Is an Investment in a Bulk Storage Plant a Good Move?
by Marty Kirshner, Gray, Gray & Gray, LLP
First, determine if the benefits outweigh the risks
With the ever-changing dynamics of the energy market, heating oil and propane dealers are faced with new challenges and opportunities. One of the pivotal decisions that can significantly affect future operations is the investment in a bulk storage plant. Given fluctuating energy prices, heightened environmental consciousness, and increasing demand for reliable energy supply, adding or expanding a bulk storage plant merits careful consideration.
In our 2022 Energy Survey, 27% of heating oil dealers said they planned to develop a new bulk plant, while 34% of propane dealers had similar plans. What would lead nearly one-in-three dealers to make such an investment?
The decision to build a new bulk storage plant is complex and multifaceted, necessitating a thorough analysis of financial, strategic, and environmental factors. While the initial and operational costs can be significant, the potential benefits, including improved supply stability, increased competitiveness, and potential scalability, could render this investment worthwhile for many heating oil and propane dealers.
From a purely financial perspective, the initial investment in a bulk storage plant can be hefty. The cost involves purchasing a suitable piece of land, navigating the bureaucratic maze of obtaining necessary permits, and the actual expenditure on construction, which varies significantly based on the desired capacity of the storage facility. Further, there are ongoing costs, which include maintenance of the facility, implementing safety measures, insurance premiums, and hiring competent personnel for operation and management of the plant.
One must also consider the potential financial implications of any environmental incidents. A significant spill or leakage could result in significant cleanup costs and potential penalties. As such, while it’s crucial to account for the initial investment and running costs, potential risk-related expenses must also factor into the financial equation.
However, beyond the costs, private bulk storage plants also offer considerable financial benefits. With a storage facility, dealers can buy fuel in larger quantities during periods of lower prices, effectively reducing the average cost per unit over time. This purchasing strategy could lead to substantial savings if fuel prices increase.
Moreover, having a bulk storage plant ensures a consistent supply of fuel, particularly during periods of high demand when prices tend to rise. This creates an opportunity to hedge against market volatility, buying low and selling high, which could significantly boost profit margins.
One more financial consideration: We are in the middle of a “storage war” where having a bulk plant has proven to be an important asset. Companies with a bulk plant command a higher selling price than those without one.
From a strategic point of view, owning a bulk storage plant can offer a critical competitive advantage. Control over your storage infrastructure provides a buffer against supply disruptions, resulting in enhanced delivery reliability and improved customer satisfaction. As more customers prioritize stable and reliable services, this could increase customer retention and even attract new customers, translating into revenue growth.
Additionally, a bulk storage facility brings a level of flexibility and agility, allowing a dealer to respond swiftly to market conditions. This ability to react quickly can be a priceless asset in a volatile market, with unpredictable price fluctuations or sudden changes in supply and demand.
Having a storage plant also opens doors for business expansion. For dealers planning to scale their operations, the availability of storage capacity can facilitate the process. Furthermore, the potential to diversify energy offerings could also be a strategic move. In an era of growing energy alternatives, having the space to store and offer different energy products could prove to be a beneficial long-term strategy.
In a world grappling with climate change, the environmental impact of our energy sources is in the spotlight. While heating oil and propane are less polluting than certain other fossil fuels, they are nevertheless contributors to greenhouse gas emissions.
Investing in a bulk storage plant, therefore, brings along environmental considerations. Potential spill risks and emissions during storage are concerns that can’t be overlooked. Investments in storage facilities should include a comprehensive environmental management plan, encompassing prevention, mitigation, and remediation strategies. While this adds to the cost, it also reduces the risk of unforeseen environmental incidents.
However, environmentally savvy dealers can leverage their investment in a bulk storage plant as a stepping-stone towards greener practices. By incorporating state-of-the-art safety measures to minimize spill risks and investing in cleaner, alternative fuels (such as biofuel) to be stored and distributed, they can enhance their brand’s environmental standing. By turning an environmental challenge into a strategic advantage, dealers can attract a new segment of environmentally conscious consumers, potentially expanding their market reach.
As the energy landscape continues to evolve, the ability to adapt and make strategic investments will shape the future success of heating oil and propane marketers. While not suitable for every dealer, under the right circumstances and with the right approach, a private bulk storage plant can be a sound investment that brings substantial long-term benefits.
Marty Kirshner leads the Energy Practice Group at Gray, Gray & Gray, LLP, a business consulting and accounting firm that serves the energy industry. He can be reached at (781) 407-0300 or firstname.lastname@example.org.