Genscape : Fairway’s Caverns, Other Projects to Expand U.S. Gulf Coast Crude Storage Capacity

Underground storage is generally considered more economical and environmentally-friendly than above-ground storage tanks, but this is the first major underground crude storage facility in the Houston area.

The facility is being constructed at Pierce Junction, fewer than three miles south of the Houston Astrodome. Twin 24-inch bidirectional pipelines will connect Fairway's cavern storage to existing Houston storage terminals at Speed Junction and Genoa Junction, which subsequently feed the Houston Ship Channel, Texas City, Texas, and Baytown, Texas, markets.

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Fairway has tentative plans to expand the facilities, including an additional nine million bbls of cavern storage capacity, four million bbls of above-ground tank capacity (which could be used for segregation and blending), and greater pipeline connectivity to Houston-area terminals. These additions, referred to as Phase 2, are dependent on market conditions and customer demand. For more information on the project and cavern operations, please visit Fairway's website.

Genscape will report on cavern storage levels at the facility by monitoring brine levels in the ponds. The same methodology is used to report storage levels for Enbridge's three million bbl Hardisty Cavern in Genscape's Canada Crude Oil Storage Report. Coverage of Fairway cavern inventories will be included in Genscape's Gulf Coast Crude Oil Storage Report and is expected to begin Q1 2017.

Build-a-Barrel: Storage Construction Persists Along the Texas Gulf Coast

Global crude oversupply and a persistent contangostructure in the crude futures contracts have stimulated the largescaleconstruction of new crude storage infrastructure in recent years, especially along the Texas Gulf Coast. West Texas Intermediate prices have slowly climbed upward in recent months, surpassing $55/bbl in January, according to the NYMEXLight Sweet Crude Oil futures contract.

Despite the outright price increase, the price spread between the NYMEXprompt and second month contracts remained above $0.55/bbl as of January 25. While that spread has shrunk considerably in the past year, it remains somewhat opportunistic in its contangostructure. A wide contangostructure of the futures contracts heavily incentives storage plays. Market participants can hold barrels in storage and sell at a later date when crude is more valuable. Several companies have invested in building new storage tanks to accommodate the stockpiling of inventories since 2014.

On January 25, The WTI forward curve still showed prices climbing $2.68/bbl by December 2017. On the same day, the prompt-to-second month contract spread closed at $0.64/bbl and the spread between the prompt and seventh month contracts closed at and $2.42/bbl, according to the NYMEX Light Sweet Crude Oil futures contract. One-year prior, the same futures contract spreads closed at $1.45/bbl and $5.88/bbl, respectively.

In late 2014, crude prices plummeted due to several factors, including the Organization of Petroleum Exporting Companies (OPEC) decision to not cap production levels. The NYMEXprompt month contract fell nearly $55/bbl to $26.05/bbl between November 2014 and February 2016. The decade-low prices led to a strong contangostructure of the futures contracts.

In February 2016, when crude prices bottomed, the spread between the prompt and second month contracts widened to $2.90/bbl, while the spread between the prompt and seventh month contracts reached $8.90/bbl, according to the NYMEX Light Sweet Crude Oil futures contract.

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In 2015, nearly 12 million bbls of new storage capacity was brought online at Genscape-monitored locations in Houston, Beaumont-Nederland, Texas, and Corpus Christi, Texas. This number was surpassed in 2016, when nearly 17 million bbls of additional capacity became operational.

Since early December 2016, when WTI front month prices jumped $5/bbl, primarily on news of an OPEC production cut decision, two million bbls of new storage capacity has come online in the region.

Another 14.7 million bbls of capacity is currently under construction, including Fairway's cavern storage. More than half of that capacity is in the final stages and is primed to begin operation within two months.

If OPEC production cuts lead to global supply declines in the coming months, prices are likely to strengthen.

Rejuvenated prices have led to a recovery in production in the West Texas Permian Basin. Production flows out of the Permian Basin increased 487,000 bpd to 2.18 million bpd between January 2015 and January 2017. Flows are forecast to continue increasing to 2.8 million bpd in January 2018, according to Genscape's U.S. Crude Oil Production Forecast Report published on January 23. Production increases in West Texas call for greater storage infrastructure in midstream and downstream markets.

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Storage Operators Place Bets on the Gulf Coast

One of the big names on the construction front is Magellan Midstream Partners. In the past two years, operational crude capacity at Magellan's East Houston terminal increased 2.6 million bbls, to more than six million bbls. Another one million bbls of capacity was under construction at the terminal as of January 20, with plans to continue building tanks, according to a June 2016 permit submitted to the Texas Commission on Environmental Quality.

Magellan and LBC Tank Terminals formed a Joint Venture, SeabrookLogistics, to construct the SeabrookLogistics Terminal near Houston. The company is in the final stages of construction on six 120,000-bblcrude storage tanks, totaling 720,000 bblsof new capacity. SeabrookLogistics plans to expand this construction to 1.7 million bbls of capacity, and has the space for an additional three million bbls of tankage on top of that, according to a Magellan press release from late last year.

Enterprise is the only company that has built more tank capacity along the Texas Gulf Coast than Magellan in the past year. Operational capacity at the Genscape-monitoredEnterprise terminals in the region has increased by about eight million bbls since January 2016. Enterprise acquired all Houston crude terminal assets owned by OiltankingPartners as part of a merger in February 2015.

Currently, Enterprise has four 390,000-bbltanks under construction at their Houston Ship Channel terminal, totaling 1.56 million bbls. Tank foundations for all four tanks were in place by February 2016, but the project sat idle for nearly a year before Enterprise resumed work on the construction progress this month. The company has said in company presentations that the terminal is expandable by five million bbls.

Recent activity at several terminals, including those operated by Fairway, Magellan, and Enterprise, suggests that new infrastructure expansions will persist along the Texas Gulf Coast. Market participants may be furthering construction progress in anticipation of increased crude prices and production. The robust buildoutof storage capacity in Gulf Coast markets will likely outlast the global oversupply that initially spurred many of the projects. Genscapewill continue tracking capacity utilization and construction as market dynamics develop to monitor how changes in prices and production impact infrastructure trends.