It is doubtful Mark Twain was talking about the oil and gas industry when he said, “All generalizations are wrong, including this one.” But that statement is fitting of an ever-changing industry where nothing is ever as it seems.
Case in point: The industry is in the midst of a price downturn due to an oversupply of natural gas, NGL and crude oil; however, there are storage opportunities to be found. Many assume these opportunities are with gas storage in the Northeast. That assumption isn’t false, but it isn’t the only opportunity as there is an unbalanced storage market in the industry nerve center of Houston.
“Storage has to be looked at on a market-specific basis. Many of the markets in the U.S. have a reasonable amount of crude storage, and most analysts believe that when any market has 30 to 35 days of crude storage then it is balanced,” Chris Hilgert, CEO of Fairway Energy Partners LLC, told Midstream Business.
Infrastructure demand
Though the Gulf Coast has more midstream infrastructure than anywhere else in the U.S., it is also the destination for the majority of all domestic gas, NGL and crude production. This means that the region has a larger demand for more infrastructure than other parts of the country. One of these needs is in the form of underground storage.
Although the Cushing, Okla., crude market is currently close to Hilgert’s 30-day metric, the Houston market is underserved, according to him, as there will be about 4 million barrels per day (MMbbl/d) of pipeline capacity directed to this market by 2017. This would indicate a need for 100 MMbbl of crude storage, but the current market only has 55 MMbbl of working storage at this time.
“We think it’s a challenging environment in Houston to find additional real estate and to obtain air permits in a timely fashion to build out many more storage tanks,” Hilgert said. This recognition opened the door for the company to develop its first project, the Pierce Junction crude oil storage facility.
This project will convert three existing underground storage caverns at the Pierce Junction salt dome in south Houston for use to store crude oil. In addition, Fairway is also building the related pipelines and interconnections, brine ponds and pumping infrastructure for the storage facility.
Phase I of the Pierce Junction project will add more than 10 MMbbl of crude storage to the market when it is completed by the end of 2016, with expansion capability to double this capacity. This first phase also includes the construction of two bi-directional 24-inch pipelines that will run about 22 miles from the caverns to the Genoa Junction and Speed Junction pipeline hubs. The capacity on each of these lines will be about 360,000 bbl/d to 550,000 bbl/d depending on the type of crude that is being transported.
In addition, Pierce Junction will be connected to other pipeline systems to move volumes to the refining complexes along the Houston Ship Channel.
Prized assets
Underground storage, in particular, is desirable in Houston due to the benefits it has over above-ground units.
“Our caverns are a closed, pressurized system so we will have no air emissions from our system. We won’t be generating any product losses for our customers, whether venting to the air or building out any tank heels like you would find with conventional surface tanks,” Hilgert said.
These caverns are located in close proximity to major hubs that have vast amounts of production delivering to them, which requires storage capacity. The limited amount of existing salt dome liquids storage capacity in the region is what made this project most attractive to Fairway, especially considering that Pierce Junction is very close to these hubs.
“We have eight caverns representing almost 20 million bbl of capacity and can handle five different segregations of crude,” Hilgert said. He added that the Houston market is a fairly unique hub since it is a market area storage center with its own demand center led by refineries and limited export markets. By comparison, the Cushing hub is farther away from market demand centers and requires longer lead times to manage deliveries to customers.
Like precious gems, underground caverns are nearly perfect but they are also rare and located in fewer parts of the world. In the U.S., they are most plentiful along the Gulf Coast as well as parts of the Southwest, Midwest and Northeast. These underground storage caverns are created through a leaching process from bedded salt formations or the depletion of natural gas reservoirs.
Salt dome stability
Salt domes are considered to be the best storage caverns because of their stability, which allows for large volumes of crude and other petroleum products to be stored. These volumes are extracted by pumping brine into the cavern, which forces the crude or petroleum products out since the brine water is denser.
“We have to use saturated brine to be able to move crude in and out of the caverns and into our pipelines in a manner that does not continue to grow the caverns,” Hilgert said.
Volumes will be transported from the Permian Basin, Eagle Ford Shale and the Midcontinent, which will also include crude from Canada in its mix. The facility will also provide storage to offshore volumes from the Gulf of Mexico and imported volumes into Houston.
In this way, the Houston market brings to light the truism that each market is different despite the challenges facing crude at this time.
“We try not to look at storage utilization as a primary indicator of the need for storage. However, it’s an undeniable fact that the market is currently very full. We look at storage like an office building—it’s about what is leased, not necessarily how much of the space is being used,” Hilgert said. Given that every indication is that storage in the Houston market is fully leased, additional storage is welcomed in the market.
Solid formation
Fairway Energy Partners was founded in 2011 by Hilgert and Bill Rome, the company’s COO. Prior to this formation, Hilgert served in various technical, financial and commercial roles at Royal Dutch Shell and Enron Corp. in both the upstream and midstream.
Rome has a long history in midstream project construction and operations, including serving as vice president-construction services at Enron Gas Pipelines. While at Enron, Rome helped to develop Phase II of the Florida Gas Transmission system, Transwestern Pipeline expansion, Florida Sarasota Connector and the Northern Natural Gas, East Leg project. This experience helped the company in tying the various aspects of this project together, including pipeline development.
“Storage has always been an interesting asset and it has many different characteristics that we like,” Hilgert said in explaining the reason for focusing on this sector of the market when forming Fairway. He added that Fairway’s executives view storage as the primary physical way to provide liquidity for various commodities. This means that when there isn’t enough liquidity in the market, there needs to be more storage.
The initial financial backer of Fairway was Haddington Ventures LLC, a private equity investor in midstream projects and companies. The fund typically targets investments of $20 million to $70 million with enterprise values of up to $250 million. Haddington has a significant amount of experience with storage projects.
“Haddington was the ideal private equity sponsor for what we were doing as they have a deep background in the underground storage business. As the principals of TPC Corp., they helped develop some of the first independent gas storage projects in the U.S. They have also continued to invest in various underground storage projects, including the Magnum NGL storage project in Millard County, Utah, which was recently sold to NGL Energy Partners in February” Hilgert said.
Haddington served as the sole investor through the development work of the project, supporting Fairway’s efforts to secure positions in the Pierce Junction caverns, pipeline rights of way and the engineering work, and they have continued to be an investor while the project moves into construction.

Additional financial backing
As the Pierce Junction storage facility has moved along, it has added investors through FBR Capital Markets & Co., which served as the project’s sole placement agent and initial purchaser for Phase I construction of the hub. “We have been making the transition to a broader investor base that is causing us to perform more like a public company,” Hilgert said.
“Frequently, private equity-backed companies go out and do a lot of the early stage development work and put the opportunity together. At the end of the day, private equity companies are better suited toward these projects than an MLP,” he said.
It may have made sense to use private backing to develop Pierce Junction, but Hilgert said that the company could explore public markets in the future.
“Going public is an option, but we’re very focused on getting this project constructed today. We want to get the highest EBITDA and return for our shareholders. If it makes sense to go public, we’ll go there; if it makes sense to look down other paths, we’ll do that,” he said.
How does it grow from here?
Fairway’s focus may be on getting Pierce Junction completed and online as scheduled, but it has also left room for growth within the storage facility should the market require it. Additionally, the company believes that there is room for further underground storage projects for liquids and eventually gas along the Gulf Coast.
“We haven’t seen any other projects that made sense to us yet, but we’re still a relatively small company, staff-wise, and we need to focus our resources on the opportunity in front of us. Once Pierce Junction is built out and contracted, we will look toward more opportunities, including acquisitions,” Hilgert said.
There is also the possibility of the hydrocarbon export market continuing to open up out of Houston, which could prove to be a growth sector for Fairway. As the market has shifted from a period of continued backwardation to contango, it has seen crude prices become more uncertain and volatile and the desire for exports grow.
“We aren’t directly connected to water today, but there are various opportunities in Houston to connect the crude infrastructure system to water. The export opportunity has been opening on a limited basis and we won’t predict how it will play out, but momentum seems to favor its expansion,” he said. This would mean that more crude will flow into Houston and the Gulf Coast, which will drive the need for additional storage and open up more opportunities for Fairway and other storage providers.
Impact of downturn
Storage projects may not be directly tied to commodity prices, but like any aspect of the industry, they are impacted by price fluctuations indirectly.
“The downturn has put pressure on prices that companies are willing to pay for storage capacity. However, that has been somewhat offset with the opening up of contango that has become quite large at times as well as advantageous for companies looking to store crude today and sell tomorrow,” Hilgert said.
The amount of crude coming into Houston relative to the amount of storage available is creating a tighter market for crude and a healthier market for storage.
“We are not ignorant of the drop in crude prices and its impact on our customers, and we are working very hard to accommodate them. Fortunately we have a very competitive cost profile and are able to build this out for a healthy amount, less than if we were to build the same amount of capacity in surface tanks,” he said.
Hilgert declined to comment on how much capacity was contracted for at Pierce Junction, but stated that Fairway’s interactions with customers have been favorable in the current market.
“Fairway is working very closely with customers in order to best serve their needs. Each customer is a little different based on what their volumes are and the types of crude they’re moving. Producers want to get the highest price for their volumes, refiners want to get the lowest cost of supply and traders and marketers want to have an asset that can position them to serve either end, or both ends, of the market,” he said.

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