Harvey's Reach Extends Far Beyond Houston

When Hurricane Harvey brought disastrous flooding to the U.S. Gulf Coast, it threatened more than Houston residential neighborhoods.

A significant part of the nation’s energy infrastructure is located in and along the 29 Texas counties on or just inland from the Gulf of Mexico, and a network of production platforms and offshore pipelines stretches eastward from there to Louisiana and beyond.

Anything that threatens this crucial area will have consequences in numerous states — and even other countries.

“When you have a hurricane like Harvey, and others we had a decade ago, it creates an impactful situation in terms of gasoline supply, in meeting distillates demand. The short answer is, it had a significant impact,” said Sandeep Sayal, senior director in the downstream group for IHS Markit in Houston.

With a disruptive major hurricane along the Gulf Coast, “the effect is going to be worldwide,” he observed.

To understand the potential impact, consider a report prepared by ICF International for the U.S. Energy Information Agency (EIA).

“The Gulf Coast is the largest petroleum refining region in the country, producing 7.5 million barrels per day of transportation fuels in 2014, or nearly half of total U.S. refinery production,” the report found.

Supply Shift

Because the region’s transportation fuel production is three times its consumption, the Gulf Coast area is a major exporter of gasoline, distillates and jet fuel.

Movement of refined fuels between the Gulf Coast and the East Coast “represents the largest movement of such products in the United States,” the report stated. The five largest oil refineries in the United States are on the Texas and Louisiana Gulf Coast, and the two largest refineries in the country are in the vicinity of Houston.

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When Hurricane Harvey brought disastrous flooding to the U.S. Gulf Coast, it threatened more than Houston residential neighborhoods.

A significant part of the nation’s energy infrastructure is located in and along the 29 Texas counties on or just inland from the Gulf of Mexico, and a network of production platforms and offshore pipelines stretches eastward from there to Louisiana and beyond.

Anything that threatens this crucial area will have consequences in numerous states — and even other countries.

“When you have a hurricane like Harvey, and others we had a decade ago, it creates an impactful situation in terms of gasoline supply, in meeting distillates demand. The short answer is, it had a significant impact,” said Sandeep Sayal, senior director in the downstream group for IHS Markit in Houston.

With a disruptive major hurricane along the Gulf Coast, “the effect is going to be worldwide,” he observed.

To understand the potential impact, consider a report prepared by ICF International for the U.S. Energy Information Agency (EIA).

“The Gulf Coast is the largest petroleum refining region in the country, producing 7.5 million barrels per day of transportation fuels in 2014, or nearly half of total U.S. refinery production,” the report found.

Supply Shift

Because the region’s transportation fuel production is three times its consumption, the Gulf Coast area is a major exporter of gasoline, distillates and jet fuel.

Movement of refined fuels between the Gulf Coast and the East Coast “represents the largest movement of such products in the United States,” the report stated. The five largest oil refineries in the United States are on the Texas and Louisiana Gulf Coast, and the two largest refineries in the country are in the vicinity of Houston.

As of last January, the 29 petroleum refineries in Texas had a capacity of more than 5.4 million barrels of crude oil per day and accounted for 31 percent of total U.S. refining capacity, the EIA said, with 17 of those refineries on or near the Gulf Coast and vulnerable to storm disruption.

Harvey knocked out an estimated 4.8 million barrels per day of distillation capacity, or 27 percent of the U.S. total. A week later, around 2.9 million barrels per day were still offline.

This huge complex of refining capacity also has a major supply effect on the rest of Texas and the mid-continent. Dallas-area fuel prices increased almost 70 cents a gallon on average after Harvey’s landfall. Tulsa’s gasoline prices were 30-40 cents higher for weeks after the hurricane struck.

Overall, “the U.S. average regular retail gasoline price increased 28 cents per gallon, from $2.40/gal on Aug. 28, 2017 to $2.68/gal on Sept. 4, 2017,” the EIA reported, reflecting the widespread effects of Harvey’s disruption.

Two major interstate pipeline systems originating on the Gulf Coast, the Colonial Pipeline and the Plantation Pipeline, are critical to supplying gasoline and other fuels to the southwest and New England.

The 5,500-mile-long Colonial Pipeline — the largest refined fuels pipeline in the United States — begins in Houston and takes fuel supply to nine southeastern and mid-Atlantic states, then extends into Pennsylvania and New Jersey, terminating near the New York Harbor area.

“Both the pipelines were impacted by the hurricane, so the East Coast had to depend more on imports from the European refiners,” Sayal said.

For the European distillates market, that meant higher gasoline prices and much stronger refining margins, he noted.

“At the end of the day, all the world markets are impacted. It’s a global market,” Sayal said. “The impact was definitely felt across the board, from oil to gasoline to LNG to chemicals.”

Fuel shipments from Gulf Coast ports move to Florida and other southeast ports on coastal compliant tankers and barges, and to markets primarily in the Atlantic basin on foreign-flagged ships.

“A lot more of the European cargoes also got into the Florida market,” Sayal noted.

Many Eggs in One Basket

“Designed to take advantage of the region’s deepwater ports, the Texas Gulf Coast’s 17 refineries and associated infrastructure are heavily concentrated in three logistics clusters along the Texas coastline, making them particularly vulnerable to disruption from hurricanes, tropical storms and associated storm surge,” the ICF report said.

Having so much downstream infrastructure located on or near the Gulf Coast has both supply and security implications for the U.S.

“Over the long term, the energy sector will have to consider the costs of additional hardening of the infrastructure on the Gulf Coast versus moving to a different location like the Eastern Seaboard,” noted Michael Webber, deputy director of the Energy Institute at the University of Texas at Austin.

The EIA’s report following Hurricane Harvey “illustrates very clearly the impact that Harvey has had on the U.S. oil operations,” IHS Markit reported.

Domestic production fell by 750,000 barrels per day, while consumption of crude dropped almost 3.3 million barrels per day because refineries were forced to shut down.

For the first time in many years, the United States is a crude oil exporter and those shipments also were disrupted by Harvey.

“We were exporting about 1 million barrels of crude a day before Harvey and I think the exports dropped down to 200,000 to 300,000 barrels a day,” Sayal said.

Lone Star Impact

Harvey brought unprecedented rainfall to parts of the Gulf Coast, where many areas received more than 40 inches of rain. In Texas, at least 82 people died, more than 1,000 homes were completely destroyed and another 17,000 sustained major damage.

Operations at oil and gas company facilities in west Houston’s Energy Corridor and other parts of the city were disrupted by the hurricane. ConocoPhillips’ Houston main campus was closed for almost two weeks, until Sept. 11, and its Energy Center 3 remained closed due to high water.

Hurricanes that strike Texas bring a direct threat to the nation’s oil and gas production capacity as well as its refining operations.

According to the latest data from the EIA, Texas ranks first in the nation in the production of crude oil, natural gas and electricity. It leads all states in total proved oil reserves, with recent gains coming mostly from the Eagle Ford shale play and tight formations in the Permian Basin.

Last year, Texas produced about 1.156 billion barrels of crude oil and condensate, or just under 3.167 million barrels per day, the Railroad Commission of Texas (RRC) reported. The state’s annual natural gas production was about 8.169 trillion cubic feet.

With so much downstream, midstream and upstream infrastructure in place, the Gulf Coast region has become a key storage area for crude oil and petroleum products.

As of March, 49 percent of total U.S. working crude oil storage capacity and more than 40 percent of working storage capacity for both motor gasoline and diesel fuel were located in the Gulf Coast, the EIA reported.

Petrochemical infrastructure in the U.S. also is concentrated along the Gulf Coast, and operations at more than a dozen petrochemical plants were disrupted and then curtailed by Harvey.

According to the American Chemistry Council, about $85 billion worth of petrochemical projects have begun or been completed across the country since 2010, nearly all of them in the Gulf Coast region, where significant additional investment is planned.

Half of the nation’s natural gas processing capacity is located in Gulf Coast states, according to the EIA. Texas alone has 166 gas processing plants with a total of 21 billion cubic feet per day of processing capacity.

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