Thirty years ago, John McDonald started the Houston Fuel Oil Terminal, which is today the largest handler of heavy refining byproducts called black oil. He sold his stake in the company over time but was an adviser until about four years ago.

His new venture, Battleground Oil Specialty Terminal Co., or Bostco, will be a 7.8-million-barrel black oil terminal just a few miles away from his former company on the Houston Ship Channel.

McDonald won’t yet reveal where financial backing is coming from for the 187-acre project, but he said some of his customers will have an equity stake in the facility. About 50 percent of the planned terminal’s capacity is under contract, with interest in the other half close behind.

“We feel good enough about this market to begin construction without 100 percent of the facility under contract,” McDonald said.

Black oil is what’s left over after a refinery has gotten all the gasoline, diesel and other fuels it can out of a barrel of crude.

It’s mainly used as bunker fuel oil, which runs the engines on large ships and some kinds of power plants, particularly overseas.Another form of black oil, known as carbon black, is used as a feedstock for plants that make rubber and printer toner.

It’s a relatively small market. Shippers handle about 14 million barrels of black oils per day, compared with about 86 million barrels per day for the total global crude market, according to Platts.

The Houston Fuel Oil Terminal, the nation’s largest, is a 310-acre collection of storage tanks and terminals southeast of the intersection of Interstate 10 and Beltway 8 on the Houston Ship Channel. That facility has connections to several local refineries and pipelines as well as 13.3 million barrels of storage capacity.

Congestion an issue

Despite its leading position, customers of the Houston Fuel Oil Terminal complain the facility is congested at times, leading to long loading delays for tankers and barges, said Jennifer Brumback, editor of U.S. Gulf Coast Residual Fuel Market coverage for Platts.

Shipping delays — known in the industry as demurrage – can be costly as vessels may lease for tens of thousands of dollars per day, said Mark Reichman, an energy analyst with Madison Williams.

“At the end of the day, customers are looking for the lowest storage costs per barrel, and part of that depends on how quickly you can load and unload vessels and turn those barrels over,” Riechman said.

McDonald said he was encouraged to start the project by the major oil producers and refiners in the region, which found there was a shortage of capacity for storing and blending black oil.

The location is several miles closer to the Gulf of Mexico along the Ship Channel than the Houston Fuel Oil Terminal, on land previously owned by power plant operator NRG Energy and directly adjacent to the company’s 765-megawatt natural gas-fired NR Bertron power plant.

Two docks

The Bostco facility will have two docks capable of handling tankers with 45-foot-deep draughts, 12 spots for barges, 12 rail car spots and pipeline connections for crude.

In the future the site could expand to include another 2.5 million barrels of storage and pipeline connections for other products, two more deep-water ship docks and eight additional barge spots.

“As a modern facility, we think we’ll be more efficient and have the advantage of cost savings,” McDonald said in an interview.

Officials with the Houston Fuel Oil Terminal’s owner, ArcLight Capital, couldn’t be reached for comment.

The Bostco project has received mixed reactions from the market, Brumback said.

Some question whether the costs for a new facility could be competitive with Houston Fuel Oil, while others wonder if there will be enough demand for such services as U.S. refiners become more sophisticated and produce less black oil.

Others have said there’s a shortage of storage and fuel blending capacity in the region, so a new facility should stay busy.

Construction could start in the second half of 2011 with the terminal operational the first half of 2013.