W4V26 - Oil logistics1 - Handout.pdf

Oil & Gas From exploration to distribution Week 4 – V26 – Oil logistics: storage depots de pots Ludivine Pidol

W4V26 - Oil logistics1 – p. 1 © IFPEN - IFP School 2015 / © TOTAL SA 2015 / © IFP Training 2015

Introduction In this section, we will take a look at the logistics of petroleum products with a special focus on oil depots. In a second video, we will explore the different means of oil transport. And in a third video we will deal with the specificities of gas logistics. So, for this video, first, we will introduce how oil distribution is organized and after, we will focus on oil depots. We will see what they are used for; and the several types of oil depots will be described.

How is oil distribution organized? Every day, we all use petroleum products to meet our domestic needs - for example to drive a car or to heat a building. Likewise, the industry, agriculture and transport sectors and public authorities and services have substantial oil requirements. So, oil companies have to deliver the right product at the right time, to the right location and at the best price, and also under optimum safety and security conditions, to protect the environment. These are the aims of oil logistics, which coordinates refineries, import depots, storage depots and a distribution network to deliver petroleum products to the consumer. Now, take the example of France in order to have some figures in mind. There are 8 refineries and twenty import depots. About 30% of the petroleum products go directly to the consumer. Consequently, about 70% are stored in a depot . There are about 200 depots in France and they are located 300 km on average from • • •

• •

the refineries or the place of import. Next, there are about 12 000 service stations, about 80km from a depot.

In this video we will focus on oil depots. What are they used for? and what do they look like?

W4V26 - Oil logistics1 – p. 2 © IFPEN - IFP School 2015 / © TOTAL SA 2015 / © IFP Training 2015

What are the roles of storage depots? Hydrocarbon storage allows us to adjust the supply to fluctuating consumer demand in real time. These intermediate storage depots help meet local demand quickly. Companies don't have to carry out multiple journeys between refineries and the locations where the products are to be delivered. The storage of products allows us to transport them on a large-scale, leading to lower transport costs. Storage depots are also used to blend some additives, dyes or biofuels. With the increasing use of biofuels, storage depots are also used for blending biofuels with petroleum products.

Oil storage depots are not only used to manage the distribution of petroleum products in a given region. Industrialized countries also accumulate oil and gas reserves for strategic reasons.  This provides them with energy resources in the event of political upheaval threatening their supply. Strategic storage can be used if there is a break in supply- either because of a delay in delivering crude to a refinery or a refinery shutdown that prevents the delivery of finished products over a longer period. For example, all EU countries have an obligation to store enough additional oil to meet national demand for three months - these are known as strategic stocks.

Depending on the country, strategic stocks could consist of crude oil (as in Germany), petroleum products or a mix of crude oil and petroleum products (as in France). These strategic stocks can be managed by state-run companies, private companies or both, working in tandem. For example, the Strategic Petroleum Reserve is an emergency fuel storage of oil maintained by the United States Department of Energy on the Gulf of Mexico. It is the largest emergency supply in the world: this equates to about one month of oil at daily US consumption levels.

The storage depots can also be used for cost optimization. W4V26 - Oil logistics1 – p. 3 © IFPEN - IFP School 2015 / © TOTAL SA 2015 / © IFP Training 2015

During the first week, the concepts of “spot transaction” and “forward transaction” were introduced. When the futures price is below the expected future spot price, this is called backwardation. When the market is in backwardation, the stocks tend to decrease.

Contango is when the futures price is above the expected future spot price. If they expect a contango market, traders could buy crude oil and oil products at current rates, and store them until delivery.

They expect the forward price to be higher than the spot price plus the cost of the storage.

For example, in two thousand and nine, a lot of large oil tankers were being used more for temporary storage of oil, rather than for transportation. Indeed, the cost of the storage was about 1$ per barrel and per month. And in the same month, the price of the barrel increased by 4 to 5 $. Several millions of barrels were stored in tankers.

W4V26 - Oil logistics1 – p. 4 © IFPEN - IFP School 2015 / © TOTAL SA 2015 / © IFP Training 2015

What do storage depots look like? We can define four categories of oil depots: 1. First there are depots in the refineries 2. There are also depots for importation. They are located along the coasts; they can accommodate large capacity vessels and they are well connected to large transport facilities. 3. Next, we have storage depots, which are built close to the consumers in order to ensure a continuous supply. Their capacities depend on the catchment area. We have primary storage depots, with large capacities. They concern the wholesale market; 4. [and we have secondary storage depots, for the retail market, these depots are smaller and generally run by independent dealers. The classification of oil depots also depends on their capacities and their facilities. For example, in these pictures below there are aerial depots for crude oil and for petroleum products. Each oil storage depot has 10 to 30 steel tanks. An oil storage depot can take ten thousand to three hundred thousand cubic meters of various petroleum products such as fuel, gasoline, diesel, and kerosene.

Another type of depot is underground storage. The main types of underground natural storage sites are: depleted natural gas or oil fields, aquifers, mine caverns, and salt caverns.

Take the example of salt caverns: their capacity ranges are very large, a few dozen million barrels. This type of storage is cheaper than storing oil below the surface. The caverns were created by drilling down and then dissolving the salt with water.

W4V26 - Oil logistics1 – p. 5 © IFPEN - IFP School 2015 / © TOTAL SA 2015 / © IFP Training 2015

The Strategic Petroleum Reserve in the United States contains a number of artificial caverns created in salt domes below the surface.

In a service station, the fuels are typically stored underground to save space at the facility, but some facilities have aboveground tanks. –- Whatever the type of oil depot, a number of safety and security standards must be met.

Indeed, petroleum products are dangerous and carry a risk of fire or explosion. Ensuring the safety and security of storage depots and of the distribution chain is therefore crucial. In Europe, refineries and oil storage depots are subject to very strict regulations, defined in the Seveso II directive.

W4V26 - Oil logistics1 – p. 6 © IFPEN - IFP School 2015 / © TOTAL SA 2015 / © IFP Training 2015

Moreover, to avoid any pollution caused by leaks, the tanks are regularly inspected and the extent of corrosion is examined. Each storage depot has a number of facilities, like retention ponds around the reservoirs to recover any leaking liquid, or a waste collection skip.

W4V26 - Oil logistics1 – p. 7 © IFPEN - IFP School 2015 / © TOTAL SA 2015 / © IFP Training 2015