Fairway’s caverns, other projects to expand US Gulf Coast crude storage capacity

Construction is nearing completion on two brine ponds associated with Fairway Energy Partners’ underground crude storage cavern project just south of Houston. Of the 11 million barrels (bbls) of capacity originally slated for operation by 1 January 1 2017, about 6.8 million bbls of operational brine pond capacity is expected to be online within the next two months, according to Texas Railroad Commission regulatory documents and Wood Mackenzie aerial imagery captured on 26 January.

Brine from the ponds can be pumped into the caverns, moving crude barrels out. The company website states a 1:1 ratio between brine pond capacity and underground storage capacity.

The construction is one of several projects underway to provide additional storage capacity along the Texas Gulf Coast region, despite a transitioning market environment in which reported decreases in international production have led to higher crude prices.

Storage construction projects have persisted in Texas, even as a potential rebalancing of global supply and demand emerges on the horizon. This continued construction has likely been encouraged by expected increases in domestic production and an opportunistic market structure.

Back to the ground: Fairway’s underground storage caverns to begin operations

With a total capacity of about 7.3 million bbls, the two ponds associated with the underground salt caverns are being prepared for crude oil storage. Approximately 6.8 million bbls of this is usable capacity, according to Texas Railroad Commission regulatory documents. Fairway has submitted plans for a third brine pond, which would bring total pond capacity to the stated 11 million bbls. Wood Mackenzie aerial imagery on 26 January confirmed that construction on the third pond has not yet commenced.

Fairway began developing the underground storage caverns in 2011, and in July 2015, the company closed funding for Phase 1 of the construction. Fairway’s original plans for Phase 1 included 10 million bbls of capacity, which was later updated to 11 million bbls. The same press release said that the terminal could be expanded to about 20 million bbls.

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.

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.

Wood Mackenzie 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 Wood Mackenzie's Canada Crude Oil Storage Report. Coverage of Fairway cavern inventories will be included in Wood Mackenzie'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 contango structure in the crude futures contracts have stimulated the largescale construction 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 NYMEX Light Sweet Crude Oil futures contract.

Despite the outright price increase, the price spread between the NYMEX prompt and second month contracts remained above $0.55/bbl as of 25 January. While that spread has shrunk considerably in the past year, it remains somewhat opportunistic in its contango structure. A wide contango structure 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 25 January, 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 not to cap production levels. The NYMEX prompt month contract fell nearly $55/bbl to $26.05/bbl between November 2014 and February 2016. The decade-low prices led to a strong contango structure 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.

In 2015, nearly 12 million bbls of new storage capacity was brought online at Wood Mackenzie -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 Wood Mackenzie’s US Crude Oil Production Forecast Report published on 23 January. Production increases in West Texas call for greater storage infrastructure in midstream and downstream markets.

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 20 January, 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, Seabrook Logistics, to construct the Seabrook Logistics Terminal near Houston. The company is in the final stages of construction on six 120,000-bbl crude storage tanks, totalling 720,000 bbls of new capacity. Seabrook Logistics plans to expand this construction to 1.7 million bbls of capacity and has 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 Wood Mackenzie -monitored Enterprise terminals in the region has increased by about eight million bbls since January 2016. Enterprise acquired all Houston crude terminal assets owned by Oiltanking Partners as part of a merger in February 2015.

Currently, Enterprise has four 390,000-bbl tanks under construction at their Houston Ship Channel terminal, totalling 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 buildout of storage capacity in Gulf Coast markets will likely outlast the global oversupply that initially spurred many of the projects. Wood Mackenzie will continue tracking capacity utilisation and construction as market dynamics develop to monitor how changes in prices and production impact infrastructure trends.

Wood Mackenzie’s Canada Crude Oil Storage Report enables traders to make more informed, confident trading decisions using highly accurate, measured data. The report compliments Wood Mackenzie’s US Gulf Coast Crude Storage Report, which tracks capacity and construction trends to provide a better understanding of market fundamentals. Wood Mackenzie’s in-the-field monitors provide exceptional accuracy and advance notice of these fundamentals. Our analysts combine this data with our real-time production data, which are showcased in Wood Mackenzie’s US Crude Oil Production Forecast.