Hello, Michael: Beware The Resiliency Of The U.S. Oil And Gas System
“The natural gas industry has made significant strides to improve safety and crisis management during natural disasters. The muted impacts of Hurricanes Harvey and Irma on the oil and gas market exemplify how far the industry has come in supporting infrastructure resilience and reliable supply,” Black & Veatch, 2017
I doubt there’s anything in our energy-environment discussion more under appreciated than the sheer complexity of extracting oil and natural gas from the ground and then delivering it to end-users, as safely as possible. It’s a massive 24/7/365 non-stop system, processing 39 million gallons of oil and 3.8 Bcf/d of natural gas every hour.
This is a far more challenging endeavor than the anti-oil and -gas business apparently comprehends. But the ongoing effectiveness of it is mandatory: oil and gas supply 65% of the energy that we Americans consume to run the economy. It’s no wonder then that Petroleum Engineering is the highest paying major in college.
Complicating everything, there are hundreds or even thousands of companies involved in the value chain, doing all that they can to process oil and gas through hundreds of thousands of machines and hundreds of thousands of miles of pipelines. The nation’s oil and gas fuel supply system is geographically diverse and impressively adaptable, so disruptions have been minimal even under the most pressing conditions. Over 95% of all our 150,000 gasoline stations are independently owned, for instance, not managed by the major oil companies themselves.
And there’s nothing more obvious for these multi-billion dollar companies, that heavily invest in the most advanced technologies and deploy the best experts in the world, to do everything possible to maintain safe operations. With invaluable reputations on the line, it’s no exaggeration to say that their very existence depends on it: the 2010 Deepwater Horizon spill has cost BP over $65 billion.
This elaborate system used for oil and gas extraction and delivery is perhaps most threatened during times of severe weather, such as the destructive hurricanes we’ve had over the past 14 months. To say the least, such events strain the entire network. Just think about the challenge from a geographical standpoint, last month’s Hurricane Florence was double the size of Pennsylvania.
At each level of the distribution chain, supply and demand is the key factor.
Generally, demand ramps up right before the hurricane hits the affected areas, as Americans fill-up for evacuation. This can cause prices to temporary spike because the rest of the supply chain hasn’t had time to respond.
Yet things normalize quickly: “Gas Prices Remain Stable Amid the Aftermath of Hurricane Florence.” During last year’s historic hurricane season, U.S. oil prices remained remarkably stable, mostly in the $47 to $52 range. The impact of Hurricanes Harvey and Irma on natural gas prices was mostly muted.
Rule changes and exceptions are essential to keeping the integrity of the system. For example, the Trump administration suspended the cumbersome Jones Act in preparation of Irma last September. For Florence, “EPA Approves Emergency Fuel Waiver for North Carolina and South Carolina.”
As Hurricane Michael approaches landfall this afternoon in the Florida panhandle, a few things to consider:
-Industry and local, state, and federal governments work together to meet demand
-Companies monitor developments and gauge where extra supplies may be required, with the storm path being the constant focus
-Some companies have planned to bring gasoline and diesel supplies from surrounding states if needed
-Fuel terminals are working non-stop to dispense supplies to service stations, even those out of the area that they would regularly supply
-Our inventories for gasoline, diesel fuel, and crude oil are relatively high right now
-Right now, hours before landfall, prompt month WTI is right where it was to start the week ($74.60)
Looking forward, as more hurricanes hit, especially in the vulnerable Gulf, the impacts will need to be buffered even more. The Gulf holds about 50% of our total oil storage capacity and 40-45% of our working storage for gasoline and diesel fuel.
Centered in Louisiana and Texas gulf regions, the Strategic Petroleum Reserve is a cornerstone of our response strategy for refiners and can hold nearly 730 million barrels of petroleum – a full 35 days of total U.S. usage (including imports). The Gulf accounts for nearly 20% of total U.S. crude oil production
For natural gas, however, increasingly the go-to source of energy, the Gulf accounts for less than 5% of our total domestic supply, compared to 25% in 2005. For sure, one typically ignored energy security benefit added by our shale revolution since 2008 has been that our domestic gas supply system, now headquartered in West Texas and Appalachia, has become less susceptible to hurricanes.
Although as exports become an increasingly larger part of the U.S. oil and gas puzzle, it too is being centered in the vulnerable Gulf. This means that global markets will increasingly feel the impact of U.S. hurricanes: “U.S. Crude Oil Exports Could Jump To Almost 4 Million Bpd By 2020.”
Indeed, the expansion of the oil and gas markets and associated infrastructure over the past decade has made our system much more complex and integrated. For example, since 2008, crude oil production is up 122% to 11.1 million b/d and gas output has surged almost 50% to ~85 Bcf/d, with much more coming.
This increasingly expansive network, wisely guided by the companies that run it, has proven remarkably resilient in the most difficult of times and cannot be taken for granted in the years ahead.