Off Florida, massive oil tanks menace U.S. refiners

Joshua Schneyer, Rebekah Kebede and Bruce Nichols
Feb 18 2010

NEW YORK/HOUSTON (Reuters) - The newest threat to a vulnerable U.S. oil refining industry may be looming 80 miles off the coast of Florida, on the Island of Grand Bahama.


There, a huge oil storage terminal is expanding capacity to handle millions of barrels of fuel shipments that could hit the U.S. market at a time when refiners are bleeding cash and fuel demand has fallen.

The Bahamian terminal, known as Borco, is planning to add 6 million barrels in light fuel storage tanks by the end of 2011, a company executive said in an interview.

"If you're on the East Coast, you better be ready for competition," said Tim Day, managing director at First Reserve Corp, the Connecticut-based private equity firm that bought the site in 2008 with Dutch partner Vopak.

"A light sweet refiner making gasoline on the East Coast could suffer long term," he told Reuters.

First Reserve has decided to move ahead with the expansion after it received project bids and major interest from customers in late January, Day said. Borco is in talks with customers to lease the new space.

The tank expansion may cost around $350 million, Borco managing director Raymond Jones told Reuters on Friday by email.

An oft-ignored patch of the oil industry compared with high-profile exploration and production, oil storage is now gaining marquee status. A rapid expansion of Asian and Middle East refineries is lifting fuel trade between regions, and in turn, demand for terminals like Borco that handle the flows.

Since the new owners bought Borco from Venezuela's PDVSA in 2008, they have spent $150 million refurbishing it, expanding usable capacity by 80 percent to 21.5 million barrels -- enough to meet a quarter of the world's daily oil demand.

Borco's usable capacity had dropped to as little as 12 million barrels before the sale, as PDVSA used the terminal to handle mostly Venezuelan crude, allowing many of its tanks to fall into disuse.

The 40-year old terminal known among oil traders as Borco has been officially redubbed Vopak Terminal Bahamas.

But unlike most of Borco's existing storage of heavy fuel oil or crude oil, which is often shipped to U.S. refineries for processing, the new "clean" tanks will hold already-refined light products such as gasoline, diesel, jet fuel, heating oil or naphtha.

Borco's capacity to store these lighter products would rise to near 8.8 million barrels, or enough tank volume to supply the United States with gasoline for a full day, based on recent demand.

With the new tanks, Borco would grow to 27.5 million barrels -- about double the size of the next-largest regional facility -- putting First Reserve in control of around a quarter of the oil tank capacity for commercial lease offshore from eastern and southern U.S. fuel markets.

Many of the light refined products could be shipped from new overseas refineries to Borco, from where they often are sent to U.S. markets, Day said.

First Reserve, which has invested over $12.5 billion in energy projects worldwide, may soon have interests in refining light fuels itself. It is also a partner to legendary refiner buyer Tom O'Malley in PBF Investments, a $2 billion U.S. refinery buyout fund looking to snap up cheap plants.


Since 2008, an oil market contango -- when barrels for delivery further in the future are priced higher than prompt barrels -- has put the world's commercially available oil storage leases in high demand. The contango curve in futures markets encourages traders to hoard oil instead of selling right away.

First Reserve isn't the only one betting on more storage trade. Swiss trader Vitol will open a new 2.8 million-barrel clean fuels terminal in Florida in April, and PetroChina has taken up a large 5 million-barrel lease at a fuel and crude oil storage facility in St. Eustatius in the Caribbean.

Borco's customers include private oil majors, state-run oil giants, foreign refiners and traders who often lease tanks for years of use, also gaining access to Borco's blending facilities and deepwater jetties. This allows them to ship bulk cargoes into Borco, mix them to any market's specifications, and store or ship them onwards, often in smaller batches.

"Most if not all major players in the oil and oil products markets have expressed interest for storage at Borco," Day said, declining to name specific customers.

Industry sources told Reuters they already include big Asian refiners like Reliance Industries, which controls a new 1.24 million barrel-per-day (bpd) refinery complex in India and is using Borco to stage regular shipments of gasoline into U.S. markets.

A flood of new fuel from abroad could squeeze U.S. refiners like Valero Energy Corporation or Sunoco Inc, with several plants each on the East Coast, where three refineries were closed last year and others are on sale. The region's plants are facing their third straight year of slumping margins.

Around half of supplies that move through Borco now are bound for the United States, Day said.

Industry sources say customers like Venezuela's PDVSA use Borco to stage Venezuelan heavy fuel oil exports to China, and Petrobras is using it to handle new Brazilian oil exports.


Borco's building spree comes after its customers requested more space to lease, but it's also based on one seeming paradox: the customers want to sell more fuel into a U.S. market where demand is shrinking.

"Demand is stagnant and potentially declining. Why do you need more storage?" said Mark Gilman, an oil analyst at the Benchmark Company in New York.

U.S. crude and oil product demand plunged by more than 2 million bpd since 2007 amid a financial crisis. A push for fuel efficiency means U.S. gasoline use may never recover to 2007 levels, according to the Energy Information Administration.

In 2008, the United States became a net exporter of distillate fuels and a net exporter of gasoline in 2009.

Still, the country remains by far the top market for fuel, and a favorite dumping ground for other regions' extra supply.

While Asia has the fastest-growing market for oil products, its refining capacity may grow even quicker than demand, creating a glut that needs to be stored or sopped up in other regions.

World refining capacity should expand by 8.7 million bpd through 2014, with Asia and the Middle East making up 75 percent of growth, International Energy Agency data shows.

In December, China became a net exporter of refined oil for the first time since at least 1993.

"(If) China all of a sudden found itself with 5 million barrels a day of excess capacity and decided to dump it in the Western hemisphere, that would be a bad thing for Western refiners," said Peter Beutel of Cameron Hanover in Connecticut.


As Borco grows its capacity next-door to vulnerable U.S. refiners, First Reserve may also be betting that easy access to oil storage will allow some U.S. refiners to flourish even if others fail.

The equity firm could soon get its own stake in a heavy oil refinery on the East Coast, through PBF Investments, the buyout fund where it holds a one-third stake.

PBF is in advanced talks to buy the Delaware City refinery, which was shuttered by Valero in late 2009, since it was losing up to $1 million a day.

Famed for buying cheap, troubled refineries and turning them profitable, O'Malley also chairs Petroplus, another PBF shareholder, which owns refineries in Europe.

Day declined to comment on PBF's plans. But experts say the use of distribution terminals like Borco could give O'Malley -- or others with a transatlantic refining network - an important edge, by helping them stage fuel shipments or "refinery arbitrage" between regions.

Europe has had chronic shortages of diesel fuel that could be supplied via Borco. The fuel could even come from U.S. refineries if margins improve, as they might if some more plants are shut down.

Vopak, the world's largest tank terminal operator, operates the site and lists it as the company's largest in the world. First Reserve owns 80 percent of Borco while Vopak has a 20 percent stake.

The owners' move to rapidly expand storage leases at Borco now looks prescient: Demand for storage has since boomed due to the market contango. Last year, traders even parked more than 100 million barrels of oil in ships at sea, with terminals like Borco brimming with crude.