Industry leaders share their visions on what the year ahead holds for

the tank storage sector

Outlook for 2012As we come to the end of 2011, it is safe to say the year has proven to be more economically

turbulent than most expected. Moving into the New Year, sovereign debt issues and the prospects of another world recession continue to dominate headlines and permeate debates at both the corporate and personal levels.

The industry as a whole continues to produce incredibly robust results despite a challenging year and we expect 2012 to be no less demanding. We strongly believe that the fundamentals of liquid bulk storage as a whole are unaltered – the industry remains as crucial as ever to helping producers, suppliers, traders and end-users in managing their overall supply chains. Globalisation continues to be a key driver as global production and consumption patterns continue to evolve requiring the use of liquid bulk storage to stabilise these imbalances.

In 2011, we saw a spur of divestments by oil majors – a trend that we expect to continue into 2012. However, the changing economic landscape has also led many industrial corporations to re-evaluate their asset portfolios and the potential divestment

of non-core industrial assets, particularly in developed economies like North America and Europe. Along the same lines, a rebalancing in assets is typically accompanied by a shift or consolidation in production capabilities. The foreseeable effect of these initiatives is perhaps a combination of additional niche storage facilities for sale on the market and a further consolidation of storage requirements into major established hubs.

For Westway, we see the development of current and new storage hubs as core to the long term success of our business. At the end of 2010, we announced the construction of 40,000m3 and 16,000m3 of additional storage capacity at our Houston and Amsterdam terminals respectively – two areas which we consider to be strategic hubs serving important markets. We are pleased that these infill expansions have now successfully come on stream and are generating revenue. With our Amsterdam land bank fully utilised we continue into 2012 with our infill strategy as we recently announced a further 60,000 m3 capacity expansion in Houston where we seek to solidify our position as the

leading non-hazardous storage provider in the region.

Overall, I believe the industry will maintain the consistent performance we have come to be known for, which is perhaps reflected by the high valuations placed on the industry by investors.

I am confident that innovation and sound operating fundamentals will pave the way forward for improved efficiencies and expansions that will support the next round of global economic growth.

Gene McClain

Gene McClain, president, Westway Group

The challenge of restructuring logistic systems for private and public sectors

between 2012 and 2020 needs expertise and a proven track record. Over the past few years, the world has

been facing some of the most extreme economic challenges, especially developed countries. The oil industry has been adapting to this delicate situation. As a result, the major factors contributing to a slow down of the oil industry

development necessary to solve energy needs have emerged from the financial system’s limited access to credit resources coupled with a general decline in oil consumption by developed countries. According to the OPEC 2011 World Oil Outlook, the oil demand in the OECD countries will slightly decrease at a compound

average annual growth of -0.2% until 2020; however the developing countries oil demand will significantly increase at a compound average annual growth of 2.8% in the same period.

Furthermore, European refineries are threatened by the high efficiency of oriental refineries that are currently provoking European shut

Restructuring logistic systems for 2012 – 2020 to meet market demands

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downs and/or reconversions into storage facilities. These types of changes the European refining industry is suffering will eventually cause modifications in the oil and refined product flows. In addition, the emerging oriental refineries may benefit from a complete overhaul of their logistic infrastructures to adequately modernise their system in order to efficiently distribute their production.

Considering this overall picture, the oil industry needs to be prepared for efficient logistic systems in order to maximize the return on investments, currently limited by the financial situation, and to guarantee the supply of oil products to the different industries and to the population. The most developed countries will need to re-adapt their infrastructures according to the new product flows and the emerging economies will need to construct new facilities to both supply the local demand and efficiently export their products.

What are the different criteria to be considered when re-structuring or developing logistic systems? To identify the main objectives to meet the demand in both emerging economies and developed countries, the following should be addressed:• Optimise investments in

logistics assets, ensuring the optimal location of storage facilities and the correct dimension of the transport capacity,

including pipelines, waterways, trucks and rail.

• Optimise commercial policies, establishing a pricing policy in order to maximize the profitability of the overall system both for clients and shareholders.

• Define an optimised product movement flow and adapt the design of each element of the logistic system, based on a calculated movement flow that minimizes global costs and considers clients’ overall costs, including those occurring outside the logistic system.

• Define the system’s profitability, calculating the revenue and cost model of the future system and the profitability obtained from the asset investments.

The design of efficient logistic systems could be considered an easy task at first glance, however nothing further from reality. The following factors should be taken into account in order to obtain a competitive logistics system, in such a way that clients, shareholders, and governments alike maximise their profitability with efficient use and strategic investments:• High investment decisions

based on sound guidance in the design phase to prevent high costs if modifications in the future are necessary, strengthening investment return on profitability.

• High complexity designs to ensure cost efficiency that require advanced support tools with a

Andres Suarez, strategy and business development manager at CLH

Magellan seizes domestic crude oil transportation and storage opportunities

While 10% of our growth capital was directed to crude oil projects in 2011, we expect to direct over

60% of our growth capital in 2012 towards crude oil related projects. Magellan has taken several key steps to grow in the domestic crude oil transportation and storage sector while keeping our commitment to deliver excellent service in our base business of refined products transportation, storage and distribution. With over $575 million

(€444 million) of expansion projects underway, Magellan is seizing opportunities to grow its infrastructure.

With over 12 million barrels of capacity, Magellan is the third largest crude storage provider in Cushing, Oklahoma and Magellan officials say they are currently considering the construction of additional storage in Cushing to meet the needs of their customers.

Magellan’s first investment in the crude oil transportation business was through purchasing a 50% interest of the Osage Pipeline system

which originates in Cushing and has the capacity to transport over 160,000 b/d to refineries in Kansas. In 2009, Magellan acquired 7.8 million barrels of storage in Cushing from BP and over 300 miles of crude oil and refined product pipelines in Texas. With the BP acquisition complete, our customers were willing to underpin the construction of 4.25 million barrels of new storage in Cushing. All of Magellan’s storage in Cushing is backed with multi-year customer agreements.

While several companies are

working on crude oil pipeline projects in Oklahoma and Texas, Magellan is planning to offer Permian Basin producers a new option - pipeline transportation from the Permian Basin to Houston-area refineries. The project, which will make the new capability a reality, involves the conversion and reversal of an existing pipeline system and should be operational in early 2013.

The Houston-to-El Paso segment of the Magellan Pipeline system is currently being used to transport refined petroleum products

systematic, structured and verified study approach.

• High management skills to avoid intuitive decisions based on simplifications, which can decrease efficiency even in highly modern logistic systems.

Logistic systems are capital intensive businesses that require a high level of system utilisation to compensate for high investments. In addition,

the pricing policy has a strong effect on customer’s use of the system as they are price sensitive and will try to reduce overall costs, modifying therefore the use of the system. Furthermore to make it more complex, the initial configuration of the assets will determine the pricing policy, and therefore the overall profitability of the system.

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from Houston to El Paso. In response to customer demand, Magellan will reverse flow and use part of the Houston-to-El Paso route to transport crude oil from Texas production regions. The Crane, Texas-to-Houston segment will have an initial capability to transport 135,000 b/d of crude oil. With additional pumping facilities, Magellan can increase the capacity to 225,000 b/d. Based on current feedback from shippers, we are optimistic we will be able

to secure commitments to transport 225,000 b/d.

The price spread between West Texas Intermediate (WTI) and Brent crude oil has been significant. There are many factors that are responsible for the WTI discount including one major contributor - the lack of pipeline takeaway in Cushing. While crude oil is aggregated in Cushing from production in Canada, the northern tier of the United States and the Midwest, approximately

350,000 b/d of crude produced in the Permian basin of Texas is transported via pipeline to Cushing. “Forecasts indicate production in the Permian basin could increase 600,000 b/d above current levels which gives us another great reason to move forward with our reversal project,” said Barnes.

To continue to deliver reliable service for customers of refined products in West Texas, Magellan will expand another existing pipeline route that connects Magellan’s Texas infrastructure from Frost (approximately 50 miles south of Dallas) to Midland and Odessa. Magellan will continue to use its existing

pipeline to safely transport refined products westbound from Crane to El Paso. The current project scope of the westbound segment of Magellan’s pipeline system will have a capacity of 58,000 b/d into El Paso.

Once crude oil arrives in Magellan’s East Houston crude storage terminal via the newly reversed system, it can be delivered via current and potential pipeline connections to all refineries on the ship channel and Texas City. Magellan is planning to construct 1.25 million barrels of new crude oil storage in Crane and at their East Houston terminal.

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Robb Barnes, VP of Magellan’s Marine Terminals

Despite the current economic situation our forecasts are that the global product imbalance between

oil producing regions and oil consuming regions will continue to grow and this varied regional demand growth for oil products is driving trade patterns and increased business opportunities for independent storage operators, especially those geographically situated to service numerous markets, such as SemLogistics.

For example, as consumers in Europe increasingly prefer

diesel fuel to unleaded gasoline, the region has seen an increasingly large diesel deficit, notwithstanding investments on the part of European refineries to increase their diesel yield per barrel. Russia and the former Soviet states currently fill the vast majority of this diesel deficit, although imports from the Middle East and the Far East are expected to increase in the long term.

Similar to Europe’s reliance on diesel, the US’ heavy reliance on petrol means imports are necessary to meet the demand US refineries are

unable to entirely satisfy. This benefits import terminals on the east coast of the US as well as European refineries and terminals that are able to service US petrol demand. In addition to Northern Europe and the US, regions such as South America, West Africa, China, and Singapore are generating increased demand for various refined petroleum products. These geographic imbalances greatly increase the demand for strategically located storage capacity and have allowed SemLogistics and other European storage operators

to generate growing margins.SemLogistics is situated

in Milford Haven on the west coast of Wales and is strategically located to access the UK market and to service numerous global markets such as Europe, the east coast of the US and the west coast of Africa. SemLogistics has a commercial storage capacity of 1.4 million m³ (8.5M bbls), approximately two-thirds of which is comprised of multi-product or dual purpose tankage, while the remaining tanks are primarily dedicated to storage of crude oil and specific

Nigel Passmore, Managing Director, SemLogistics Milford Haven

Corpus Christi prospects look brightMagellan is working with another company on a project to transport condensate via pipeline from the Eagle Ford basin to Magellan’s marine terminal in Corpus Christi. The project is in the late phase of development and prospects look bright. Magellan’s terminal in Corpus Christi currently has 3 million barrels of storage and has room to double its storage capacity. The terminal is connected via pipeline to three local refineries and petro-chemical plants and has dock capacity to load water cargos for export to other domestic refineries and plants.

Magellan believes its competitive advantage lies in the fact that it is an independent transportation and storage provider. Magellan does not directly compete against the companies who use its crude services since they do not have a crude trading group or take ownership of the crude stored in their facilities.

Earlier this year, Oklahoma-based Magellan Midstream Partners celebrated its 10 year anniversary as a Master Limited Partnership. Magellan’s financial and operational success has been largely attributable to the management of the company’s core business which includes approximately 10,000 miles of refined products pipeline and 85 petroleum distribution terminals in 22 states.

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refined petroleum products. The terminal has two deep water berths with a maximum capacity of 165,000 dwt.

The continued increase for environmental and safety regulations from the UK authorities are an area of concern. However, at SemLogistics the investment in the terminal over the last five years in respect of full tank refurbishments including underfloor secondary containment for over 50% of the tanks, has the company well placed for the future. Another successful project during 2011 was the installation of an automated shutdown system on all the Class 1 tanks by our in-house engineering teams.

Since being acquired by SemGroup Corporation in 2006 the SemLogistics terminal has seen significant capital investment to become

one of the most advanced independent terminals in the UK representing over 23% of the total UK independent storage capacity.

Since the acquisition, SemLogistics has invested over $50 million of capital to maintain, refurbish, and upgrade tanks and equipment and planning permission is in place for a future expansion project to provide approximately 240,000 m³ (1.5M bbls) of additional commercial capacity. This project will bring the terminal’s commercial capacity to approximately 1.6 million m³ (10.0 million bbls) upon completion and leaves us well placed to satisfy the ever growing demands of storage customers and to provide flexible, value adding storage opportunities in an ever changing market.Nigel Passmore