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Gulf Coast Oil, Gas Operations ‘Too Important to Fail,’ Says IEA
The oil and gas industry is able to respond faster than it did a decade ago when severe storms hit the U.S. Gulf Coast, but the region today also is more strategic to world energy markets, which means disruptions like Hurricane Harvey have to be overcome, and quickly, the International Energy Agency (IEA) said.
The global energy watchdog, in its latest Oil Monthly Report (OMR) on Wednesday, acknowledged the severity of the twin terrors, Harvey and Irma. Harvey’s impact more directly touched energy operations far beyond the Gulf Coast, IEA said.
“As far as Harvey is concerned, disruption to local oil markets in the U.S. Gulf Coast is easing on a daily basis and its impact on global markets is likely to be relatively short-lived,” analysts said. “Given the severity of the storm, it was inevitable that the normal output and distribution of products would be hampered, that local shortages would emerge, and prices would rise.”
Harvey’s aftermath is still being felt nearly three weeks later, as communities and businesses slowly return to business.
For a long time, the Gulf Coast has been known as a production and refining hub, but the region has become much more key to world trade.
Today the region for crude oil alone has become an “important global trading center, with more than 4 million b/d of products and 0.8 million b/d of crude oil being exported,” IEA said.
U.S. oil exports are growing in importance for many countries, including to Mexico, Venezuela and several Central American states. As well, domestic crude oil is winding its way to more countries, including China, Korea, Italy, the Netherlands, Singapore and the United Kingdom.
As U.S. export volumes increase, “the strategic importance of the Gulf Coast will grow,” IEA said.
“The rise of the Gulf Coast as a major energy hub means that, in some respects, it can be compared to the Strait of Hormuz in that normal operations are too important to fail.” The Strait of Hormuz, a narrow strip between Oman and Iran, is the chokepoint for about 35% of all seaborne traded oil and nearly 20% of all oil traded worldwide.
Thus far, the oil market has coped relatively well with the two major hurricane challenges. That being the case, the IEA said “now may be a good time to consider steps to mitigate the impact of future severe-weather events.
“This could encompass reviewing the robustness of the Gulf Coast energy infrastructure, including production facilities, refineries, crude and product storage capacity, pipelines and marine infrastructure, and what measures can be taken to minimize disruptions to port operations.”
An opportunity also exists to consider what more can be done “by industry and government working together to strengthen energy security, perhaps including the provision of government-held product stocks in the U.S.,” which IEA examined in its 2015 Quadrennial Energy Review.
Before Harvey stormed ashore in Texas, commercial oil stocks in the United States and in the Gulf Coast region were at comfortable levels.
“This was a good thing because the estimated loss of refinery output in September of about 1.6 million b/d has only partially been offset by lower demand,” IEA analysts said.
IHS Markit estimated Wednesday that 13 of the 20 affected refineries were at or near normal operating rates. Five of the other seven were actively in the process of restarting or ramping up runs.
“The amount of capacity offline is still significant,” according to IHS Markit. Including the impact of refineries partially operational, it estimated that around 1.7 million b/d of distillation capacity (9%of U.S. total) was offline as of Tuesday, which was down from around 4.8 million b/d (27% of U.S. total) at the peak of the flooding.
IHS Markit noted there was a “persistently wide” Brent-West Texas Intermediate price spread, “the most telling signal that U.S. crude oil markets need more time to return to normal in the wake of Hurricane Harvey.”
The price differential, about $3/bbl pre-Harvey, is now above $6.00, “a sign that U.S. crude oil supplies are increasing surplus relative to the international market.”
The surplus has emerged as a still significant chunk of Gulf Coast refining capacity remains offline.
In addition to the adaptations made by the market, the IEA said it was “ready to act through its collective response mechanism if the situation had worsened, although that did not turn out to be necessary. However, the availability of global strategic stocks proved their value, even at a time of strong oil market liquidity.”
The IEA said it remained committed to strengthening energy security in all parts of the value chain and would work with member governments and others to achieve objectives.
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