Commodity Sale By JP Morgan
CALGARY. Wall Street’s giant, JPMorgan Chase and Company is divesting its interest in the physical commodities market and is currently on the lookout for potential buyers. If this develops, Canada’s oil storage tanks, which represent 25 percent of the company’s long term leases, may unexpectedly become its most valuable trump card on the bargaining table.
“Despite decreasing rental rates for leasing oil storage facilities globally, the vast opportunity to take in six million barrels of oil in Hardisty, a Flagstaff county in Alberta, Canada, serves as a powerful sweetener in the negotiations,” says the crude oil traders from Calgary, Canada’s oil capital. Any company who is serious in entering the physical oil sands market, may find the availability of the storage tanks owned by Enbridge Inc., as a way for an easy entry into the occupation.
JPMorgan on its own, knows that the storage tanks represent one of its most profitable offerings. Other assets to be sold include, the metal warehouses – Henry Bath and Sons. However, the latter is subjected to close legal scrutiny due to a number of class action suits, for the alleged illegal hoarding of aluminium . The deal also includes several power plant contracts, many of which have been sold to third parties. Said one Canadian crude oil trader in Calgary, “JPMorgan will market its tangible assets when they sell their commodity holdings. In this business, storage is something that is important to have.”
The six million barrels crude oil production from Hardisty is more than 50 percent of Enbridge’s storage capacity of 11 million barrels. Hardisty is a small town in Alberta that is the Canadian equivalent to Cushing, the crude oil capital in Oklahoma, U.S.A. It is also about 25 percent of estimated storage capacity – for crude oil production of 890,000 barrels per day (bpd) fromTransCanada Corporation and Keystone XL ; and 1.1 million bpd from the Energy East pipelines. The adjoining city of Edmonton, another trading hub in the region, has approximately 11 million barrels of storage capacity, per industry estimates. Most of JPMorgan’s lease agreements enabled the company to re-let other storage facilities to companies operating within Alberta’s oil patch, according to reliable sources.
Still, JPMorgan admittedly also plays in the physical markets. It provided 82,000 bpd to Northern Tier Energy Refinery in St. Paul, Minnesota. At present, it supplies around 90 percent of the plant’s crude oil requirement according to the SEC. The quantity supplied included 10,000 bpd of crude oil importation from Canada last year as shown in the EIA data report. JP Morgan, however, refused to comment.
Ownership and Transfer
The presence of storage facilities give oil companies the needed elbow room to wait it out in case there is a price war. Waiting would enable banks and trading houses to speculate and earn when the rise in prices occurs. Rising production costs and operational bottlenecks saw the volatile price movement of Canadian crude to hit a low of US$40 per barrel this year, which was way below West Texas Intermediate price benchmark for the period. This resulted in cuts in the producer’s profits when it happened.
JPMorgan built up its extensive storage business after acquiring Swiss Bank UBS’s Canadian commodity business line in 2009. The sale included two million barrels of long-term storage capacity, together with RBS Sempra’s global oil and metal product line for $1.7 billion way back in July 2010. “If JPMorgan sells its commodities business line, it has to notify Enbridge on the change of arrangement, so the lease can be assigned to the new owners. If the new owners have the same credit rating as JPMorgan, there would be no issue about the transfer from our end.” said Enbridge spokesman, Graham White.
The storage rates in Western Canada are not known to the public. Operators are not likely to talk about contracts either. Market sources are of the opinion that rates can range from 55 cents to C$1 per barrel per month, depending on the duration of the lease. Several mid-stream companies like NuStar Energy LP have warned that lease storage rates can be volatile in some areas since some contracts have been up for renewal.
“Potential buyers come from large banks or producers, with trading houses like Trafigura or Glencore who are not that keen on entering the market due to inherent difficulties at Hardisty,” according to a senior Wall Street analyst, who did not want to be identified since he was not authorized to speak to the media. Hardisty is unlike Cushing with many inward and outward routes from the facility. It is essentially a one-way stopover route from oil sands to U.S. refineries – until rail terminals and an eastern line is constructed . This predicament limits the arbitrage opportunities that traders can play around with.
Some companies like the Vitol Tank Terminal Intenational (VTTI), a venture of top oil trader Vitol, is looking at some U.S. oil terminal companies that are up for sale by banks like JPMorgan and Morgan Stanley. However, it faces strong competition from a profusion of Master Limited Partnerships (MLPs) that can take advantage of tax breaks from infrastructure developments. The Chief Executive Officer of VTTI, Rob Nijst, responded when queried about banks bidding for assets, “We would be interested to look at that direction and investigate potential structures that are financially viable. But being realistic, it would be difficult for us to compete head-on with the MLPs.” This is a interesting Commodity Sale.