Unveiling its acquisition of First Reserve Corporation’s 80 per cent majority shareholding in the Grand Bahama-based oil storage and transhipment facility, Buckeye Partners described the project to add a further 7.5 million barrels of storage capacity – taking total capacity to 29.1 million barrels – as “a go”.

Much planning for the $400 million expansion has been done under First Reserve’s ownership, and Forrest E. Wylie, chairman and chief executive of New York Stock Exchange (NYSE) listed Buckeye Partners, described the acquisition of BORCO – which is expected to generate $138 million in operating income in 2011 – as a “perfect fit” for his company that would enable it to break into “the international supply chain” for break bulk/build bulk petroleum products.

BORCO currently has 21.6 million barrels of storage capacity, this having been steadily expanded under First Reserve’s ownership from 15.4 million and 19.1 million barrels at year-end 2008 and 2009 respectively, and Mr Wylie yesterday served notice of Buckeye’s intention to use the company’s undeveloped land to more than “double” the current capacity to 45 million barrels worth of storage.

Apart from the initial 7.5 million barrels expansion, Buckeye is seeking to gain a further 16 million barrels of capacity. This will come from a combination of an additional net 3 million barrels of capacity from “optimising configuration” of existing tanks, plus the addition of 13 million barrels’ worth of storage on the undeveloped land.

On the immediate $400 million expansion, Mr Wylie said there were already draft agreements in place with potential storage clients to support it, plus preliminary designs and a ‘turnkey’ construction contract solution.

“We see this as a near-term opportunity we’d like to hit the ground on once we close,” a Buckeye Partners executive told a conference call with Wall Street analysts yesterday. “We see this expansion as a go.”

Construction costs were unlikely to be “materially higher” than if BORCO was located in the US, although some specialist labour would have to be imported.

“This really puts Buckeye into the international supply chain in build-bulk, break bulk,” Mr Wylie said of the purchase, “where we see growing demand for refined products. We’re extremely excited about BORCO, and in the next few quarters you’ll hopefully see the benefits of the acquisition.”

Buckeye Partners is projecting that BORCO will add $65.969 million to its annual distributable cash flow.

Also celebrating yesterday’s deal were the hard-pressed Ministry of Finance and the Public Treasury, given the tax windfall the Buckeye Partners’ purchase is likely to create. Given that it is a $1.36 billion deal, the 10 per cent Stamp Duty on all BORCO real estate assets, plus 4 per cent on all other assets being sold, are likely to mean a substantial payment is made to the Government’s coffers.

Zhivargo Laing, minister of state for finance, declined to specify how much the Government might earn from the BORCO deal, but said some $40 million was received when First Reserve acquired the facility from PDVSA three years’ ago.

“The boost from the last sale was $40 million,” Mr Laing told Tribune Business.

“We’re always appreciative to have more rather than less revenue. It all helps, absolutely.”

Given that the latest BORCO deal is much bigger than both the First Reserve purchase (completed for $900 million) and the transaction that saw Statoil acquire South Riding Point, the latter deal generating $64 million in revenues for the Government, it is likely that the Ingraham administration could receive anywhere between $64 million and $100 million.

Together with the $210 million and Stamp Duty received from the BTC sale, the BORCO transaction could be enough to plug the Bahamas’ fiscal deficit for 2010-2011, and slow the growth in the national debt-to-GDP ratio.

Meanwhile, Mr Wylie yesterday said the BORCO purchase was expected to be “10 per cent accretive to cash flow” immediately, with this increasing to the “mid-teens” if the $400 million expansion project was executed successfully.

Explaining BORCO’s attraction for Buckeye Partners, Mr Wylie said that it had a “world class customer base” and a major backlog (surplus) in customer demand, something that supported the expansion and generation of increased cash flows for the company. Leases were mostly long-term for three to five years.

Added to this was BORCO’s unique location amid the Caribbean and Atlantic shipping lanes, plus is proximity to the US and non-Jones Act status. As a result, it was “strategically positioned to act as a hub in facilitating international logistics”, with Buckeye Partners also eyeing opportunities for build-bulk, break-bulk and blending operations. Mr Wylie said demand for BORCO’s services was being driven by rising fuel demand in China and the Far East, and the US’s continuing need for refined petroleum products. For example, BORCO could serve as a build-bulk facility, collecting crude oil shipments from Latin America that were ultimately headed to China, while also breaking bulk on Middle East oil shipments before they headed into the US.

BORCO’s storage capacity exceeded all its regional competitors, while its 91 feet of draft space enabled it to receive the largest class of oil tankers, Buckeye Partners said.

And being located just 80 miles from Florida and 920 miles from New York, no one else enjoyed its US proximity.

Mr Wylie, in a conference call with New York analysts to discuss the BORCO purchase, said First Reserve and current operator, Vopak, had “substantially increased the dockage and berthing capacity”, including the offshore jetties.

Two inland docks in Freeport had also been added under their ownership, taking the total number of berths from four to eight. Referring to the upcoming $400 million expansion, Mr Wylie added: “We don’t see a need with this expansion or any expansion to increase any berths or dockage. First Reserve/Vopak have done a really good job in attacking that and getting on top of that.”

Pointing out that a further plus for BORCO was that it owned its own jetties and berths, rather than leasing them from a port authority, Mr Wylie said the Grand Bahama-based facility’s expansion possibilities included butane blending, ethanol, build and break bulk, and increased bunkering opportunities.

BORCO currently offered largely local bunkering services, where ships did not venture out into the major sea highways.

Yet Mr Wylie said BORCO sat “smack dab in one of the biggest shipping lanes in the Atlantic”, giving it the chance to “reach out and get more bunkering business”.

The purchase price could ultimately rise to $1.7 billion if Vopak decides to sell its 20 per cent BORCO stake to Buckeye. It has 20 days in which to decide whether to do this, and if it stays in, Mr Wylie said his firm would be “more than happy to work” with the terminal operator.

Explaining why First Reserve had decided to sell, Mr Wylie indicated it had done what all private equity firms do – turn a company around, then sell it for profit. First Reserve had transformed BORCO from a proprietary facility to a third-party storage facility, and Mr Wylie said: “They’ve been very successful at doing it. It’s time for them to cash out.”