Kinder Morgan sees demand for Bostco tankage
Argus: Given the International Maritime Organization (IMO) decision to reduce fuel oil bunker sulphur content from 3.5pc to 0.5pc starting on January 1, 2020, how would Bostco prepare for this regulation? Are there plans to clean the residual fuel oil storage tanks and turn them into clean product storage tanks or could the residual fuel oil tanks be replaced with clean product tanks?
Wheatley: The new IMO low-sulphur fuel oil bunker standards will affect our Bostco operations and our customers' businesses. It remains unclear how either the refining or shipping industries will adjust to the new standards. We currently have no plans for repurposing any existing heated and insulated black oil tanks at Bostco. In fact we foresee continued and increasing demand for Bostco's black oil tankage.
Bostco has two 45 feet draft ship docks capable of handling Suezmax vessels, three barge docks with 12 berths, a 24-spot rail unloading rack, and an inbound distillate pipeline. This combined connectivity adds customer value through multi-modal access in and out of the terminal. Bostco is well positioned to meet changing market demands in the US Gulf coast.
We believe demand for our Bostco black oil tankage will continue to remain strong, if not grow. Industrial and power demand for high-sulphur fuel oil remains and many vessels continue to be retrofitted with onboard exhaust gas cleaning systems. New opportunities will also develop to blend high-viscosity 0.5pc sulfur bunkers at Bostco to compete with marine distillates. Finally, dislocations in residual oil markets will result in growing US import demand as heavy-conversion refinery feedstock.
Argus: What is Bostco's residual fuel oil storage capacity?
Wheatley: Bostco has over 7mn bl of tankage, 6.1mn bl of which is in residual oil and VGO heated service. The remaining 900,000 bl is in clean product distillate service.
Argus: What opportunities for your overall business do you see with regards to the 2020 IMO regulation?
Wheatley: Overall demand for marine bunker fuels will continue to grow hand-in-hand with the global economy. The new IMO regulations will inevitably shift demand away from high-sulphur fuel oil and toward both LNG and marine diesel. Kinder Morgan is the largest transporter of natural gas in the US. Our pipelines serve the demand of multiple LNG liquefaction facilities including our own in Elba Island, Georgia where we recently began construction. In addition, we have liquid marine terminals in multiple US ports which are very well positioned as preferred locations for marine diesel blending, storage, transport and delivery.
Argus: Do you have plans to expand oil storage or terminal services in the rest of the terminals you own in the US and Canada?
Wheatley: We continue to invest in our strategic hub terminaling systems. Two separate projects on the Houston Ship Channel serve to meet increasing gasoline and diesel exports by adding 3.5mn bl of tankage, three new ship docks, and one new barge dock and represent over \\$500mn in Kinder Morgan investment. When completed we will have 43mn bl of capacity in Houston (including Bostco). The investment will be complete in 2017.
In Canada, we are building a terminal in Edmonton in a joint venture. The project represents a \\$340mn Kinder Morgan investment in a new 4.8mn bl, fully-contracted merchant crude terminal. The new Base Line Tank Terminal will be connected to our other Edmonton facilities and when completed we will have roughly 12mn bl of tank capacity at our Edmonton hub. The terminal will be phased in throughout 2018.
Argus: How do you expect oil storage utilization rates to perform for short-term and long-term leases in 2017?
Wheatley: Our hub terminals are currently fully contracted and any utilization below 100pc is due to tankage that has been taken out of service for American Petroleum Institute inspections and routine maintenance. We do not see diminishing demand for our liquids terminals and expect our average term contract length to remain stable.
Argus: Do you think demand for storage in particular regions and particular products will increase or decrease in 2017?
Wheatley: We see continued growth where we are investing: gasoline and diesel export infrastructure in the US Gulf coast as well as merchant crude oil tankage in Edmonton. When completed in 2020, our expansion of the Trans Mountain Pipeline will open new refining export markets to our Edmonton customers.
Argus: Kinder Morgan's subsidiary American Petroleum Tankers (APT) took delivery of a fifth product tanker which has the ability to accommodate future installation of LNG-power systems in December. APT has four more LNG-ready tankers on order. What are the delivery dates for each of the four tankers? What are the ports you would look into fueling with LNG?
Wheatley: Our LNG-ready vessels are currently capable of burning LNG and conversion is largely limited to installing the LNG fuel supply and storage systems. We have explored the opportunity of LNG conversion alongside one of our long-term charterers. If we decide to convert a vessel, the bunkering decision is not ours, but rather the charterer's. The delivery dates of the new four vessels are: April 2017 - American Freedom, June 2017 - Palmetto State, August 2017 - American Liberty and December 2017 - American Pride.
Argus: In addition to the LNG-ready tankers, do you have plans to expand your Jones Act fleet?
Wheatley: We have no current plans to grow our fleet beyond what has been planned and announced. All new Jones Act tankers will be required to meet IMO/EPA Tier 3 standards for nitrogen oxide emissions in the North American ECA and result in higher construction and operating costs. We do not expect any new Jones Act tankers will be built in the near future.
Argus: Have you considered the use of marine exhaust scrubbers for your tankers?
Wheatley: As Jones Act tankers, our vessels exclusively sail in the North American ECA and currently burn low sulfur marine diesel as required by law. We have not given serious consideration to exhaust gas scrubber systems retrofits.
Argus: Some analysts are pessimistic about Jones Act tanker rates in 2017, saying that contracts that come open this year are faced with lower rates compared with 2016. What is your expectation?
Wheatley: All of our available vessels are currently sailing under time-charter with limited exposure in 2017.
Argus: Shipping markets are notoriously cyclical. Which phase of the cycle are we in now for the oil tanker market?
Wheatley: Prognostication of forward markets for any commodity is very difficult and equally so for Jones Act tankers. This is the primary reason the majority of our fleet remains under long-term fixed charters. Nevertheless, we believe the industry's consensus view is that the current Jones Act tanker market may have passed its nadir with current sign posts toward recovery: increasing US crude production; favored tanker economics over articulated tug barges; developing new Jones Act trades; and finally a potential acceleration in retirements.