The three laws of real estate are ‘location, location and location’. This is because land is a commodity whose location cannot be changed once you take title. For commodities which CAN be moved, the magical word is LOGISTICS. And, sometimes LEGISLATION.
Page B1 of today’s Wall Street Journal (WSJ) features a story about Enterprise Products Partners LP, a Houston-based company little known outside of the energy industry. Inside the industry, they are a company founded by a maverick entrepreneur (the late Dan Duncan) which has grown to be valued at more than $60 billion in the stock market. They are known for re-thinking the rules, and last year found a way to legally export light crude oil without processing it through a refinery as required by a law “imposed in the 1970’s in response to the Arab oil embargo”, according to the WSJ. Their innovation involved “convincing the U.S. Commerce Department that heating up and distilling ultralight oil in the field to remove volatile gases….was enough to qualify it as legally exportable refined fuel.”
Of course, major upstream major players have followed this lead, collecting export premiums of more than $5 per barrel on similarly processed ultra-light crude. But Enterprise is a leading player in the mid-stream oil market, which involves storage and transportation rather than exploration and production. (Funny how disruptive business innovations come from the outside, isn’t it?) So the company acquired Oiltanking Partners LP last fall for $5.9 billion to increase their logistics capabilities on the U.S. Gulf Coast, where they now control “more than 10% of the oil storage along the waterfronts of Texas and Louisiana, according to data from Genscape Inc., an energy tracking firm”, per the WSJ.
Enterprise has started charging its oil storage customers a per-barrel loading fee from the terminals it owns, including those acquired from Oiltanking. The company states it “is honoring all existing contracts but some of those agreements are for oil storage, not dock services. Customers who want to export can amend contracts and pay market-based rates”. This seems reasonable, does it not? Enterprise took risk and invested capital to increase its storage and distribution capabilities in response to a market opportunity (available to anyone) that fit their business strategy.
By the math of Enterprise’s customers, this “raises the costs of their exports compared with Enterprise’s own shipments.” According to the WSJ, “companies including BP PLC have complained to the U.S. Federal Trade Commission, which is investigating”. It’s anyone’s guess how this will play out, and competing with your customers does make for some awkward dynamics, but when their next move is to complain to regulators, you’ve probably found a competitive advantage.
Energy distribution requires dedicated, specialized equipment involving substantial capital investment (risk). Its importance also plays into economic competitiveness and natural security concerns, which means that politics will be close nearby. So it seems like more than a coincidence that while Enterprise’s distribution logistics are being discussed on page B1, yesterday’s veto of the Keystone XL pipeline authorization by President Obama is being analyzed elsewhere in the very same WSJ edition.
Putting the politics aside (and there have been some high profile, explosive train wrecks which make the risks related to pipeline transport seem relative, at best), commodity market forces are greater than the stroke of a regulatory ruling or legislative pen. As a result, while “political resistance to the Keystone XL pipeline has emboldened resistance to at least 10 other pipeline projects across North America” and “America’s 94-year old Jones Act..makes it prohibitively expensive” to move oil by ship (Holman Jenkins, page A11), North America has experienced a “crude-by-rail” boom. About 1 million barrels of crude oil per day move by rail in North America.
Ironically, while completion of the Keystone XL pipeline is being blocked, “Oregon..has already approved $6.9 million in public subsidies to expand rail capacity to receive Bakken crude from North Dakota and redistribute it on Columbia River barges”. The impact of crude-by-rail has extended into Texas as well as Philadelphia, where “ten oil trains a day already trundle through downtown to the city’s reborn refinery industry”. In commodities (especially but not limited to energy) logistics is more than operations, it’s a strategic capability.
My 2014 research note “Key Considerations for Managing Commodities in Your Supply Chain” can be found on www.gartner.com (available to clients).