How Surging US Oil Output Is Being Moved and Stored

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1:28Hello and welcome to another episode of the All Thoughts podcast. I'm Tracy Alloway. And I'm Joe Weisenthal. Joe, do you remember that time I bought a barrel of oil? That was a classic, classic moment in a, well, yeah, that was classic. You can say it, in all of financial journalism. In all of financial journalism where you actually acquired, it wasn't a barrel though. No, it wasn't. Let's be honest here. Let's be honest. It wasn't. I tried to buy an actual barrel. It was like a gallon, right? It was basically a jar of crude oil. I'm really happy I didn't buy an entire barrel in the end because part of the experience of doing this was I realized how difficult it is to actually move and store oil.

2:10Oil is a dangerous thing. Yeah. You had it on the desk next to us and then you left, right? Like you left for Hong Kong or you left for Abu Dhabi and left the oil and like a bunch evaporated. I'm not sure I should tell this story, but I couldn't figure out how to dispose of my jar of crude oil. So I just procrastinated and left it on the desk and it slowly evaporated and poisoned my colleagues. We all inhaled oil fumes for months and months and months on end. Sorry about that, Jim. Sorry, I survived. All right. Well, I bring it up because I'm very, very curious about the business of storing and transporting oil right now.

2:45And part of the reason is because as we've been discussing on this podcast, we had a really great episode with our colleague, Javier Blas, for instance. U.S. oil production is at a record. I think it's like more than 13 million barrels per day now. Yeah, it's really extraordinary. Obviously, the U.S. just production booming like crazy. And, you know, you mentioned that episode with Javier. When we talk about oil most of the time, right, we're talking sort of like macro, like who are the big producers? How much global demand is there? What is the trajectory? What's happening in shale? What is happening in Saudi, et cetera?

3:19But as we like to do from time to time, like these aren't just numbers on the screen. Right. Oil is definitely not just a number on a screen. And if you want to go long oil, if you're bullish on oil, you might be able to do that with a few clicks. But someone somewhere - You don't want to take physical delivery. You probably don't want to. But someone somewhere has to have the physical, I don't know if it's counterpart or the physical exposure to meet your financial obligation. So if you trade oil futures, someone there, like I assume, takes the other side on some level by having exposure to the physical product, which means worrying about disposal, delivery, storage tankers, and so forth.

3:58And so like this sort of the side of the business that's not usually talked about, we should talk about. Absolutely. And just going back to that episode with Javier, I remember one of the themes from that was how much oil production patterns have changed in the past few years. And so I'm very curious if the storage and transportation patterns are also changing. So I'm pleased to say we really do have the perfect guest to dive into the business of storing and moving oil. We're going to be speaking with Stephen Barsamian. He is COO at the Tank Tiger and also the co-host of the Tank Talk podcast.

4:34So a fellow podcaster. Steve, thank you so much for coming on All Thoughts. Thanks, Tracy. Thanks for having me. Thanks for having me, Jo. Maybe just to begin with, talk to us about what the Tank Tiger actually does. I was looking at the website, you describe yourself as a clearinghouse for terminal storage. And if you go to the website, Joe, I don't know if you've done this yet. I have. But you can look at basically kind of want ads for storage. It's like looking for, you know, specialty chemical storage, this amount, or I have available this amount of storage for a particular product. Yeah. I mean, Tracy, you kind of nailed it there.

5:11That's kind of what we do. I like to say we're Airbnb for tanks. I was going to say Tinder for tanks, but Airbnb probably works too. My dad has used Match.com before. So yeah, no, that's kind of high level what we do. Essentially, we have customers that are terminals that store, you know, petroleum products, chemicals, bioproducts, and they're all pretty much liquids and they go into a, you know, a giant tank. I'm sure people have seen The Sopranos, the intro to The Sopranos, those ginormous tanks in the intro that typically holds, you know, gasoline or diesel. And essentially, you can lease them out like an apartment.

5:46And people pay for a term on that tank like you would pay for a term on an apartment. And essentially, oil traders, oil majors, they usually are the customers that lease those tanks. And there's terminal storage companies that are public companies that kind of lease them out third party. So that's kind of how it works. And essentially, we kind of get in the middle of that. And we try to facilitate the transactions of people that need storage and the people that have storage. And like you said, it's kind of like one ads, you know, trying to find the perfect match. And really, that's what we've done for the past nine years.

6:17And so far, we're still in business and still paying the bills. Wanted storage unit with sensitivity and, I don't know, affinity for poetry. Slightly random. How much of the business, if you look overall, is sort of like big sort of long-term relationships between some oil producer and some storage company? And then how much maybe of the Tank Tigers business or anyone else's business is perhaps like sort of like, I don't know, maybe the term is odd lots of oil storage where some storage company has a little bit of extra space beyond what their contract is. I mean, I assume there are like long term contracts, but why don't you like talk about the breakdown there of how these deals usually come together?

7:03You know, so my dad who started the company, he worked at Hess for over 30 years and he kind of started the third party leasing of terminal storage at Hess. Those terminals are now not obviously owned by Hess anymore. And he kind of saw this need in the market to create this company. and when he was doing deals at Hess, it was largely long-term deals or spot deals and essentially trying to find the best fit for their excess capacity and assets. So I would say typically today, with us being in the market, we've kind of added some liquidity and transparency. A lot of the big players, there's big and small terminals and a lot of them have, like you said, long-term customers that have been there for years and years.

7:45And then there's swings in the market where there's Contango, which I hope your folks know what that is. It's basically in the futures market when the price is more than today's price. So essentially you can put oil away and make money by storing it. And then backwoodation is the opposite. So that de-incentivizes storage. So that kind of fluctuates and people leave and enter markets all the time. Companies change all the time. So leases run off. So that kind of leaves that excess and incremental storage capacity that's, you know, up for a spot or long-term lease. I was just going to ask one quick question.

8:19This comes up in a lot of the episodes we do on trucking, where we look at the rates and they say, okay, there's a spot rate and a contract rate for trucking. Is there basically an equivalent where you could sort of plot over time what sort of contracted rates there are for long-term relationships and then like a spot rate that fluctuates both up and down relative to the contract? Yeah, definitely. I mean, you kind of hit the nail on the head there. you know, you know, long term rates, they're kind of steady at a certain threshold. And it has to make sense for both sides. And there's spot rates and that kind of moves kind of with the markets.

8:51And that's, yeah, exactly it. So I know some oil majors obviously have their own storage, but a lot of people are clearly leasing it from third parties. Why is that? Like, why not just build out your own capacity? Some do, but it's kind of like, you know, the old economics model that I remember from an episode of The Office. Usually, you know, you don't want the liability and you have to essentially use that tank all the time if you're going to be building it. That's really what leasing comes in is you don't have that general liability of operating a terminal. So you just can come in and go as you please when you need it and when you don't need it.

9:31Most oil majors do own their own storage for their own operational use. I would say a lot of, you know, oil majors now these days are trading, physical trading, and they will take advantage of arbitrage opportunities by leasing storage in certain markets, whether that's for blending or moving product from A to B or, you know, taking advantage of Contango, as I mentioned. So they kind of do both. And there's oil trading companies that exist that are just, you know, these companies that trade commodities from all different parts of the globe. And basically, they operate with long-term and short-term leases to take advantage of the same trading opportunities, as I kind of just mentioned.

10:12You mentioned those tanks in the opening scenes of The Sopranos. My assumption would be that in suburban New Jersey or suburban New York or wherever they are, there's probably not a lot of appetite to build more, that there are neighbors who probably do not want those big fields or those big terminals or the big storage facilities to continue to expand. I imagine people don't want to live next to them. Whereas on the production side, I imagine in sort of depopulated parts of like North Dakota or Texas or wherever there's explosion, there's probably not much less of a constraint. So is there a mismatch in the country's ability to produce oil, which seems like it can ramp up like crazy, versus the country's ability to store oil, which I imagine, especially in strategic locations near ports, near where people live, is going to be somewhat constrained.

11:04For sure, Joe. I mean, we live, or I live, all of us live kind of in the New York area. And New York Harbor is the NYMEX hub for gasoline and diesel. And we have, I don't know if people have noticed, but there's a giant bunch of tanks farms in the area. And really, that kind of has actually constrained over the years. A lot of terminals have been sold and turned into warehouses. And like you mentioned, NIMBY, nobody wants to see an oil tank pop up in their backyard. So a lot of that is actually kind of constraining here in this geography, whereas you mentioned other parts of the US and the globe, they're probably more willing and there's nothing around them to build more tanks.

11:43Building tanks, I mean, it kind of fluctuates with the market, as I said before. We started the podcast with production growth. That was a big boom in midstream in the early parts of the 2010s with the fracking and kind of midstream followed along with that to facilitate the movement of that production. And that was kind of the big midstream boom there and then you know recently with the uh opening of the mexican border there was a big boom for midstream needs to move product to mexico whether it was by rail so sorry the tanks are midstream midstream tanks sorry sorry no no just making sure but that tanks are considered midstream midstream yes yeah midstream terminals yes it's kind of all midstream includes you know pipelines tanks etc so yeah there's downstream midstream and upstream yeah so you had you know the big boom for Mexico, there was a lot of tanks built for that movement of product to Mexico that all these companies were able to do business in Mexico.

12:35So that provided the opportunity to expand and build more tanks for that. And then recently we've seen on the chemical side and on the agricultural side, which kind of leads into renewable fuels, we've seen quite a large movement to build more tanks for housing renewable fuels. And, you know, that's not a coincidence. there's been a global push to get into renewables. When I say renewable fuels, that's biodiesel, that's ethanol, that's renewable diesel. This product called SAF, that's meant for airlines, it's a replacement fuel for jet fuel. And then there's the feedstocks that are used to produce these products.

13:16And those are typically like palm oils, veg oils, used cooking oil. all this product does need to be imported and then moved to the production facility. So that's kind of facilitated this kind of new boom in midstream and terminal infrastructure of building more tanks for that. And that's largely, I mean, we've seen it largely across the U.S. and it's predominantly happened in the Gulf Coast too, where I would say the Gulf Coast is one of the largest holders of tanks inventory in probably the U.S. and just sheer total capacity. It's definitely the most active and the largest.

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15:49There used to be headlines about the U.S. running out of oil storage. I think during the depths of the pandemic in 2020, we started to see those crop up. But even before then, I think during the shale boom, there was storage concerns and like the pipelines were getting clogged up and things like that. Do those concerns still exist today? If U.S. oil production is at more than 13 million barrels per day, we've seen this massive surge. Is the infrastructure to handle the movement and storage of that where it needs to be? Yeah, actually, we kind of overbuilt our pipeline capacity a little bit in anticipation of all this production and needing it to pretty much any incremental barrel we produce is exported.

16:32Because, you know, we've kind of satiated our need with the refining capacity here in the U.S. for light crudes. So yeah, we kind of overbuilt it a little bit and the production is trying to keep up to get to that point where levels are paying for that infrastructure that was built. So yeah, kind of the things you mentioned for your prior point, it was around 2015 when oil kind of cratered. And oil typically does boom and bust cycles, as everybody says. And that was a bust cycle in 2015 with all that production. And yeah, pretty much everybody that had a tank was filled during that time period.

17:11And then we have the pandemic, which was more on the demand side where there was no demand for oil. So people had to park it every nook and cranny. I mean, that might have been the craziest two months of my life during that period. What did you see? Did you see creative storage solutions? Yeah, talk about that time. Yeah, no, it really was pretty wild. I'm not going to lie. It was unprecedented for so many reasons for so many people. And yeah, we did see so many unusual things, which probably won't be replicated. We had people parking frack tanks, which are these small, like portable tanks and filling them with oil next to, you know, Cushing, which is, you know, the NYMAX hub for WTI.

17:50And for futures contracts, that's the easiest place to trade oil. So, yeah, we were seeing that kind of weird level of detail of, you know, filling up and moving frack tanks to Cushing, you know, people filling up pipelines and not even moving the oil. It was a very, very strange time. And, you know, typically it's more of a flatter market than that. And we were seeing another weird thing, you know, people booking vessels and just parking oil on large vessels and parking at sea or near ports. I'm trying to think, oh, oil on rail cars. That was another thing. People were parking on rail cars and parking them in rail yards.

18:26So, yeah, that was an interesting time. Not going to lie. I was doing a lot of work in a very short period of time. And also being in a lockdown was making it weirder. But what is the economic sweet spot for owners of midstream assets? Because obviously, you know, you know, we could talk about oil in terms of volume or we could talk about oil in terms of price. And sometimes they move in the same direction, sometimes not. Often they move, I guess, intuitively, often they move in opposite directions. What is the sort of like the dream business environment if you're in the midstream space? Probably the dream is high oil prices and high contango.

19:03That's pretty much the dream. So high oil prices, but even higher in the future. Yeah, exactly. Got it. I would say that's probably the dream scenario. Typically, that doesn't happen. But yeah, that would be the dream scenario. I mean, then you have producers still producing, moving the oil, which they're paying tariffs for the pipeline. And then they're paying it for the export of moving it from the pipeline to the tanks, to the dock, and onto a ship. So that's making money for the terminal all the way through. and then they're making money on the storage costs, which people are just going to park oil in their storage and pay for it.

19:36So I would say that's a good dream scenario. What makes for a good storage facility? And obviously, I get that the requirements are going to depend on the exact product. But in general, what are the things people are looking for when they're looking for storage capacity? Is it just price or is it maybe safety or convenience, things like that? So when we started the Tank Tiger, storage prices was very, very opaque. And we tried to bring a little bit of light and transparency. Like I said, we've been doing this for eight years now. So people kind of trust us, I think. So we've been able to kind of shed some light on storage pricing.

20:13And it was a black box day. Somebody could have been paying like$2 more than the other person in that same terminal or vice versa. So we've been able to actually create kind of more transparency and liquidity in what we do. But to answer your question, yeah, I would say it's a combination of all. So typically in a flatter, more backwood-edated market or a small contango market, the more what I call well-connected facilities or desirable locations are going to be the first to get leased out. And typically, those are, you know, terminals in Houston. Those are terminals in New York Harbor, like I mentioned, in Cushing and along the river in New Orleans.

20:57You know, these are pretty much major trading hubs and logistical hubs. And for at least oil terminals, the better the connected, which means, you know, the best pipeline connected facilities tend to do better than the other the ones that are not as well connected pipeline. And that kind of means is like they're bringing in oil from multiple locations. So it gives a person optionality and they're bringing it to their outbound connectivities to are vast and broad. So that kind of lends itself to be a favorable facility. And then, you know, obviously price matters a lot as well. And then for logistically, it's, you know, location.

21:37So customers that lease storage want to be around other people that lease storage. So they're able to move barrels from point A to B and, you know, that provides some liquidity and trading activity. So they don't want to be stuck in the middle of nowhere and nowhere to sell their barrels. And that kind of hurts a lot if they can't sell and the market's bad. So that's kind of what I would say lends to a favorable facility. And crude and products, clean products is like gasoline and diesel jet and crude oil, you know, obviously it's crude oil. So they're kind of segregated in different terminals.

22:07Typically, they're different facilities handle both. So there's differentiators between those two. I have a really basic question since you mentioned the pipelines, but how does the oil or the product get from the pipelines into the actual storage facilities? Like what is the mechanism? Are we talking from a crude oil or clean product standpoint? I guess we could do both. I'd be curious to hear the sort of like life cycle of both those things from like stuff comes out of the ground and then gets moved or stuff comes out of the ground and gets refined and then put into storage. Because I don't really understand the physical process.

22:46Yeah, the sequencing of it. And do the pipelines like plug in directly into storage tanks? I can't imagine that's the case, but go ahead. Sure. Yeah, of course. I'll start with crude because that's where it all starts. So typically, you know, they drill it out of the ground and the way it's moved is into kind of like an aggregation site. Either they move it via a truck or a pipeline that's connected kind of close to the well. And that's moved into like an aggregation terminal. And from that aggregation terminal, a terminal that has tanks. So it's literally taken if it's a truck that's driving it to the terminal, they'll stick a hose into the truck.

23:24It'll pump it into a tank. And then at that tank, there's multiple tanks in that little small terminal that'll pump into a bigger terminal. And that bigger facility will then inject it into a long haul pipeline. Some of the long haul pipelines from the Permian go to Houston or Corpus Christi for crude Corpus for their refining complex and to export out of there. And then Houston, you know, for their refining complex and to export out of there. So when it goes to the long haul pipeline, typically the midstream company that owns the long haul pipeline also owns the terminal at point A and point B.

24:02So when it's coming in and when it's going out. And then from that pipeline, it'll go into various tanks in that tank field, depending on manifolds and connections in that terminal. And that's kind of how it moves. And then, you know, in that terminal, there's multiple pipes that are connecting each individual tank. So it can move from one point to another and one tank field to another. Certain terminals have interconnected tanks. And it's just like kind of a web inside the terminal, how the oils move to each location. And then from that tank, it's either transported onto a dock. So the dock is located at the terminal.

24:44It's piped into the dock and a ship comes up and the ship is loaded and it goes off to some foreign port. Or it's moved into another pipeline that is connected generally to a refinery. And then the refinery has their own tanks at their own plant. And they'll take from that tank into a distillation tower and start producing clean products. And then that kind of leads me to the clean products. So once a refinery produces clean products, typically we'll start from Houston because that's where a lot of refining capacity is. So a lot of these refineries have connections into some of these major terminal hubs in Houston where a lot of gasoline blending and diesel activity happen.

25:31And they're pumped into these terminals by a pipeline and it can go trade hands from one person to another. and then it can be exported like I mentioned before pumped onto a dock sent to like South America or wherever or it can be shipped up Colonial Pipeline which is you know the largest distribution pipeline in the U.S. and that pipeline has injections at the terminal site in Houston and then there's various stops along the way as it goes up to New York Harbor and then once it's at its destination let's say at a terminal here in Linden or Bayonne or wherever in New Jersey it hits the tank and then typically it's consumed by a customer.

26:11So you'll have a truck that comes up to the terminal and it'll load the product at the truck rack and then it'll drive off to a gas station. So that's kind of how it works. That was great. Yeah, that was a really good overview. And I have a very first I have a very quick, simple question. The basic pricing. I mean, are we basically talking about a sort of barrel per day type of pricing or how does storage pricing? Yeah, storage pricing. Yeah, so it's essentially, like you said, it's in dollars per barrel per month. Per month, okay. So that's a typical storage. What's a typical price on an average market to store a barrel of oil?