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Energy companies choose storing oil over selling it cheap

Just a few miles from Houston's Astrodome, a cluster of subterranean salt caverns will soon be able to store enough oil to fill the famed stadium.

By the end of 2016, phase I of Fairway Energy Partners' Pierce Junction crude oil storage facility will come online, touting three caverns capable of socking away a combined 10 million barrels of black gold. That will represent 25 percent of the Houston market's total crude storage capacity, and the privately held company has plans to expand to 20 million barrels.

"We are actively leasing to capacity right now and the marketplace is being received very favorably," said Chris Hilgert, chief executive of Fairway. "We have a competitive cost advantage that we are trying to exploit as much as we can, and offer a much-needed service to a market that we feel needs more liquidity, which storage offers."

Pipelines run toward oil storage tanks at the Enbridge Cushing storage terminal in Cushing, Oklahoma.
Daniel Acker | Bloomberg | Getty Images
Pipelines run toward oil storage tanks at the Enbridge Cushing storage terminal in Cushing, Oklahoma.

Salt caverns are typically a less costly means of storage than renting a tanker ship as "floating storage" or the using above-ground tanks. Salt caverns are also a less common option for commercial crude storage, making Pierce Junction a notable midstream newcomer to the Texas oil market.

"We have seen a big renaissance of production here in the U.S., and lots of new pipeline infrastructure has been built into the Houston market, and the market has responded the best it can to build surface tankage," says Hilgert. But "more storage is needed in order for the [area] to be able to handle all of this inbound crude from those pipelines."

Fairway is betting on that need, but it certainly isn't alone. A number of high-profile infrastructure projects are in the works along the Gulf Coast, even as depressed crude prices have resulted in hundreds of billions of dollars in spending cuts throughout the overall energy sector.

Energy data firm Genscape estimates that 19 million barrels' worth of above-ground storage is currently under development in Texas alone, in addition to Fairway's caverns.

"Some of those [investments] are actually entire new terminals that are going in on the water. They provide access for both intra-North American movements and the possible export of crude or condensate, and then of course there's the possible swap of crude oil with Mexico," said Brian Busch, director of oil markets and business development at energy research firm Genscape. "So we see new terminals in Corpus Christi being built along the river, and we see the expansion of many of the terminals along the Houston ship channel, Pasadena, and over all the way into Beaumont."

While a four-decades-old U.S. crude export ban persists, energy companies are allowed to export condensate, a super-light oil that undergoes minimal processing to qualify as a refined product. In August. the United States approved crude export swaps with Mexico as well, marking the latest loosening of export policy.

As opportunities to move more oil and petroleum products in and out of the Gulf Coast present themselves, refineries and infrastructure companies are getting ready.

Enbridge announced a $5 billion, multiyear plan to create three oil terminals between Houston and St. James Parish in Louisiana that will likely include crude storage, pipelines and ship docks.

In Beaumont, Texas, at the terminal it purchased from Chevron last year, independent refiner Phillips 66 is doubling crude storage capacity to 16 million barrels. In St. Landry Parish, Louisiana, Hazelwood Energy Hub is planning a $400 million crude storage and blending complex.

Even the Louisiana Offshore Oil Port (LOOP), which stores and distributes foreign crude it offloads from tankers, said it's doubling an expansion plan to add 2.2 million barrels of above-ground crude storage capacity at its Clovelly Hub.

All of those projects are still months, and in many cases years, away from completion, but they help illustrate how storage has been filling up fast at a time when the world is awash in oil.

According to the Energy Information Administration, for the week ending Nov. 27, U.S. commercial crude inventories (excluding the Strategic Petroleum Reserve) climbed to 489.4 million barrels — the highest level for this time of year in at least eight decades — and 1.5 million barrels shy of the modern record of 490.9 million, hit in April.

Eric Lee, vice president of commodities at Citi Research, points out that, based on above-ground and underground commercial storage, plus oil in transit (in pipelines, for instance), total U.S. tank capacity is 63 percent utilized, meaning nearly two-thirds of the nation's available storage is full. Refineries, which account for an additional 152 million barrels of crude capacity, are operating at a 68 percent utilization rate.

"We have never been that close [to filling up] anywhere except Cushing [Oklahoma] in past few years, and we are much higher now than we have ever been," Lee said.

He noted that while utilization rates are high historically in the United States, it's arguably the only major energy-producing country in the world that isn't on the cusp of running completely out of space or is out of it already.

Stateside, the two regions seeing the biggest inventory builds have been the Midwest (PADD 2) and the Gulf Coast (PADD 3). The Midwestern Petroleum Administration for Defense District includes Cushing, one of the largest collections of tank farms in the world, while PADD 3 is home to an extensive network of refineries that process both domestic and imported crude.

More than half of U.S. stockpiles — 250 million barrels — currently sit in the Gulf Coast. The region hit a record high a few weeks ago, ticking down only slightly in recent weeks as refineries have come out of maintenance season and local, year-end taxes stimulate a draw-down in inventories.

"Basically, you're still at year-over-year, all-time highs in inventory — and at all-time highs pretty significantly," says Genscape's Busch. "Not just along the Gulf Coast, but also throughout North America."