JACK DAGLEY/SUN MEDIA
“It’s not like milk, you can’t dump it into the fields,” said Elias Foscolos, a Calgary-based analyst with Industrial Alliance Securities Inc. “There’s people looking at doing anything possible… somebody’s probably calling up every single independent closed service station and saying, ‘Hey is there a storage tank there? We’ll pay you.”
The historical proportion of the current oil market imbalance and the fears about running out of oil storage came into sharp relief last week when the price of WTI crude for delivery in May fell to negative US$40 per barrel — meaning one party pays another party to take a barrel of oil.
It marked the first time the price of oil dropped below zero and came amid social distancing measures meant to contain the spread of the COVID-19 virus. Analysts estimate global demand for oil has dropped 30 per cent as people work from home and air travel all but stops. Now, even as oil producers dial back output, there is excess supply.
While companies have drastically cut back budgets for drilling new wells and other expansions, Halyk said that about a month ago, oil producers started inquiring about the cost of using his company’s tanks, which normally hold fracking fluids.
Since then, the calls have been increasing, he said, with companies attempting to set up temporary storage facilities.
“Nowadays, a tank is a tank,” said Halyk. “If you’ve got to pay someone to take your oil, it probably makes a lot of sense” to find a storage solution.
“We call them tank farms,” said Halyk, adding, “We can go day to day, month to month. We’re in competitive bidding situations.” He declined to say which companies have used his company’s services or at what cost.
Meanwhile, Reuters reported Tuesday that a few oil traders in the U.S. are spending as much as US$100,000 per day to hire fuel tankers as storage vessels, and that, globally, storage capacity was at 85 per cent last week.
We have built Canadian energy to work on a ‘just in time’ system — the way Apple uses its supply chainELIAS FOSCOLOS, ANALYST, INDUSTRIAL ALLIANCE SECURITIES
Exactly how close Canada is to reaching its storage capacity is a matter of debate, given that there is little data on the topic.
According to Foscolos’ back-of-the-envelope calculations, about four million to five million barrels of oil was being produced in Western Canada daily before COVID-19 affected output. There are about 55 million barrels of oil storage capacity — about half of which is being used at any given moment, he said.
“We’re just talking about three to four days of capacity,” said Foscolos. “It’s not like we have weeks or months like a strategic reserve. We have built Canadian energy to work on a ‘just in time’ system — the way Apple uses its supply chain.”
At other storage hubs, such as at Cushing, Okla., a 500,000-barrel tank may be available on a short term or monthly basis, but Canada’s storage is already under long-term contract with producers. Other storage tanks are used to manage the flow of oil through pipelines, according to Foscolos.
“It’s like your sewer system in a sense,” he said. “It’s not designed to store, it’s designed to manage flow.”
Calgary-based Gibson Energy Inc., which claims that one in four barrels of oil produced in Western Canada passes through its facilities, controls 10 million barrels of storage capacity. In an April 2019 presentation on its investor day, it estimated that 80 per cent of its EBITDA, a measure of cashflow, comes from long-term contracts.
While such measures may provide some cushion to absorb the drastic shock to oil demand, most analysts say reaching the storage limit is merely a prelude to shut ins.
Unless more production shuts down, the extracted oil will literally have nowhere else to be storedBJORNAR TONHAUGEN, HEAD OF OIL MARKETS , RYSTAD ENERGY
“Based on announced and anticipated production cuts through the second quarter, we expected Western Canadian crude oil inventories to build beyond available capacity,” analyst Randy Ollenberger at BMO Capital Markets wrote earlier this month.
Western Canadian Select, the heavy oil benchmark, was trading down 28 per cent to US$4.86 per barrel Tuesday, having briefly slipped below zero earlier in the month.
Rystad Energy’s Head of Oil Markets Bjornar Tonhaugen wrote in a note Tuesday that the “greatest energy crisis in history” may be coming if producers don’t act more quickly to cut production, estimating that global storage would run out sometime in May.
“Unless more production shuts down, the extracted oil will literally have nowhere else to be stored,” Tonhaugen wrote. “Which implies a forced shutdown across several locations. This is not something the industry has ever seen or ever been prepared for, maybe that is why we see a slow reaction. A major shock is brewing for producers.” SOURCE