As the US recovers from Harvey, what’s next? - Fuel for Thought

The shale revolution has dramatically transformed this country’s energy landscape, making the US an exporter of crude, products and LNG—a far cry from the situation 12 years ago when Hurricane Katrina struck Louisiana.

Prolific production from unconventional sources in the Permian Basin and the Eagle Ford in Texas keeps OPEC up at night. Latin America has become ever more dependent on US gasoline. And even India and South Korea are becoming customers of US crude.

So when a major disaster like Hurricane Harvey strikes at the heart of US energy dominance—Texas and the US Gulf Coast—the reverberations are felt around the world.

This latest storm was unprecedented in size and ferocity. Flooding and power outages remain a serious problem for refineries and petrochemical plants. Upstream, production is resuming. But with ports closed and rail lines and roads under water in many areas, there is no place for all that oil to go.

So the question on everyone’s mind in the coming weeks is: what’s next?

Here’s a look at some of the open questions.

Upstream: ‘flipping the switch’

Production onshore and in the Gulf came back online fairly quickly after the winds and rain passed. But flooding and the lack of outlets for that crude could have have a domino effect, according to Tony Sanchez III, CEO of Eagle Ford producer Sanchez Energy.

Shale wells may have to remain shut in until refineries and roads come back online.

Operators are unsure if they can be restarted with the same pressure so that they produce at the pre-storm rates.

“It’s not just a matter of flipping a switch,” Sanchez told the Wall Street Journal. “There is significant risk in those wells not coming back to previous levels.”

Production from tight, unconventional sources is still so recent, there is little precedent upon which to base an assessment.

Even as production comes back online, the big question is where will it go?

That question was raised last week when Canada’s Baytex Energy announced it was restarting operations at its Eagle Ford shale acreage.

“There is currently a limited ability to produce as downstream markets are closed or significantly curtailed,” the company said in a statement.

Rig counts

Another impact of the storm could be on Eagle Ford drilling rigs. So far, the market hasn’t seen a big drop in onshore rigs nor any effect on day rates. But this kind of data is lagging, so the real story may not be known for weeks.

Bob Williams, director content at Platts RigData, points out that much of the lighter crude from the Eagle Ford is destined for export. So problems with pipelines, ports, the Houston ship channel and similar infrastructure is key here.

“What you have to keep in mind is what we count as an ‘active’ rig—one that is post-spud and pre-release—remains counted as active even if it is temporarily idled and the well shut in out of concern for weather or any other factor,” Williams said.

“While some operators temporarily shut in active wells and idled rigs, drilling could be resumed quickly. Or they could remain shut-in as DUCs (drilled uncompleted wells). That was commonplace before Harvey, but I would expect the number of Eagle Ford DUCs to rise because of the flood damage to midstream and downstream facilities (shrinkage to offtake capacity). Another concern is site access—i.e., trucks delivering consumables such as drilling muds, water, and drill pipe.”

Strategic reserves

The storm has proven, yet again, the importance of maintaining a large and nimble strategic petroleum reserve.

Over the past year, the US Congress has turned to the SPR as way to raise money for various purposes, authorizing the selloff of nearly 200 million barrels of crude to fund various spending bills and to upgrade the aging SPR storage caverns.

While it may be debatable how large the SPR needs to be, its utility seems undeniable.

As of Friday, the US has authorized withdrawals of up to 4.5 million barrels. Phillips 66 at one point last week asked for 1 million barrels of crude from the SPR for its 260,000 b/d Westlake refinery in Lake Charles, Louisiana. Later in the week, it scaled that back to 700,000 barrels as some of the constraints posed by closed ports and waterways began to ease.

On Friday, The Department of Energy approved a request from Marathon Petroleum for 3 million barrels and a request for 500,000 barrels from Valero.

Kevin Book, managing partner of ClearView Energy, said it makes sense to help the refineries that are running get more crude while ports remain closed and harder-hit refineries near Houston undergo damage assessments.

“The problem is you have close to 20 million barrels sitting [offshore] waiting to come into the Houston Ship Channel that can’t, and the pipes are still connected to the refineries that can’t get crude,” Book said. “Why not pull it from the SPR as a swap?”

Petrochemicals

While the impact of Harvey on crude production and refineries has garnered most of the attention, the storm’s wet fists were equally tough on the critical petrochemical plants located along the US Gulf Coast.

More than 50% of US ethylene production capacity remained offline on Thursday, and producers with full or partial operations were focused on how they would get feedstock and whether stalled logistics or spotty access to power might squeeze their ability to move output to markets.

In the LOOP

Over the years, Houston has become a vital destination for ships carrying heavy crude destined for the Gulf Coasts refineries. The shale revolution has reversed some of that flow, making both Houston and Corpus Christi critical as hubs of exports as well.

In light of this, the The Louisiana Offshore Oil Port (LOOP) and regional refining industry could be set to carry some of the the load in the near future, especially as the facility seeks to expand to accommodate VLCCs that could aid in the export of even more US crude.

LOOP typically ranks No. 3 behind Houston and Port Arthur for US crude imports and accounts for 10% of US imports and 16% of Gulf Coast imports, according to Platts Analytics and US Customs data. But with Texas ports closed, LOOP could be set toreclaim the title of No. 1 port for US crude imports, which it has not held since May 2016.

-- with Starr Spencer, Ashok Dutta, Kristen Hays and Laura Huchzermeyer in Houston, Meghan Gordon and Brian Scheid in Washington, and Janet McGurty in New York