By: John Mayes and Robert Auers
Our thoughts and prayers continue to go out to all of the residents of the Texas and Louisiana Gulf Coast that are beginning to recover from the devastating impacts of Hurricane Harvey. The storm claimed 65 lives in the United States and preliminary damage estimates have come in as high as $180 Billion. As those on the Gulf Coast continue to assess damage and begin rebuilding, we will discuss the progress made on those fronts thus far in the energy industry and how, as Bob Dylan Said, “Things Have Changed” since Katrina and Rita struck the Gulf Coast in 2005.
“This Place Ain’t Doing Me Any Good” – U.S. Refineries Become Less Dependent on Waterborne Crudes but, Pipeline Outages Limit Benefit during Harvey.
One of the most significant developments in the U.S. crude supply environment in recent years has been the growth of light shale grades. Primarily from the Permian, Eagle Ford, and Bakken fields, these crudes have largely been transported to refining centers through an equally expansive pipeline infrastructure system. In 2005, at the time of Hurricane Katrina, there were 6.8 million BPD of pipeline-delivered crudes, which represent 45% of the total U.S. refining slate (Figure 1). Waterborne grades represented the remaining 55% of U.S. crude runs. In the first half of 2017, however, pipeline crude receipts had nearly doubled, surpassing 12.5 million BPD. During the same period, waterborne crude receipts fell from 8.5 million BPD to 4.7 million BPD.
The shift to pipeline crude deliveries was supposed to bring substantive logistic advantages. Not subject to the vagaries of weather and vessel problems, pipeline deliveries are viewed to be more ratable and dependable and typically come with a lower cost. Under most conditions, this presumption has been validated by years of steady deliveries with only minor disruptions.
Another significant advantage of pipeline receipts is the ability to store less crude oil. Refineries must be able to contain larger delivery volumes from vessels but can dramatically reduce inventories with a steady supply of pipeline deliveries. This has allowed refiners to only increase crude oil inventories inside refineries by 0.2% since 2005 even though crude runs have increased by 8.6% over the same period. While economically advantageous, this phenomenon has worked against the industry during severe disruptions, such as Hurricane Harvey.
The intensity, magnitude and path of Hurricane Harvey presented exceptional challenges for the petroleum industry. The level of rainfall and resulting flooding proved exceptional and overwhelmed much of the pipeline infrastructure. The floods forced TransCanada to shut down its southern leg of the Keystone line from Cushing to Nederland, while Magellan closed its Longhorn and BridgeTex lines from the Permian to Houston. While all major crude pipelines have since restarted, the combination of pipeline disruptions, port closures, and production decreases (resulting from Gulf of Mexico platform closures) prompted the DOE to approve total releases of 4.5 million BPD for the Strategic Petroleum Reserve. The released crude is going to Phillips 66, Marathon and Valero.
The lessons learned from Hurricane Harvey should prove beneficial to the industry. While the severity of Harvey was unusual, similar circumstances are likely in the future. Relatively inexpensive measures such as elevating pumps or the construction of containment dikes could prove highly beneficial. If there is one aspect on the Gulf Coast which will always be present, it is the seasonal threat of hurricanes and tropical storms.
“Gonna Get Lowdown, Gonna Fly High” – U.S. Goes From Product Importer to Exporter
Even as refineries are grappling with insufficient crude receipts, marketers and consumers are contending with erratic product availabilities. Just as crude pipeline terminals have become flooded and shut down, product pipelines have been similarly impacted. The Colonial pipeline has incurred staggered closures in Texas as a result of insufficient injection volumes in Houston to fully operate the line. Beyond Lake Charles, the pipeline is fully functional. The Explorer pipeline to Chicago was also closed due to a lack of available volumes.
Not only are these problems impacting U.S. consumers, but foreign ones as well. In 2005, the U.S. was the largest net product importer when Hurricanes Katrina and Rita struck. Today, the U.S. is the global leader in net product exports (Figure 2). In 2005, the U.S. had net imports of approximately 2.5 million BPD; but in the first half of 2017, the U.S. was a net exporter of around 3 million BPD. This 5.5 million BPD shift is the result of declining consumption, rising crude throughput and NGL output, and increasing production of alternative fuels.
Much of the exported products have gone to Latin America and Asia. The U.S. is now the dominant supplier of products into Latin America and this trend is assisted by declining refinery throughputs in the region. In the aftermath of Hurricane Harvey, and the resulting disruptions of USGC refineries, importers in Latin America are scrambling to obtain alternate sources for products. 
The shift from net imports to net exports brings many advantages to U.S. refiners, but it can also increase risks. American refiners are now partially dependent on foreign markets, which are also subject to weather, political and economic uncertainties. The risks go both ways, however, as consumers throughout Latin America are now being directly impacted by the effects of Hurricane Harvey.
“I’m Looking Up into the Sapphire Tinted Skies” – Looking Toward the Recovery
Now, a full week and a half after Harvey first made land fall on August 25, we are starting to see some meaningful signs that things are getting better. While about 11% of total U.S. refinery capacity (down from over 20% last week) is still completely offline or only in the very early phases of restarting, some refineries are already back to normal operation and others are currently starting up and projected to be back at full rates within the next few days. The table below provides an overview of where each Texas Gulf Coast refinery currently is in the restart process. Furthermore, all of the Lake Charles area refiners (not mentioned in the table) are back at full throughput rates, and the refineries shown in the table that are yet to begin startup are all expected to begin the process “soon,” according to their respective owners. 
Additionally, supporting infrastructure has mostly come back online as well. All major crude pipelines have returned to operation, as have the critical Explorer and Colonial product pipelines. The Port of Houston, along with the Houston Ship Channel, and the Port of Corpus Christi are all open (still with some restrictions), allowing for waterborne crude receipts and product/crude exports. Lastly, crude oil production, both in the Eagle Ford and Gulf, is nearing pre-hurricane levels.
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 cannot 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.