By: John Auers, John Mayes and Robert Auers
Our thoughts and prayers are for all of the residents of the Texas and Louisiana Gulf Coast that are feeling the devastating impacts of Hurricane Harvey. As Harvey continues to linger in the region, it is way too early to assess the complete set of consequences it will have on life, limb and property. However, the severity and duration of the storm is setting all kinds of records, particularly in regards to the levels of rain it has generated. This, combined with its path, which is directly through the heartland of the U.S. energy industry, is resulting in major disruptions to both crude and product markets, with potentially much more to come. This certainly isn’t a new experience for the industry, as hurricanes and tropical storms, along with their effects have always been a threat that operators in the region have had to take into consideration every summer and fall and sometimes even beyond the typical June through November hurricane season. In most cases the impacts are short-lived, with operations, supply and prices affected for only a few days; however, long-term market disruptions are not unprecedented, as extended capacity outages can roil the markets for weeks and even months. Twelve years ago, in 2005, the one-two punch that Katrina and Rita delivered to Louisiana and Texas caused several plants to remain down for extended periods, with corresponding and at times very extreme impacts on product markets. The effect on the industry and markets of other storms varied significantly; in many cases it was often quite limited in both scope and duration. In today’s blog, as refiners along the Texas and Louisiana Gulf coasts continue to “Ride the Storm Out,” we take a look at what happened during those past hurricanes and tropical storms, in an attempt to find clues to what the industry might have in store in the coming weeks and perhaps even months.
“The Wind Outside is Frightening” – A Review of the Current Situation
As we write this, the situation along the Texas and Louisiana Gulf Coast remains in flux. Since Harvey first came ashore northeast of Corpus Christi late Friday, it has taken a meandering path, generally heading up the coast towards Houston. While most of the original concern was for the Corpus Christi refineries which were closest to the point of landfall for Harvey, most of the worries now involve the Houston/Texas City and Port Arthur/Beaumont refining centers. While the “wind outside” was certainly “frightening,” considering Harvey reached wind speeds north of 130 mph, it has been the volume of rain that has and continues to fall in the eastern part of the Texas Gulf Coast that is causing the most problems. Although damage assessments aren’t complete yet in Corpus Christi, preliminary reports indicate that the plants weathered the storm fairly well. Most of the over 800 MBPD of crude and condensate refining capacity which was shut down in the area are reportedly preparing to attempt restarts in the next few days. The situation is trending in the opposite direction up the coast, as severe flooding is leading to the actual or potential shutdown of some of the largest refineries in the country, including Exxon Baytown, Shell/PEMEX Deer Park, Motiva Port Arthur, and several others. As the remnants of Harvey head eastward, Lake Charles and possibly even Mississippi River corridor refiners could be impacted. With over 2 million BPD of refining capacity offline and more threatened, product prices have headed higher, with crack spreads for gasoline up by several dollars per barrel throughout the U.S. since Harvey first strengthened into a hurricane last week, as shown below.
“And I’m Not Missing a Thing” – Revisiting Past Hurricanes
As noted earlier, Harvey is certainly not the first hurricane or tropical storm to hit the U.S. Gulf Coast and it is instructive to review the impacts of previous storms on the refining industry and oil markets.
Prior to Katrina, the largest storms to impact the Gulf Coast over the past several decades were likely Hurricane Alicia and Tropical Storm Allison. Hurricane Alicia made landfall on August 18, 1983, on the western end of Galveston Island, near San Luis Pass, with sustained winds of 115 mph and proceeded right up Interstate 45 through the heart of Houston. The storm began to dissipate as it moved northward however, with the wind speed declining to 80 mph as it passed over downtown Houston. Twenty-one persons died as a result of Alicia which also caused $1.7 billion in damage. The most visible destruction was in downtown Houston which saw extensive numbers of large plate glass windows shower down on the streets below.
While the property damage was extensive and 750,000 homes lost electricity, the hurricane’s impact on area refineries and oil markets was relatively minor. Some refineries on the Houston ship channel did temporarily close, but there was no reported extensive damage or extended downtimes. The pricing impacts were even more muted. The average Gulf Coast spot gasoline price for the week after the storm was less than 0.5 cpg higher than the week before Alicia. Gulf Coast diesel prices only rose by 0.2 cpg.
While smaller in magnitude, Tropical Storm Allison caused much more damage for the public and the oil industry. Sustained winds were only 50 mph when the storm made landfall on June 5, 2001, near Freeport, Texas, but like Hurricane Harvey, the dominant damage was a result of the heavy rainfall. The storm produced 40 inches of rain in Jefferson County, Texas, with 35 inches falling on Houston. There was extensive flooding in downtown Houston with the underground tunnel system being submerged. The cost of the damage was estimated at $9 billion, making it the most expensive tropical storm (excluding hurricanes) in American history. Even more tragic were the 41 deaths. Similar to Harvey, Allison went back into the Gulf of Mexico after its initial landfall and then breached land again farther east near Morgan City, Louisiana, on June 12.
As a result of the extensive flooding, three Houston area refineries reported some damage and shut down. Three workers at the Lyondell refinery were injured in a fire on the delayed coking unit. The closures were relatively short-lived, and like Hurricane Alicia, the effects on the oil markets were not significant. Spot Gulf Coast gasoline prices had been falling before Allison made landfall and the storm had no effect on the downward slide. Distillate prices did see a modest bump after the storm, rising by 8 cpg, before falling back again a few days later.
The Twin Terrors – Katrina and Rita
When the general public thinks about Katrina, they remember the massive flooding in New Orleans, leading to people crowding into the Superdome and helicopters rescuing people off of their roofs. Furthermore, we remember the pictures of absolute destruction it left behind, the red X’s on the houses still left standing, the massive depopulation of New Orleans, and the tragic loss of life it caused (1800+). Less remembered by the general public, but still burning bright in the minds of oil industry participants are the impacts Katrina had on oil markets, particularly the refining sector. There is no doubt that Katrina, was the most damaging single weather event the U.S. refining industry has ever experienced. The market impacts of Katrina were magnified by the fact that Rita, likely #2 by that measure, followed by less than a month.
Katrina first made landfall on August 29, 2005 in New Orleans; however, the storm began affecting offshore rigs in the Gulf of Mexico (GOM) a few days earlier. Rita swept through the Beaumont/Port Arthur area just about month after, making landfall on September 25, wreaking even more havoc both on and off shore. In its final report on the Evacuation and Production Shut-in Statistics for Katrina and Rita, the Minerals Management Service (which has since been replaced by the Bureau of Ocean Energy Management), reported the cumulative loss in crude oil production from these two storms at 162 Million Barrels through June 1, 2006. This equates to an average of 582 MBPD from when Katrina first entered the GOM on August 25, 2005 to June 1, 2006. Still, the impacts to the downstream sector were the most significant. At one point, as much as 23% of U.S. refining capacity was shut in during the storms, and it wasn’t until May 2006 (9 months after Katrina) that gross refinery inputs in the U.S. reached their pre-hurricane levels. At the time Rita hit in late September 2005, 14 refineries (representing nearly 4 MMBPD of capacity) were totally shut down and three others were at reduced rates: however, most of these plants were back running at or near full capacity by the end of November 2005 (still three months after Katrina and 2 months after Rita). Two plants however took much longer to restart. Conoco Phillip’s (now Phillips 66) Alliance Refinery in Belle Chasse, LA, outside New Orleans did not restart until April 2006 and Murphy Oil’s (Now Valero’s) 135,000 BPD Meraux refinery finally restarted in May 2006.
Since the Gulf Coast is a major supplier of refined products to not only the surrounding region but also the Midcontinent and East Coast, markets throughout all those regions were impacted. Crack spreads shot up in late August 2005 as Katrina neared the Louisiana coast line, then recovered somewhat in early September only to increase sharply once again in anticipation of Hurricane Rita. By late October 2005, crack spreads had finally declined to more typical levels. The chart below shows Gross U.S. Refinery Inputs and U.S. Gasoline cracks for June 2005 through the end of November 2005. The gasoline crack spreads are calculated as the difference in the regional wholesale gasoline price and a representative crude price.
Super Storm Sandy
Even storms that don’t make it to the USGC can impact oil markets. The best example of this is Super Storm Sandy. Sandy made landfall near Brigantine, NJ, on October 29, 2012. After ravaging Jamaica, the Dominican Republic, Puerto Rico and Cuba, the storm travelled up the Atlantic coast before turning westward into New Jersey. While it only had winds of 80 mph the magnitude of the storm was best measured by its size, which was nearly 1,200 miles in diameter. The storm killed 233 people, including 157 in the U.S., with damage estimated in excess of $75 billion. The U.S. portion was estimated at nearly $72 billion.
There was extensive warning of the approach of Hurricane Sandy with the result that the local Philadelphia area refiners had ample time to prepare. By the time the storm struck, the Phillips 66 Bayway refinery and the Hess Port Reading plant had shut down while the PES Philadelphia and PBF Paulsboro refineries were operating at reduced rates. None were significantly damaged in the storm but Phillips Bayway did sustain some flooding. Complicating the supply picture, the Colonial pipeline facility in Linden, NJ, lost power during the storm but was able to resume operations by bringing in portable generators.
In addition to the significant refining capacity losses, the petroleum supply picture was made worse by low inventories prior to the storm’s arrival. Both regular gasoline and ULSD prices had already begun to rise by the time of landfall, with gasoline up by nearly 16 cpg and ULSD up by almost 10 cpg. While ULSD prices remained relatively flat after the storm, gasoline prices continued to surge. By November 9, gasoline prices increased by an additional 15 cpg before beginning a slow descent.
In spite of the sharp increase in spot gasoline prices (nearly 31 cpg), Hurricane Sandy appeared to have limited impact on retail prices in the NYC area. The average RBOB price in the Central Atlantic states had been falling for about six weeks prior to the arrival of Sandy. Immediately after the storm, and in contrast to the upward trend in spot prices, retail prices were flat for three weeks before resuming their downward trend.
“It’s a Hard Life to Live, But it Gives Back What You Give” – What Happens Next?
So what happens next in the oil markets? Ultimately it will depend on the level of damage Harvey inflicts on refineries and the time it takes to remedy that damage and bring all of the capacity back online. While all refinery restarts involve risk and potential start-up issues that can further delay the facility achieving its full operating rates, flooding tends to lead to the most lasting damage beyond any outright destruction from high winds. Submerged electrical equipment such as motors must undergo a formal, off-site dry-our process that can take up to a week before they can be reinstalled and energized. Seawater damage for a storm surge, and the conductive residue it leaves behind, can ruin motors and other electrical devices and require outright replacement. To a lesser degree, water damaged refractory and insulation can also require a lengthy dry-out procedure or replacement. Depending upon the service and any associated safety concerns, some insulation must be replaced before a safe restart is attempted. All of this, when coupled the simple clean-up of debris, could lead to several weeks, if not months, of low utilization among the refineries impacted by Harvey in Texas and perhaps Louisiana. The impacts will be very refinery specific, as they were during previous storms (particularly Katrina), and we won’t know the ultimate effects on refinery operations or markets for several days or more likely weeks.
Turner, Mason & Company continually monitors developments in the global petroleum markets and assesses how they will impact the industry. Earlier this month, we released our latest Crude and Refined Products Outlook, which forecasts supply, demand and prices for petroleum on both a regional and global basis. While events such as Hurricane Harvey can’t be forecasted, we do consider and discuss how such developments can affect the markets. For more information about this publication or studies and other consulting services TM&C can provide, please visit our website or give us a call.
We would like to close out our blog with the following Prayers for all of you who are being impacted by Hurricane Harvey:
- For God’s comfort. It is hard to be comforted when you have lost your family and all your property; only God can give comfort. He is the God of all comfort. 2 Corinthians 1:4-7
- That God will preserve the lives of all those affected by the flood and that they will not question why but rather they will thank God for having survived. Romans 8:28
- For wisdom, speed and efficiency in the execution of relief efforts in the affected areas. Genesis 41: 38