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Abu Dhabi, UAEMonday 25 June 2018

How will Hurricane Harvey affect US energy sector?

Impact will reveal just how much the sector has changed since 2005' Katrina

Cars sit abandoned at a flooded petrol station after Hurricane Harvey made landfall on the Texas Gulf coast. Nick Oxford/Reuters
Cars sit abandoned at a flooded petrol station after Hurricane Harvey made landfall on the Texas Gulf coast. Nick Oxford/Reuters

In 2005, hurricanes Katrina and Rita smashed through the US Gulf Coast.

In addition to the destruction of lives and property, they severely damaged American oil infrastructure. After a long period of relative quiet for the petroleum industry, another hurricane, Harvey, has hit Texas. Its impact will reveal just how much the US energy business has changed in the intervening decade – with new strengths and new vulnerabilities.

Harvey reached the coast as a category 4 storm, the first of that strength to hit the state since 1961. Its winds have slowed, but it is now dumping a year’s worth of rain on Houston and other coastal cities. Forecasters expect an unusually active hurricane season this year, although the number that make landfall, and whether they hit key oil areas, is unpredictable.

After the chaotic response to Katrina blew away the Bush administration’s reputation, Harvey is a test for Donald Trump’s government. Alongside immediate disaster management is the current US official denial of climate change. No single hurricane is “caused” by a warming world, but researchers do believe Harvey is more intense, bigger, longer-lasting and rainier than it would be otherwise. The Texas coast has been naturally subsiding over the past century, while global sea-levels have risen due to warming, expanding waters and melting ice.

Apart from physical damage to facilities, hurricanes affect the energy industry due to flooding, power cuts, evacuation of workers and disruptions to the loading or unloading of tankers. Crude oil prices have actually fallen on the news, while petrol prices are up, with traders expecting refineries to be affected more than oilfields.

At least 10 per cent of the Gulf’s oil output has already been closed in as a precautionary measure but, with Harvey missing most of the offshore installations, this is likely to return quickly. Katrina and Rita, and the earlier Hurricane Andrew in 1992, destroyed offshore oil platforms, while 2008’s Ike caused shortages of petrol and smashed a tanker into a drilling rig, and Isaac in 2012 flooded a refinery. More modern platforms have been hardened against storms.

Much has changed over the past decade. The Gulf of Mexico’s oil output has grown but has fallen as a share of total US production, while gas production has continued falling steadily. The offshore area is much less important than it was during Katrina.

Meanwhile, shale oil has boomed, bringing new production areas into service in onshore Texas, and transforming the Gulf coast from a locus of imports to a nexus for both imports and exports. While exports were negligible a decade ago, now they meet 6 per cent of global demand outside the US. The region has grown into an even more important area of refining than back in 2005, representing 30 per cent of US capacity.

Harvey’s track is taking it over the Eagle Ford shale of South Texas, which produces 1.4 million barrels per day. High winds and floods will close down production and interrupt drilling. The ports of Lavaca and Corpus Christi are threatened, disrupting exports.

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This storm is missing the liquefied natural gas plant at Sabine Pass in Louisiana. But more LNG facilities are springing up along the Gulf coast and, in hurricane seasons to come, disruptions may become a feature of the market. Since the costly Hurricane Ike narrowly missed Houston in 2008, proposals for dykes to protect Galveston Bay, its industrial facilities and the vital Houston Ship Channel have gone nowhere. A direct hit by a powerful storm, bringing a sea surge of more than seven metres, could cause devastating spills of oil and chemicals, and shut down activities for months.

The Trump administration proposed in May to sell off about half the crude oil in the Strategic Petroleum Reserve, located in Texas and Louisiana. It is plausible that the US has more stored crude than it needs, giving its booming production. But apart from a limited amount of refined fuels kept in the north-east, the US does not have a stockpile of oil products such as petrol, diesel, home heating oil and jet fuel. With a growing share of its refining complex in Hurricane Alley, this was a glaring weakness even back at the time of Katrina.

Thus far, Harvey does not look catastrophic for the US oil business, merely disruptive. It will mildly support oil prices due to interrupted production, once refineries restart. Since Katrina, the petroleum industry offshore has become less vulnerable and relatively less important, while the coastal and onshore industry has become much more vital. Exports of petroleum and LNG connect this region far more to world markets now.

So this hurricane is an important test of a transformed US oil industry. It is an opportunity to fix vulnerabilities that it reveals – the exposure of shale oil wells, refineries and the Houston energy complex. And it is a warning of the confluence of a warming climate, higher seas and more coastal energy infrastructure. Katrina was largely a US domestic disaster, but the ripples of future hurricanes will spread further into global oil and gas markets.

Robin M. Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis