Hurricane Ida puts America’s energy security to the test

Hurricane Ida, worst storm since Katrina, is estimated to have struck 94% of Gulf’s offshore oil production, as well as power to a million houses over Louisiana and Mississippi last weekend. About 10% of the gas stations in the Baton Rouge area were no more fuel as did 7.5% around New Orleans, leaving thousands queuing for gas to fuel home generators. Gasoline shortages are expected to worsen sharply as Ida passes.

WTI crude oil prices rose 10% on Monday to $69, but have since calmed down $67.50. Despite storm damage to energy infrastructure (which has temporarily shut down nearly 15% of domestic oil production and 5% of natural gas), prices are still down 6% since last month. The minimal rebound amid Ida illustrates the resilience of the US gasoline refining system and the continued impact of Covid-19 on the transportation sector. Global demand is under pressure and supply remains healthy.

But it would be foolish to underestimate the impact of Ida and future such storms on US energy supply chains. Although this year’s Texas power supply disaster was an isolated incident confined within the state of Texas power grid, the destruction of Hurricane Idas is not bound by state lines and is already impacting the nations’ oil and gas supply chains.

Along with Texas, Louisiana is one of the nation’s largest petroleum and natural gas hubs, with 17 oil refineries accounting for nearly one-fifth of the countries’ refining capacity. Together, these facilities process approx 3.4 million barrels crude oil per day (bpd). In 2020, Louisiana’s two liquefied natural gas export terminals shipped about 55 percent of the nations’ LNG exports. The ramifications will become clearer in the coming days, but expect the damage to translate beyond the Bayous borders, including badly damaged offshore hydrocarbon production.

The damage has been done

Aware of the storm’s threat to personnel and infrastructure, energy companies cut production in the Gulf by 91%, or about 1.65 million barrels, in anticipation of the storm. About 84.87% of natural gas production in the Gulf of Mexico was also shut down. While the damage is still being assessed, ExxonMobil
XOM
and Shell have report that some platforms remain intact and functional. Others, such as BP and Equinor, have stressed that it is too early to determine the extent of destruction.

Americans can hope that early action will prevent long downtimes and rising energy prices. Some predict a worst-case refinery that goes down for weeks instead of days could drive pump prices up 15 to 25 cents per gallon national.

For family homes, the grim prospect of weeks without power seems increasingly likely. Power companies will be forced to strike a balance between restoring much-needed electricity to residents and supporting commercial utilities, including the oil and natural gas companies eager to resume operations.

Entergy, Louisiana’s largest energy supplier, has emphasized that difficult and challenging recovery, especially for the hardest hit areas. Tom Kloza, global head of energy analysis for the Oil Price Information Service, noted the current lack of clarity around power supplies in the region. When they say the southeastern parishes that house many major refineries won’t be back on the grid for weeks, that’s a much more serious event.

You can’t cut corners when reopening

The desire to resume business-as-usual operations among refineries is understandable, but rushing the reopening process could extend the closures. You can’t just flip the switch” and resume production of a refinery, said Robert Yawger, from Mizuho Securities, protective for two to four weeks before returning to full operations as they were before the storm. This frustrating time frame is because energy infrastructure, particularly in coastal Louisiana, has been hit hard.

Entergy Corp
ETR
noted that the transmission lines feeding power to New Orleans went down on Sunday, leaving the Paris of the south in the dark. Of course the oil industry will recover. Hurricanes are a known amount in Louisiana and the Gulf region, and a majority of businesses have taken appropriate action ahead of the storm. If these measures prove to have successfully prevented significant damage from the storm, we will see the market stabilize and bounce back.

What is absolutely clear, however, is the need to prepare for events related to climate change. Energy companies, the affected states and the federal government must work together on two fronts: resilience and emissions adjustments. Where appropriate, recently allocated Congressional funding for infrastructure should go to vulnerable regions, strengthen critical infrastructure and minimize the impact of worsening storms on human life. If a link can be established between emissions-induced climate change and an increase in weather-related damage, major oil companies will urgently need to adjust their timetables and practices to prevent offshoring from becoming economically and practically unsustainable. It makes sense that every province, state and the country as a whole is improving resilience and working on layoffs to prevent further disasters.

The people of the Gulf cannot regularly withstand storms of this magnitude, nor can the US energy grid.

With help from David Pasmanik and Danny Tomares