Hurricane Harvey: Impact on Oil and Gas an Open Question

The copious amount of rain carried by Hurricane Harvey into Texas last week has not only wreaked devastation on Texans but also caused tens of billions of dollars of economic disruption across a critical region. Houston is not only the central hub for the energy industry within the United States but also represents about three percent of the USA’s GDP.

“The US oil market is facing a number of challenges along the entire petroleum value chain, from production to refining to transportation. “

Widely recognized as the historic oil and gas capital of the world, 20 percent of US crude production is in the Gulf of Mexico while about one-third of all US refining capacity is on Texas’s Gulf Coast. The largest emergency supply of petroleum in the world, the United States Department of Energy’s Strategic Petroleum Reserve (SPR), which currently holds nearly 680 million barrels, is also located a stone’s throw from the flooded areas. While the Category Four hurricane’s long-term impact on global oil markets is still an open question, it is already apparent that the US oil market is facing a number of challenges along the entire petroleum value chain, from production to refining to transportation.

About a quarter of the offshore oil and gas production in the region of the Gulf of Mexico was immediately stopped, but the more noteworthy impact on energy supplies appears to have been caused by the flooding occurring on the mainland. In Southern Texas, some companies – such as ExxonMobil’s XTO Energy – suspended fracking operations and evacuated all staff. In total, US oil output fell by almost eight percent, from 9.5 million barrels per day (bpd) to 8.8 million bpd, according to the Energy Information Administration.

The Lone Star State’s 27 petroleum refineries account for 29 percent of US refining capacity, or over 5.1 million barrels of oil per day. S&P Global Platts shows that the biggest refineries in the area, such as ExxonMobil (560,000 b/d), Valero (293, 000 b/d), Shell (340,000 b/d) and Philipps 66 (247,000 b/d), were closed due to the weather conditions; in total, 11.2 percent of US refining capacity has been shut down. Not only will refining centers require outstanding maintenance in order to restart the production, but there will also be personnel problems as employees are already struggling with their own damages caused by the hurricane. As a result, Andy Lipow, president of Lipow Oil Associates, estimates that it will take one to two months before operations return to normality in the region.

Texas Refineries and their Capacities

Hurricane Harvey has been more disruptive than experts had foreseen, resulting in shipping channels and ports all along the Texas coast being shut down. The Colonial Pipeline from Texas to New Jersey, the largest mover of gasoline, diesel and other refined products in the US, was also disrupted. In total, the US government announced that an estimated 30 percent of the country’s oil capacity has been impacted by the storm and potentially figures can turn even higher due to the impossibility of oil transportation. For the time being, however, damages cannot be assessed until the rain stops, thus increasing uncertainty over the foreseeable future.

“No country, no matter how mighty an oil and gas producer it may be, is beyond the threat of catastrophic damage.”

Antoine Halff, Center on Global Energy Policy, Colombia University

While there are no big fears of oil shortages, prolonged interruptions of fracking operations will have severe repercussions on global oil delivery. The US Department of Energy has been closely monitoring the situation and has already begun to authorize the release of crude to affected refineries as a temporary measure. The natural disaster – the first of many in 2017 – has also renewed debate surrounding the US government’s decision early this year to begin the process of slowly selling off a large chunk of its reserves, which had been created in 1975, two years after the Arab oil embargo, to ensure the country could not be held hostage by foreign oil interests. As Antoine Halff of Columbia University’s Center on Global Energy Policy stresses, “no country, no matter how mighty an oil and gas producer it may be, is beyond the threat of catastrophic damage.”

Writer: Luca Nardini