex, making it hard for investors to assess the true value of a prospective asset.

In this blog, we’d like to present you with the 5 biggest pitfalls to burn money in terminal investments. 

1. Lacking knowledge

When assessing the market worth for a tank terminal, only looking at the bottom line will not be enough. Competitive value comes from collecting and understanding data on a terminal’s location, infrastructure, activity level, et cetera. 

That’s why it’s key to get access to industry-specific knowledge and get a complete picture of the asset you are interested in.

2. Paying a price which is too high

Given the complexity and dynamic of the Tank terminal industry, make sure you have a solid understanding of the key performance indicators of the terminal. What are the throughput levels? What are excess throughput levels? How are contracts being structured? What are the occupancy rates of the jetties?

Only if and when you partner with an advisor who understands the industry and will provide you with the essential and detailed insights, you can build your investment case and valuation model, minimizing the risk of bidding too high.

3. Lacking an exit plan

Even though this is true for all sorts of investments, you’ll need to pair a sound investment plan with a solid divestment strategy. Knowing when to sell is just as valuable as knowing when to buy. When market dynamics are changing and divestment of your assets is the smart move to make, a solid exit strategy is invaluable when it’s time to act.

4. Low probability of winning the bid

Being a successful investor is not only about being able to identify a good investment opportunity; it’s also about knowing when to pass on a bid. 

If there is too much competition or if you expect you will be willing to pay the expected price, it is better to exit the process at an early stage. By using a phased approach, you’ll never end up investing a tremendous amount of time and money on a bid that would never be successful.

5. Expecting high returns for low-risk investment

You can’t have your cake and eat it, too. While investments in infrastructure assets like storage terminals are often a great addition to your investment portfolio, be sure to have realistic expectations of your return on investment. While it may seem a bit ‘boring’ in the world of stock shorting, high-frequency trading and venture capital, investing in tank terminals is considered a low-risk investment with respectable returns.

What’s next?

Now you know what you shouldn’t do, you might want to know what you should do to become a successful investor in the tank terminal industry. 

Download our whitepaper “What you must know before investing in tank terminals.”

DOwnload here

Impact OPEC+ conflict and COVID-19 on Tank Storage Demand in Main Oil Hubs (part 2)

Recap last quarter blog article

In the last blog article, we explored the impact of the super contango and COVID-19 on tank storage demand in the four major oil trading hubs Amsterdam-Rotterdam-Antwerp (ARA), Houston, Singapore, and United Arab Emirates (UAE).

We concluded that the main trading hubs showed similar patterns by looking at the statistics of tanker visit numbers, marine gross trade and average berth occupancy rates, especially in the first quarter of 2020 in which the defining events OPEC+ conflict and COVID-19 evolved.

We said that in the first quarter of 2020 the number of tanker visits of the different hubs was at a minimum while the average berth occupancy rates were at their second highest since the third quarter of 2017. The low number of tanker visits was likely to have been caused by 1) high fill rate or almost full tanks of terminal operators due to contango storage play options and 2) lower consumption levels due to demand destruction by COVID-19.

The high berth occupancy rates can be explained by the fact that, despite the low number of tanker visits, in the first quarter of 2020 terminal operators were coping with the impact of IMO legislation to their business operations which might have resulted in a bit slower vessel handling at the terminals.

In this blog article we will focus on the second quarter of this year when the pandemic – in certain areas –  was at its height. We will analyze what the impact of the super contango and COVID-19 had on tank storage demand in the major trading hubs has been, individually and combined.

Tanker Hub Visits Per Quarter

For all trading hubs consolidated the number of tanker visits dropped to a new low in the second quarter of 2020, with 13% less tanker visits compared to the previous quarter and even 19% less tank visits compared to the same quarter a year ago. Looking at the tanker visits trend (figure 1), all trading hubs show a similar trend with a continuation of the downward trend in 2020. For all hubs, with the exception of Fujairah, in the second quarter of this year the minimum value of tanker visits was reached since the third quarter of 2017. For Fujairah it was the second lowest number. The 2Q20 value for ARA was 12,184 tanker visits which is 10% lower q-o-q and 18% lower y-o-y. Singapore showed the strongest decrease in comparison with the other hubs. In the second quarter of 2020, the Asian port registered 20% less tanker visits in comparison with the first quarter of the year. The value for 2Q20 was 3,305. In relation with last year’s second quarter, the number of tanker visits was reduced with almost a quarter. In Fujairah there were 893 tanker visits seen in the second quarter of 2020. That was 19% lower than last quarter and 23% lower than the second quarter of 2019. The lowest value in Fujairah was 878 tanker visits in the first quarter of 2019. Houston registered 999 tanker visits in 2Q20. That meant 20% less tanker visits q-o-q and 22% less tanker visits y-o-y.

Figure 1: Tanker visits per hub per quarter; source TankTerminals.com

Marine Gross Trade Per Hub Per Quarter

With respect to marine gross trade volumes we see a striking resemblance in the trend of the major trading hubs (figure 2). For all the hubs, it applies that marine gross trade in the second quarter of this year was at its lowest since late 2017. The 2Q20 value in ARA was 7.7Mcbm while its average volume over the last 12 quarters was 9.3Mcbm. That is a 15% drop since last quarter and a 21% drop since last year. In Singapore, the 2Q20 value stands at 5.5Mcbm while the average numbers stands at 6.9Mcbm. This is a 16% decrease q-o-q and a 25% decrease y-o-y. In Fujairah these numbers are even more substantial. The minimum value in 2Q20 was 2.4Mcbm and the average value was 3.6Mcbm. The drop compared to last quarter was 31% and compared to last year even 41%. Houston numbers stood at 2.8Mcbm in the second quarter while the average stood at 3.6Mcbm. This means a q-o-q decrease of 26% and 30% y-o-y. For the hubs combined, we saw 20% drop q-o-q and 27% drop y-o-y.

Figure 2: Marine gross trade per hub per quarter; source TankTerminals.com

Berth Occupancy Per Hub Per Quarter

All major trading hubs showed a similar trend in berth occupancy rates in the second quarter of this year (figure 3). The rates showed a decrease compared to the last quarter while for ARA, Singapore and Houston the berth occupancy rates were at their lowest since the third quarter of 2017. For Fujairah, berth occupancy rates showed their third lowest value. The average berth occupancy in the ARA stands at around 32% while 2Q20 value stands at 31%. In Singapore and Houston these values are even more dramatic with an average berth occupancy of both hubs at 33% while the value in the 2Q20 was just below 30%. In Fujairah the average berth occupancy stands at 35.5% and the 2Q20 number was 32%. For the hubs combined we saw an average berth occupancy value of almost 31% (minimum) in the second quarter while the average stood at 33.5%.

Figure 3: Average berth occupancy per quarter; source TankTerminals.com

Stock numbers versus tanker visits

For all major hubs light end, middle distillates and heavy end stocks combined have been building this year (figure 4). The growth rate for the hubs is different but stock levels show a similar pattern and that is an upward trend. The same relation is visible for the tanker visits although a negative trend as the number of tanker visits for all hubs have been declining.

Figure 4: ARA stock levels and tanker visits; source TankTerminals.com

Conclusion

Especially for the tanker visits and marine gross trade of marine terminals it can be concluded that due the COVID-19 pandemic demand for fuels has been severely weakened which resulted in less product being moved to and from terminals. This trend was already visible in the first quarter of 2020 but accelerated in the second quarter of 2020. Intelligent lockdown, closed borders and other preventive measures in all major hubs weighed on fuel consumption and international trade flows.

The lower demand and forthcoming less international transports also led to a rise of consolidated oil product stocks in all major trading hubs. Besides less oil consumption, oil product terminals profited from the super contango which resulted in an additional build of oil product stocks. As the charts in figure 4 show, stock levels rose in 2020 while the number of tanker visits dropped. It is striking to see that all hubs show similar trends.

Berth occupancies in all hubs on the other hand dropped to their lowest since Insights Global started gathering data of terminals’ logistical performance. Also this change has been related to the COVID-19 pandemic impact. We concluded that berth occupancies rose as from the first quarter of 2019 till the first quarter of 2020 due to less efficient vessel handling operations at terminals in the run up to implementation of IMO2020 legislation. We see now that lesser ships handled by the terminals due to COVID-19 destructive demand impact weighed on terminals’ berth occupancy rates.

In general it can be concluded that the COVID-19 pandemic and the short term super contango had a hug impact on fuel demand, trade flows and storage demand, coinciding for all trading hubs. As current statistics show the virus is long from defeated and if countries do not take immediate preventive actions a second wave can be expected on the short term. This would mean that current market dynamics will persist for this and upcoming years.

About the authors and the data

The data in this report was extracted from tankterminals.com database and Insights Global’s weekly ARA Oil Product Levels publication. The data in tankterminals.com came specifically from the logistical performance benchmarking addon, which uncovers information on certain terminal performance indicators such as occupancy rates and turnaround times at berth level of a terminal. To analyze the hubs, all the berth data from the various terminals located in these specific hubs was aggregated and offered these unique insights. Tankterminals.com has data on the logistical performance dating back till the third quarter of 2017. Insights Global’s weekly ARA Oil Product Levels publication is a well-established report in the international oil trading business. Insights Global has data going back to 1995.

Jacob van den Berge has been working for Insights Global for more than 8 years and has 10 years of experience in the oil & gas industry. Currently he is the Head of Marketing and Sales but used to work as an oil market analyst and industry consultant for the company.

Contact Jacob van den Berge if you would like to discuss how our data driven company can add value to your organization by enabling intelligent decisions.

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Changing biofuels regulation and the impact on terminals

The biofuel component in gasoline and diesel has been increasing slowly but surely since 2003, but changing biofuels regulation over the next few years are set to have a strong impact on tank terminals.

Tank terminals have been instrumental in facilitating the rising popularity of biofuels in the European Union. The first EU biofuels directive—to promote the use of biofuels and other renewable fuels for transport—entered into force in 2003 and set a voluntary blending target of 2% in 2005. The biofuel component in gasoline and diesel has been increasing slowly but surely since then, but changing biofuels regulation over the next few years are set to have a strong impact on tank terminals.

In November 2016, the European Commission published its ‘Clean Energy for all Europeans’ initiative. As part of this package, the Commission introduced an updated version of the Renewable Energy Directive, which defines a series of sustainability and GHG emission criteria for bioliquids. After the EU member states reached an agreement on this proposal in December 2018, the Renewable Energy Directive II (RED II) officially entered into force.

In RED II, the overall EU target for sustainable energy sources by 2030 has been set to 32%. While the Commission’s original proposal did not include a transport sub-target, the final agreement stipulates that the Member States must require fuel suppliers to supply a minimum of 14% of the energy consumed in road and rail transport by 2030 as renewable energy. Fuels used in the aviation and maritime sectors can opt in to contribute to the 14% transport target but are not subject to an obligation.

Currently, most member states are not meeting their individual targets. However, considering that the directive has to be transposed into national law by the Member States by 30 June 2021, the European Commission will soon be legally equipped to enforce the directive.

For tank terminals, this will mean a substantial shift in blending demand. Traditionally, bioethanol consumption depends on road gasoline consumption, which is expected to decrease. However, due to higher blending mandates, ethanol demand is expected to grow. Likewise, biodiesel consumption is strongly correlated to road diesel consumption.  Although diesel consumption is also expected to decrease, due to higher blending mandates we expect the demand for biodiesel to grow as well. The maximum percentage of first-generation biofuels is capped at 7%, while the rest should be an advanced / next-generation biofuel 

So while we expect the net demand for gasoline and diesel to decrease due to a variety of factors (economic recession, electrification of passenger cars and cargo vans, work-from-home), the higher blending mandates will create strong growth in demand for respectively bioethanol and biodiesel. This will offset the decline in fossil fuels and increase the demand for tank terminal blending for tank terminals.

The Renewable Energy Directive II and its impact on the fuel market make it crystal clear that biofuels should be on the radar for every tank terminal operator. During our regular Market Update webinars, we offer our expert outlook on supply, demand, and trade flows and its impact on tank storage demand.

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