Midstream Part 1: The Business of Crude Oil Storage

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Midstream operators fill the gap between crude oil producers (upstream) and crude oil refineries (downstream). Midstream facilities include oil storage terminals and transportation providers, such as pipeline, rail operators, marine tankers.

In this first part in our series on the midstream sector, we'll take a look at the business of crude oil storage, which is often an overlooked linchpin in crude markets.

TANK FARMS DEFINED

Both oil producers and oil refineries have on-site storage, typically one or two days of inventory capacity. These storage tanks are sometimes referred to as tank farms. On-site storage provides a buffer in the event of short-term disruptions, like production or pipeline outages.

For longer term storage, producers need to book space at an oil storage terminal. These terminals typically serve as collection points for large pipelines.

Why are storage terminals so important? There are actually three reasons:

REASON 1 - INVENTORY CAPACITY FOR UNPLANNED DISRUPTIONS

Inventory capacity is critical in the event of major market disruptions, both on the supply and demand side of the equation.

From the producer’s point of view, storage tanks allow producers to keep producing, in the event they can't get their oil to their customer.

The onset of the COVID-19 pandemic in the spring of 2020 was a prime example. While oil production was not initially affected, oil refineries were very quick to reduce throughputs, in anticipation of much lower demand. As the refineries abruptly cut-off crude purchases, oil producers were left scrambling to find storage space, as they figured out what to do next.

Refineries also rely on stored crude in the event of a supply disruption, such hurricanes or unplanned pipeline outages. Storage tanks allow refineries to keep running while they ride out the storm, or maybe find an alternative supplier. An example of this effect was the massive drawdown in crude inventories in 2019, after the Alberta government ordered a reduction in oil output.

REASON 2 - PRODUCT BLENDING

Another important function of an oil terminal is blending. Oil producers typically ship their crude to a storage terminal, where it is blended to specifications before being transported to the final customer. Crude oil benchmarks typically have a very narrow range of specifications, particularly in terms of API gravity, viscosity and sulphur content.

Western Canadian Select (WCS), for example, is a blend of 20 different conventional, synthetic and bitumen crudes from the oil sands. WCS is blended and diluted to specification by Husky Midstream at its Hardisty Terminal. The Cold Lake blend is also a mix of in-situ bitumen sourced from Imperial Oil, Canadian Natural Resources and Cenovus Energy, all blended to spec at the storage terminal.

REASON 3 - HEDGING FUTURE OIL PRICES

Hedging is basically placing a bet on future oil prices, as a means to optimize profits.

If oil prices are moving higher, producers can store their oil in the short-term, and sell that oil at a later date, when oil prices are expected to be more favourable. Refineries, on the other hand, make more money when crude oil prices are low. They can chose to buy and stockpile crude when prices are low, and use that oil at a later date.

STORAGE TERMINALS

Western Canada has a total storage capacity of just over 100 million barrels, 90% of which is located in Alberta. These terminals usually serve as collection points for major pipelines. The two largest oil storage facilities are located in Hardisty and Edmonton, with a combined storage capacity of 75 million barrels.

Canada’s largest storage operators are TC Energy and Enbridge, who also manage significant volumes in the US. Pembina Pipeline, Inter Pipeline and Gibson Energy also manage significant crude volumes in Alberta.

Since almost all of Canada's exports end up in the U.S., a lot of Canadian barrels also gets stored south of the border.

Most of those barrels end up in Cushing, Oklahoma, which is the largest and most important oil trading hub in North America, comprising of 15 different terminals with a combined storage capacity of over 90 million barrels.

Cushing is a key collection point for many large inbound pipelines, including TC Energy’s Keystone and Enbridge's Spearhead and Flanagan South, funnelling much of that crude to U.S. Gulf Coast refineries and marine export terminals.

Stay tuned for Part 2 in our midstream series, which will cover Canada's big 6 export pipelines.