US hurricane season: turbulence ahead for the energy industry?

image is Gulf Of Mexico (1)

Modern deep-water platforms in the Gulf of Mexico are much better prepared for storms that the old shallow-water installations damaged by Hurricane Andrew in 1992, Rita in 2005 and Gustav and Ike in 2008. Picture used for illustrative purpose.

Hurricane Katrina in 2005 brought unforgettable images of devastation and human suffering as it hit New Orleans. But for the energy industry, Hurricane Rita a mere month later was more damaging as it tore up offshore oil and gas platforms. As a record storm season approaches this year, US energy vulnerabilities could make waves elsewhere.

The current climate set-up is ideal for major Atlantic hurricanes. Record high temperatures, driven by global warming exacerbated by the El Niño conditions that peaked in December, have left the Caribbean, Gulf of Mexico and Atlantic Ocean unusually warm. Hot waters can rapidly intensify storms while evaporation gives them a heavy burden of precipitation. Now, the Pacific is shifting into El Niño’s opposite, the La Niña phase, which reduces high-altitude winds, that otherwise can disrupt storms through wind shear.

Above-average hurricane season

Consequently, the US’s National Oceanic and Atmospheric Administration forecasts an above-average hurricane season this year, running from 1 June to 30 November. It predicts between 17 to 25 named storms, including 4 to 7 major hurricanes of category 3 or higher.

These storms are not just more numerous, but likely to be wetter, more intense, and prone to gaining strength quickly. In a further effect of climate change, steadily rising sea-levels exacerbate vulnerability by bringing more coastal areas within range of storm-driven surges.

The dangers of hurricanes come not just from their winds, but their rain. 2017’s Hurricane Harvey hit the Texas coast as a Category 4 storm – the second-highest level – but weakened to a tropical storm. However, it then moved slowly over the oil capital of Houston, dumping more than a metre of rain and bringing unprecedented flooding.

The US energy industry is very different from its 2005 ancestor. Shale has shifted the centre of gravity. The biggest oil importer in the world has become one of the largest exporters, on a gross basis, and overall a net exporter, combining crude and refined oil products. Nearly 4 million barrels per day of crude oil was shipped out of the Gulf Coast terminals last year. From a liquefied natural gas importer, the US is now the largest LNG exporter, outstripping Qatar and Australia.

Growing US role in the LNG sector

This role is even more important because of the decline of traditional Western Hemisphere oil producers Venezuela and Mexico, and the cut-off of Russian gas to Europe, mainly replaced by LNG.

The Gulf of Mexico was the US’s leading oil region in 2005. It yielded about 1.5 million barrels per day out of a national total of about 5 million bpd. Today it produces even more – 1.8 million bpd – but that’s a much smaller share of nearly 12 million bpd of crude oil and condensate.

But if the US Gulf of Mexico were a country, it would be the 11th-largest producer in the world. There is still plenty of life in what has been repeatedly declared the “Dead Sea”. Last year, Shell started its 100,000 bpd Vito platform and BP the 140,000 bpd Argos, its first new platform since 2009’s disastrous Deepwater Horizon spill. This year, Shell and Chevron will start production from the 100,000 bpd Whale platform, Chevron and TotalEnergies the 75,000 bpd Anchor. Next year, LLOG and Repsol should commence output from the 60,000 bpd Salamanca. New developments in the deeper Palaeogene trend by Shell, Chevron and BP should by 2028 bring the Gulf to a record high of 2.2 million bpd.

Such modern deep-water platforms are much better prepared for storms that the old shallow-water installations damaged by Hurricane Andrew in 1992, Rita in 2005 and Gustav and Ike in 2008. But there is still the potential for accidents, damage to pipelines to onshore, and production would at least have to be shut down and platforms evacuated as storms sweep through.

The US refining and petrochemical complex and oil export terminals are heavily concentrated along the Gulf Coast. So is the Strategic Petroleum Reserve, which the administration of President Biden has leaned on heavily to manage prices.

Complicated aftermath

The effect of a major hurricane hit could be complicated. If it interrupts crude oil production or exports, it would send prices up, and could be compensated if necessary by higher OPEC output. But if it damages refineries instead, it would reduce crude oil prices but boost those of refined products such as diesel and petrol.

Nearly all operating and under-construction US LNG terminals are along the Gulf of Mexico coast, while Elba Island in Georgia and Altamira in Mexico aren’t out of the firing line either. 87 million tonnes per year of currently operational capacity, and another 35 million tonnes scheduled to start this year, could be vulnerable.

LNG facilities are planned to cope with storms. Nevertheless, power cuts, interruptions to marine traffic, and flooding are all risks. Cameron LNG was put out of action for nearly a month in 2020 by damage to electrical infrastructure caused by Hurricane Laura.

Outlook for the hurricane season

The global gas market is quite comfortably supplied now, but still finely balanced. European prices have jumped recently with a pipeline outage in Norway, now the continent’s leading supplier, and a technical problem at Australia’s huge Gorgon plant. A serious outage to US LNG would push up global prices, while US gas prices would slump as production loses a major outlet.

The international energy industry has watched weather in the Gulf of Mexico intently for decades. Storms’ impact on oil remains important, but has been overtaken by gas. The expected intense hurricane season may pass uneventfully for the energy industry, but it may also be a further cause of turbulence.

  • Robin M. Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis


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