By Ryan M. Couture and John R. Auers
Our heartfelt condolences go out to those in southern Louisiana who have lost so much in the past couple of weeks to the “Storm with No Name.” Despite the relative lack of media coverage (at least until The Donald’s recent visit), it has caused substantial damage to not only tens of thousands of homes, but also to the significant petroleum infrastructure present in the region. As bad as the damage has been, it is certainly not unprecedented. In fact, weather is a routine hazard throughout the petroleum intensive Gulf Coast region. Over the years, storms of all types have regularly impacted the various segments of the petroleum industry, including refiners, causing major disruptions in both crude and product markets. As one of our favorite 1970’s rock bands would say, U.S. Gulf Coast petroleum refiners have become very experienced with all aspects of “Ridin’ the Storm Out.” But even with all that experience, and the outstanding jobs done to keep plants humming despite terrible conditions, storms are unpredictable and will cause outages. As we move into prime hurricane season (which extends until the end of November), it is worth revisiting what past hurricane seasons have brought, and what it may mean for U.S. refiners and petroleum markets.
“The wind outside is frightening”
Record rains in Louisiana over the past two weeks have resulted in significant flooding in many areas around Baton Rouge and throughout the lower Mississippi River region. While the “Cajun Navy” was busy rescuing fellow neighbors, the “Cajun refiners” were equally busy keeping things operating throughout the deluge. Despite their best efforts, there have been several incidents. In the most high profile event, a major fire broke out at Motiva’s 235 MBPD Convent refinery, causing significant damage to their 45 MBPD resid hydrocracking (H-Oil) unit. While the cause has not been announced, it was in the midst of a heavy thunderstorm, and the heavy rain and flooding made both firefighting and post-fire inspection efforts very difficult. Current guidance from the company is that the unit will not be back to full production until the 3rd quarter of 2017 (although a partial start-up could happen by the end of the year). In addition, ExxonMobil’s 500+ MBPD Baton Rouge refinery had to significantly trim throughput when the flooding impacted their salt cavern LPG storage facilities. Only a last minute startup of a LPG unit in the chemicals plant was able to keep the refinery from experiencing further cutbacks or even full shutdown. While other minor impacts have been reported, most regional refiners announced they have generally been able to maintain normal operating rates.
“But it’s kinder than the lightning”
While the U.S. Gulf Coast (USGC) is certainly no stranger to major hurricanes, it has escaped relatively unscathed over the last few years. This has led many to forget that the mid-2000’s were the most devastating ever for the industry. In 2005, perhaps the most damaging storm in U.S. history, Hurricane Katrina, struck Louisiana and Mississippi. Not only did it do extensive damage and cause significant loss of life, but from an oil industry standpoint, it had an unprecedented impact on operations. While producers were certainly effected (having done damage to several major platforms in the USGC), the damage to refineries and midstream infrastructure was truly epic. The flooding in the New Orleans area took several regional refineries out for weeks and even months. At the same time, the drop in production of over 1.4 million BPD triggered a rare release of petroleum from the strategic reserve. Despite the 30 million barrel SPR release, only 11 million barrels were ever sold, because of the lack of ability to move the crude to active refineries (many regional refineries were shut down, while logistics infrastructure was also impacted). The most significant of this was the shutdown of the twin product pipelines from the USGC to the Northeast (the Colonial and Plantation pipelines) due to the lack of power. While those pipelines came back online after only a few days, the ripple effect meant the impacts of the storm were felt up the eastern seaboard as prices spiked, prompting a rare temporary Jones Act waiver.
Hurricane Rita followed Katrina by only a few weeks. Making landfall in West Louisiana/East Texas, it had a devastating impact on the communities still struggling to recover from Katrina. The hurricane affected a larger area than Katrina, and was farther west, impacting the Beaumont/Port Arthur refineries the worst. The storm was large enough to cause wind damage throughout the Galveston and Houston area as well, which temporarily knocked refiners offline as they repaired cooling towers and flare stacks impacted by the high winds. Many of the refiners in Houston and Texas City were down for one to two weeks, while some in the Beaumont and Port Arthur refiners were down for a month or more. At the same time, producers, still recovering from Katrina, cut production again. At the peak, about 1.5 million BPD of crude production in the Gulf of Mexico (GOM) was offline.
What were the impacts? The market saw two distinct blips in prices following the storms. Prices largely recovered within a few weeks of the storm (prices began to recover not long after Katrina, but Rita impacted many more refiners, and the second blow took longer to rebound). Even as prices more or less recovered, refiners were still reeling. After Rita, over 4 million BPD of capacity was offline, and yet prices only rose by about $0.50/gal. Few other industries can rally from such an impact.
It was only three more years before the industry again experienced a one-two punch from USGC hurricanes. Hurricane Gustav hit landfall on August 31, 2008 in Louisiana, prompting a dozen refineries in the region to shut down temporarily, while another 10 reduced throughput. The GOM saw 1.3 million BPD of production knocked offline. While not as extensive as Katrina or Rita, Gustav caused considerable disruption to operations in the refineries of Louisiana and East Texas.
Only two weeks later, Hurricane Ike slammed straight into the main U.S. refining hub. Making landfall in Galveston on September 13, the storm passed directly over Houston. Like Gustav, it only impacted about 1.3 million BPD of oil production in the GOM, but it took out over a dozen refiners in the Houston and Beaumont/Port Arthur areas. Some of the facilities impacted the worst were actually in Beaumont and Port Arthur, which saw significant storm surge and experienced extensive flooding. ExxonMobil’s Beaumont refinery was one of the worst impacted, with a majority of the refinery under several feet of water, and the refinery down for over a month. At the peak, nearly 4 million BPD of refining capacity was offline.
Despite this blow, the impact to prices was nominal. Whether it had something to do with the slackening demand running up to the 2008 financial crisis or other factors, only a small spike in mid-September for gasoline prices took place before oil continued its slide through the end of the year.
“And I’m not missin’ a thing”
While Hurricane Sandy did not impact the USGC directly, this 2012 storm highlighted the fragility of the logistics infrastructure. While about seven percent of U.S. refineries in PADD I were directly impacted by the storm, actual damage was minimal. As the storm swept through the Northeast, knocking out power, massive supply disruptions rippled through the region. Unable to get products from the refineries to the wholesalers and ultimately retail stations, massive price swings ensued. Millions were without power, and lines formed at service stations. In some places, odd/even license plate gasoline rationing was enforced, while another historic Jones Act waiver was issued to help move product. As infrastructure recovered and power came back online, legislators moved to increase strategic product stockpiles and have better systems in place to move product to market and to consumers with minimal disruptions in the future.
“It’s a hard life to live but it gives back what you give”
A single hurricane has the ability to impact tens of millions of barrels of both crude and clean product production. While in past years, this was a concern with a market that was more demand than supply, it is possible such an event could help to rebalance today’s market which is oversupplied. With near record inventories (see last week’s blog), a single major storm could result in 1-2 million BPD (or more) of lost refining capacity for a week or more, helping to rebalance the current oversupply of products. This of course assumes the critical logistics infrastructure is not impacted, and only production is. Heavy rains have caused issues in the past with underground cavern storage access, including issues with diesel storage last year during the record Texas rains and the aforementioned LPG storage caverns in Louisiana. While such an event may help balance the product inventories, it could have a detrimental effect on crude stockpiles which still sit near record highs.
Still, one of the greatest challenges with recovering from the hurricanes is not repairing the refineries, but recovery of the persons that operate them. No refinery is worth more than its value in scrap if there is no one there to operate it. After these major storms, employees are often displaced, or struggling to rebuild themselves. The impacts on personnel are often greater and longer-lasting than to the refinery itself.
Conclusion
Hurricanes and tropical storms will remain a constant part of life in the USGC. Refiners are woven into the fabric of the culture and society in the region, and in many ways their ups and downs translate directly to the community and vice versa. As we enter prime hurricane season for the USGC, both communities and refiners are preparing for the worst, while hoping for the best. After years of experience, the regional refiners are better prepared for severe weather than anywhere else in the country. Still, preparation can only go so far when the big storms hit. Whether 2016 will be like 2005 or 2008, or more like the years since, is anyone’s guess, but with inventories high, any supply and price impacts will hopefully be mitigated.
Turner, Mason & Company keeps watch on developments that may impact refiners and oil markets, including developing tropical storm Fiona. While the impact of most storms is short term, occasionally major storms not only impact the industry today, but for years to come as best practices and legislation shape the status quo. Legislation or other changes that impact the industry are analyzed as part of our Crude and Refined Products Outlook that is published biannually. The most recent edition was released last month, and includes an analysis of key factors impacting refiners. For more information on our Outlook or other products, or if there are any specific consulting engagements with which we can assist, please visit our website or give us a call.