Even as they are breaking loose from once vertically integrated oil companies, midstream companies are consolidating horizontally, expanding their geographic reach and enhancing their assets' internal "connectivity." Both NuStar and Buckeye have acquired major Caribbean tank farms. The latter bought Bahamas Oil Refining Company International (BORCO), an over 21 million-barrel crude, fuel oil, and light product terminal in 2011. Buckeye plans to boost BORCO's capacity by about a third, with room for further capacity expansion if needed. The former bought a 13 million barrel terminal in St. Eustatius, Netherlands (in the former Netherlands Antilles), in 2005, which it plans to expand by almost 12 million barrels. NuStar's other international assets include tank farms in Canada, Mexico, the United Kingdom and Turkey.
Buckeye last week said it would also buy a four million-barrel marine terminal from Chevron at Perth Amboy, NJ in the New York Harbor area, which would effectively let it connect its nearby Linden, NJ, tank farm with BORCO and, after completion of a new pipeline link between Perth Amboy and Linden, move waterborne light products, such as gasoline or diesel, onto its existing pipeline network running from Linden to Pennsylvania and upstate New York, which it also plans to expand.
This mix of market changes and corporate restructuring is redefining the role of midstream services in the global supply architecture. Each midstream MLP's strategy is different, but many seem to follow a multi-pronged business model. This business model comprises a throughput-based transportation segment (the collection of pipeline fees based on transported volumes), a capacity-based storage or "facility" segment (where customers pay for storage capacity whether or not they fully utilize it), and sometimes a third business line, which is somewhat akin to arbitrage and used to hedge business risks. The contribution to earnings from this third business line varies substantially by company and reporting period.
Whereas midstream companies had often been limited to a supporting role in the oil industry, large emerging midstream independents with a global footprint could increasingly pursue strategies of their own and may become more active, direct participants in the physical and paper markets. It is too early to say how the restructuring of the logistics segment of the oil industry from integrated cost centers to independent profit centers will affect product markets. But it is probably safe to expect significant changes in supply dynamics and even, potentially, product pricing from the fast growth of this newly independent sector.