The midstream is about getting crude oil and natural gas—and their related products—from here to there. Somewhere along the way, those products must stop and wait their turn for a final move to end-user customers. That’s the business of Oiltanking Partners LP.
A part of privately held, German-based Marquard & Bahls, Oiltanking’s North American operations began in the mid-1970s, and the organization has major terminal operations along the Gulf Coast and in the Midwest. Sister firms provide worldwide crude trading, aviation services and other energy-related businesses.
Oiltanking created a separate master limited partnership (MLP) two years ago, Oiltanking Partners LP, to operate its big terminals at Houston and Beaumont, Texas. The MLP has an ambitious, $300-million capital expansion under way to enlarge current operations. By year-end 2014, it will have storage capacity of 25.2 million barrels (bbl.) with 97.3% of that capacity under long-term contract. All revenues are from fixed-fee agreements.
The partnership reported first-quarter 2013 net income of $20.2 million, equal to 48¢ per unit, an increase of 26.7% from the year-earlier quarter. Adjusted EBITDA rose 27.5% from first-quarter 2012 to $25.7 million for the first-quarter 2013. Quarterly revenues were $40.2 million, a 17.2% increase from a year earlier.
Anne-Marie Ainsworth became president and chief executive of the general partner in late 2012. She shares her insights on the organization and midstream’s rapidly changing storage business.
Midstream: What led you into the energy business?
Ainsworth: I am a chemical engineer by training. I graduated from the University of Toledo. Later, I received an MBA from Rice University. When I first graduated, I went right to work at the local refinery in Toledo, Ohio, for Sunoco Logistics, and I’ve remained in the oil industry ever since. My last job before I came here was senior vice president of manufacturing for Sunoco. Prior to that, I was general manager for Motiva Enterprises LLC's Norco, Louisiana, refinery.
Midstream: The industry's infrastructure around the Gulf Coast is expansive and still growing. How do Oiltanking Partners’ growth plans fit into the current North American midstream build-out?
Ainsworth: We have some really positive aspects here. We’re well-positioned for the infrastructure growth that's necessary to bring new volumes to the Gulf Coast. We broke ground in the middle of 2012 on the largest expansion project in our history on our Appelt property, located about a mile west of our Houston terminal [and connected via substantial infrastructure]. We are in the process of adding 6.5 million bbl. of storage there.
We have two phases for Appelt. The first phase will be completed by the end of this year. That is for 3.2 million bbl. The second phase will be completed by the end of 2014, and that will be another 3.3 million bbl. We’re bringing the tanks online in small groups as they are completed.
At the same time, we’re still proactively looking at additional land possibilities. We recently purchased 26 acres of land next to the Appelt area and that should provide another 3.5 million bbl. of storage capacity in the near term.
There’s also been a spike in interest at our Beaumont terminal, which has been mostly handling refined products and vacuum gas oils in the past. But we’re starting to see interest in crude oil, liquefied petroleum gases [LPGs] and clean products. We’re exploring those possibilities as well.
Midstream: Rail and barge transport have taken on new importance for producers. How has this impacted your business?
Ainsworth: We’ve definitely seen increased interest as far as rail goes. We currently have the capability to unload two to three unit trains per week at the Houston terminal, and we’re continually looking at rail expansion opportunities.
And we’re discussing with two different parties for light and heavy crude oil offloading capacity with connectivity to our Houston terminal. If commercially successful, each one of those projects could increase our rail unloading capacity to about five to seven unit trains per week.
We have two dedicated barge docks, and we are seeing above-average utilization there with high volumes of crude oil clearing the Houston market. Even with that increased utilization, we have plenty of availability at our docks for expansion in the future.
Midstream: Where is that oil coming from?
Ainsworth: Primarily from the shale plays, the Bakken and Eagle Ford; kind of all over. It’s also coming down from the Cushing, Oklahoma, hub.
It’s just amazing to me, because if you’d asked me a number of years ago if we would be shipping crude by rail to this extent, I never would have thought that. But clearly, when the differentials are there, you make hay where the sun shines—you creatively figure out any way to make it work. Putting pipelines in has been a bit of a struggle from an environmental perspective. It’s really interesting to see the rail growth.
Midstream: Houston and Beaumont-Port Arthur are both major refining and petrochemical centers. How are they alike?
Ainsworth: They are both key midstream and refining locations, so we feel good about having terminals in both places. They both have large refining and petrochemical processing capability. They both have the full spectrum of import and export capabilities, including pipeline, rail, barge, ship and truck. This certainly allows for crude pricing advantages at the local level.
Midstream: You recently announced a major agreement with Enterprise Products Partners LP that will lead to an expansion of your Houston Ship Channel operation. How is that project going?
Ainsworth: It’s going very, very well. Actually, in anticipation of the agreement, we obtained a permit to build another dock. Right now, we’re in the process of excavating the land where the dock is going to be, and we’ll begin offsite fabrication work shortly. We're really excited about the additional volumes this will allow us to handle.
Midstream: How has the surge in domestic light sweet crude production impacted your business, as opposed to imports of light sweet?
Ainsworth: With the influx of light sweet, we’re seeing substantially higher volumes coming to our terminals via pipeline. And of course, we’re ambivalent to the method of delivery, as our rates are based on storing products. With the lower level of import volumes, our customers have been able to utilize our docks for greater export ability.
We were just talking about our Enterprise agreement, which will increase their exports from approximately 4 million bbl. to 7.5 million bbl. per month. With this agreement, we’ll be able to earn additional revenues based on a profit-sharing mechanism, which is driven by the number of ships beyond a defined target that we handle at our docks. Enterprise saw the opportunity—and saw the dock space—to allow for that increase throughout for LPG.
Midstream: Do you provide crude blending for refiners, and how is that business going?
Ainsworth: Yes, we do provide blending capability in all of our tanks, and it’s a function solely of customer demand. Certainly with the increase of the varying grades of crude coming in via pipeline and rail, we have the ability to blend to the customers’ requirements. As our storage volumes increase, we also see that the associated blending is going to increase correspondingly.
Midstream: There’s talk that the lingering glut of crude at Cushing is going to move south and become a “Gulf glut” now that there’s new pipeline capacity on stream. Do you think that will happen?
Ainsworth: [Laughs] Well, that's the milliondollar question! There are a lot of differences between Cushing and the Gulf Coast, and those factors play into each of the markets’ excess volumes. Based on future supply and demand curves, it’s hard to predict. Ultimately, time will see it out.
Midstream: The U.S. is rapidly becoming an exporter of refined products, particularly with gasoline and LPG. Has that trend changed your operations?
Ainsworth: We're seeing a huge uptick in LPG exports. As far as our customers go, with the Appelt expansion, we’re seeing a much larger interest from producers and traders, as opposed to our legacy customers that are typically refiners and petrochemical companies.
Midstream: How will the build-out of new petrochemical capacity along the Gulf Coast change the terminalling business?
Ainsworth: It’s difficult to predict. But in the past, we’ve continued to grow as the industry has evolved. The build-out will continue to be propelled by the need to expand transportation and storage in the Gulf Coast market.
Midstream: Does being part of an international organization give you a plus in handling imports and exports?
Ainsworth: It definitely does. It gives us greater visibility to understand trade and arbitrage opportunities in the global market. We have people that watch this worldwide. And we’re able to leverage off our peers in the other regions and really believe we gain from global operating and construction expertise. It’s a very strong benefit.
Midstream: What will be different in your business a year from now, and five years from now?
Ainsworth: For both one year from now and for five years from now, we see continual growth. We believe that we’re just going to be doing things in the same direction but maybe in significantly larger volumes. It’s all driven by the need for additional midstream infrastructure in this area. We certainly see continuing growth in the next year, and we believe it will continue right on out for the next five years.
I think a key thing is we don't move forward with capital projects unless we have a lion’s share of the contracts in place. This is a lower-risk business from that perspective. Our average contracts are about six years ... With this Appelt build-out, we're increasing that a bit.
And then our customers, after that time, typically renew with us. In fact, they have renewed their contracts 95% of the time over the past five years. We’re very proud of that, but clearly we believe that is because we are an easy company to work with. We’re all about operational excellence and doing whatever it takes to please our customers. So, I think they certainly are very appreciative of that.
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