Canada oil tanks may be hidden gem in JPMorgan's commodity sale

CALGARY, Alberta Fri Aug 23, 2013 11:35am EDT

CALGARY, Alberta Aug 23 (Reuters) - As Wall Street giant JPMorgan Chase & Co begins the search for buyers of its physical commodities business, a collection of long-term leases on more than a quarter of the oil storage tanks in Canada's primary trading hub may emerge as one of its most valuable but lesser-known assets.

Despite growing signs of a downturn in global rates for leasing oil storage capacity, the opportunity to take up over 6 million barrels in Hardisty, Alberta, may be a powerful attraction, say crude traders in Canada's oil capital Calgary.

For any company serious about staking a claim to the fast-expanding physical oil sands market, the tanks - owned by pipeline company Enbridge Inc, according to market sources - offer immediate and powerful entree.

For JPMorgan, the storage tanks may be one of its most lucrative offerings. Other assets include the Henry Bath & Sons metals warehouses, which are the subject of intensifying regulatory scrutiny and several class action lawsuits over alleged hoarding of aluminum, and a handful of power plant contracts, many of which have already been sold off.

"For JP it's a tangible asset they will market when they come to sell their commodity business," said one veteran Canadian crude trader in Calgary.

"Storage allows you some flexibility and in this market it's important to have that."

The six million barrels are more than half Enbridge's total capacity of around 11 million barrels at Hardisty, the tiny town in east-central Alberta that is Canada's equivalent to Cushing, the main U.S. crude storage hub in Oklahoma.

It is also about 25 percent of the estimated total capacity in Hardisty, starting point for both TransCanada Corp's proposed 890,000 barrel per day (bpd) Keystone XL and 1.1 million bpd Energy East pipelines. The nearby city of Edmonton, another Alberta trading hub, has around 11 million barrels of storage, according to industry estimates.

Most of JPMorgan's leases are re-let to other companies operating in Alberta's oil patch, according to market sources.

However, JPMorgan is also a player in the physical market. In December 2010, it agreed to provide crude oil to Northern Tier Energy's 82,000 bpd refinery in St. Paul, Minnesota. It now supplies more than 90 percent of the plant's crude, according to SEC filings. That includes about 10,000 bpd imported from Canada last year, EIA data show.

JPMorgan declined to comment.

OWNERSHIP TRANSFER

Storage capacity gives oil companies leeway to wait out the worst of the price discounts, and enables banks and trading houses more room to speculate and profit on rising prices.

Rising production and pipeline bottlenecks saw volatile Canadian crude prices plunge as low as $40 per barrel below the West Texas Intermediate benchmark earlier this year, eating into producers' profits.

JPMorgan built up its hefty storage position after acquiring Swiss bank UBS's Canadian commodities business in 2009, which included two million barrels of long-term storage, and RBS Sempra's global oil and metals business for $1.7 billion in July 2010.

If the bank sells its commodities business, JP Morgan would be required to notify Enbridge of the change and the contracts would likely be assigned to the new owners, Enbridge spokesman Graham White said.

"Assuming the new owner will have a similar or better credit rating as JPMorgan there would be no issue from our end with the transfer," he said.

Storage rates in Western Canada are a closely guarded secret, and operators declined to comment on contract terms. Market sources say rates can vary from 55 Canadian cents to C$1 per barrel per month, depending on the length of the lease.

Mid-stream companies including NuStar Energy LP have warned recently that lease storage rates are coming under pressure in some areas as contracts come up for renewal.

Potential buyers for the assets may come from other big banks or producers, with traditional big trading houses such as Trafigura or Glencore potentially less eager due to the limited flexibility at Hardisty, according to one senior Wall Street executive. The source did not want to be named because the executive was not authorized to speak to the media.

Unlike Cushing, which has dozens of potential routes in and out of the facility, Hardisty is largely a stopover on a one-way route from oil sands to U.S. refiners - at least until new rail terminals and a big eastern pipeline are built - limiting the arbitrage opportunities that traders typically thrive on.

Vitol Tank Terminal Int (VTTI), a venture of top oil trader Vitol, is likely to look at some of the U.S. oil terminal assets now being put up for sale by banks including JP Morgan and Morgan Stanley, although it faces stiff competition from a growing cadre of Master Limited Partnerships (MLPs) that can take advantage of tax benefits from infrastructure investments.

"On the one hand, we would be extremely interested to look at that and we have been investigating potential structures to do so," Rob Nijst, CEO of VTTI, said in an interview, when asked about the possibility of bidding for bank assets.

"But at the same time, being realistic, it is difficult for us to compete with existing MLP structures."