(Bloomberg) -- What started as a strategic oil storage for South Africa during apartheid is now gearing up to attract the biggest traders as it turns into a global center for crude.
A venture building a dozen new interconnected tanks on Africa’s southern tip will add to neighboring government-owned capacity, making it one of the world’s biggest hubs. They are on some of the busiest energy transit routes, giving traders the option to store and blend various crude grades to help maximize profits at a time earnings have taken a beating.
“The location is key, and then the flexibility is the other main selling point,” said Johnny Stewart, principal analyst at consultant Wood Mackenzie Ltd. The tanks are able to accommodate a wider market with the blending capability and configuration, he said.
The partially underground tanks tucked away in Saldanha Bay are a monument to oil trading. A big advantage is their strategic position between the Atlantic and Indian Oceans, giving merchants relatively easy access to markets in Asia, Europe and America.
Each new tank has concrete walls and about 200 steel-reinforced concrete columns support a roof that large trucks can drive on. Unlike metal tanks, concrete is lower maintenance and helps keep temperatures constant, meaning fewer barrels will be lost to evaporation, said Arthur Martin, the project’s commercial manager.
They’re also built to allow nearly all the stored oil to be drained out, he said. “Even if you leave 10,000 barrels—times $60—it’s money that’s gone,” he said at the project site.
Over 100 meters (328 feet) across and 18 meters deep, each tank can take in 1.1 million barrels of oil. Heavier crude grades from places like Colombia and Venezuela can be blended using specially designed nozzles in the storage.
Oiltanking MOGS Saldanha, the joint venture of Hamburg-based Oiltanking GmbH and local company MOGS Oil & Gas Services, has already leased out at least half of the new tanks. Over the next few days, the company will look to drum up more interest during the International Petroleum Week in London, one of the oil industry’s biggest gatherings of traders and producers.
Their success is partly dependent on oil-market structures that sometimes make it appealing to store crude and sell at a later date. It also depends on how much OTMS charges for leasing the tanks in comparison with the government-owned storage nearby.
Saldanha Bay’s existing tanks drew a lot of interest from big traders earlier this decade when the oil market structure was in contango, with future prices higher than near-term contracts. Total SA, Vitol Group and Mercuria Energy Group Ltd. used the gargantuan South African tanks then to store crude with the aim of selling it later at higher prices. The market has since reversed to a structure called backwardation, which doesn’t encourage traders to store crude oil.
Still, trading houses look for price volatility for profit, and Stephan Burger, vice-president of MOGS, said crude’s recent swings have raised interest in the new tanks. However, the business model “doesn’t rely on volatility of the crude-oil price,” he said.
The project has got the attention of some big names. Saudi Arabian Energy Minister Khalid Al-Falih spoke about Saldanha last month when he signed cooperation agreements with South Africa on oil and gas.
“There has been interest shown from the Middle East,” Burger said.
OTMS plans to complete four of the tanks by May, and the next five by November, according to a presentation this month. Demand will determine whether the last three of the 12 get built, Burger said. If they do, the project will ultimately have the capacity to store 13.2 million barrels, equivalent to about three weeks of South Africa’s oil demand.
The latest project is inspired by the design of six neighboring state-owned tanks, which were completed in the 1980s during the apartheid era to ensure oil supplies for the politically isolated country. The new tanks have upgraded safety measures, cutting-edge blending capability and are more flexible, the manager Martin said.
If all the OTMS tanks get built, it will take total storage capacity at Saldanha Bay to more than 58 million barrels. Cushing, the U.S. oil storage hub in Oklahoma that serves as the pricing point for the West Texas Intermediate benchmark, can hold about 75 million barrels.
On a warm, sunny day this month, workers at the construction site wore knitted caps and covered their faces as the wind blasted them with sand. It was cool inside one of the tanks, where the only way in is by crawling through an opening in the completed roof and then scrambling down a staircase of scaffolding.
OTMS hopes to eventually expand the jetty, allowing more ships to come in.
Martin is confident there’ll be enough demand for all the 12 new tanks to be built. The final three could be finished early next year, he said.
“We’re quite bullish about that,” Martin said. “Once you’ve got the first guys in the tank,” the rest will follow, he said.
©2019 Bloomberg L.P.
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