Hurricane Harvey caused major issues for the oil and gas industry in the Gulf of Mexico. As the industry begins to assess the fallout, just how much damage was caused to the industry and the oil markets?
On 25 August Hurricane Harvey swept through the Gulf of Mexico, an area which accounts for 18% of US oil production, and 5% of natural gas production. As Harvey moved in more than a fifth of oil and a quarter of natural gas platforms in the area were shut down and workers were evacuated from 14 of the gulf’s 737 manned production platforms.
Onshore the situation was more serious, with refineries hit harder than the offshore platforms that feed them. The Gulf Coast region, made up of Louisiana, Mississippi, Alabama and Texas, accounts for more than 50% of US oil refining capacity. As torrential rain, winds and floods set in, plants shut or reduced production. In total, more than 3.6 million barrels per day (bpd) of US distillation capacity was shutdown.
Around a quarter of offshore production and more than a fifth of refining capacity in the region was shut down, yet the industry has bounced back within an incredibly short time.
Learning from the past
The Gulf of Mexico with its warm climate is free of many of the environmental challenges that plague offshore production in more northerly areas, such as ice and high winds. However, between June and November it is subjected to hurricane season, during which time 96% of hurricanes occur. The number and severity of hurricanes vary from year to year, but it has been suggested that they are getting stronger as a result of climate change.
In 2005, the Gulf of Mexico was devastated as hurricanes Katrina and Rita hit the area in quick succession. Some $300bn worth of damage was caused by Katrina alone to New Orleans, and there were in excess of 1,500 casualties. Offshore oil and gas platforms suffered a direct hit during Katrina and Rita and 109 oil platforms and five drilling rigs were destroyed or damaged. With over half of gulf production shut down, gasoline prices soared to $5 a US gallon, the highest it had reached since the 1900s.
Following the devastation of the hurricane season in 2005, further efforts were made to protect offshore oil and gas platforms and rigs. The biggest was the change in American Petroleum Institute (API) guidelines for the height for offshore oil platforms. During the 1990s the recommended minimum height of a platform was 70ft; it has since been raised to over 91ft.
Offshore oil and gas platforms can withstand a lot of rain and wind, as they are designed to stand strong against the might of the ocean that surrounds them. However, the pressure created by cresting waves can be as much as several thousand pounds per square inch. To protect them against these waves caused by hurricanes, platforms have become taller and bases have been reinforced.
Shut in and shut down
As with previous hurricanes, the platforms were shut in before the hurricane could hit, meaning the production cap was lowered to less than the available output. Overall 377,177 b/d (21.55%) of oil production and 748 MMcf/d (23.24%) of natural gas production where shut on 25 August in preparation for Harvey. Oil companies including Exxon Mobil, Shell, and Anadarko evacuated hundreds of personnel as a precaution. Shell’s employees returned to its Perdido platform by 30 August, after flyovers and monitoring equipment confirmed it was safe to do so. The situation was similar on other platforms, and production returned to normal within a short period of time.
Although major damage to the platforms was avoided, one of the challenges of restarting production was a lack of personnel as many employees were away coping with damage caused to their own homes. “Shell employs nearly 20,000 people in the US and nearly half of them are being directly impacted by Harvey,” said Shell US president Bruce Culpepper. “Ours is a resilient family and I’m proud of the effort employees are making to look after their neighbours and fellow citizens.”
Damage to platforms was limited but there were problems elsewhere as refineries were flooded, staff evacuated and 22% of the US’s capacity had to be shut down. For example, the roof of ExxonMobil’s Baytown refineries was damaged by the heavy rain leading to a chemical leak. It took refineries longer to return to normal production rates than offshore platforms, and by 30 August 3.04 million b/d of refining capacity was still offline, raising the cost of gas to a two-year high.
Not only is the Gulf of Mexico a key producer and refiner of oil and gas, it is also one of the biggest importers averaging 2,077,000 b/d. Harvey led to the closure of eleven ports in Texas, including Port Arthur which serves the US’s biggest refinery. Similarly the rail network, usually essential for the transport of petroleum products, ground to a halt due to flooding and safety concerns.
Pipelines could not be fed, and many were shut down meaning northern states were forced to rely on their strategic petroleum reserve for a short time. The Colonial Pipeline, which transports more than 3mn bpd of gasoline, diesel and jet fuel, was shut down for four days.
The cost of Harvey
The cost of Hurricane Harvey to the oil and gas industry is not as devastating as that caused by previous hurricanes, largely due to the fact that platforms were not damaged. Instead, the main costs came from the shutdown of operations, especially affecting refineries. “[Gas prices] shot up because of the uncertainty; 25%of refining capacity and folks didn’t know how fast it would come back, how long we would have these disruptions,” said Bob McNally, Rapidan Group president and former international and domestic energy advisor in the Bush Administration.
This was expected, as any major disruption, be it due to weather or political turmoil, has an inevitable effect on the market. “When a hurricane disrupts refinery or pipeline operations, the combination of an immediate loss of gasoline and diesel production and a lack of demand for crude can result in a two-tier market – the price of fuel can rise and the price of crude can fall,” a recent report by API states. As fuel runs out prices for the end product rise, but the lack of refining capability means the demand for crude drops and so prices fall.
The effect of Harvey on the oil and gas industry’s operations in the Gulf of Mexico has not had major lasting effects, and production normalised by early September. This in turn has helped with the recovery of oil and gas prices, which gradually fell as production, refining and transportation restarted in the week following Harvey. Several government initiatives helped with this process, such as a lowering of regulations. “In the last ten, twelve years, both the Obama administration and the Bush administration, now the Trump administration has had to issue temporary waivers of reformulated gasoline and so forth,” said McNally.
As with the design of the platforms, hard lessons have been learnt over the last few years.
The impact of extreme weather in the gulf now is not as dire as it has been in the past, thanks to safeguards such as the strategic petroleum reserve and because America’s power network is less reliant on oil.
“The United States’ electric power generation portfolio is far more diverse today than it was a decade ago, largely due to the increased use of affordable, reliable natural gas,” says Independent Petroleum Association of America spokesperson Neal Kirby. “This clean-burning source of electricity has provided stability, reliability, and resiliency to the US electrical grid – even when regions of the country are under duress, like during the recent hurricanes. Fortunately, US government forecasts show that power generation diversity continuing ten years from now and beyond.”
The Trump administration, however, has planned to sell off half of the strategic petroleum reserves in an effort to raise funds, a move now called into question.
“Harvey has reminded of the importance of having a government stockpile when you have a major, kind of, sever supply interruption, whether geopolitical, or in this case, weather, where companies just simply weren’t able to ensure against that and unable to get supplies,” said McNally. “And so, in that crisis, those – even if it’s a few barrels – are very, very valuable barrels.”
The offshore oil and gas industry appears to have weathered the storm, putting valuable lessons from past hurricanes to good effect. But as hurricanes as strong as Harvey become more common, more may need to be done to ensure damage is always kept to a minimum.