Will GoM Oil Refiners, Drillers Survive The Harvey Mayhem?

As Hurricane Harvey tore through the Texas Gulf Coast--the devastating storm just made landfall again, this time in Louisiana--workers in the U.S. oil industry have struggled to evacuate production facilities and shut down refineries. This, in turn, triggered the biggest disruption in nationwide energy supplies in years, driving gasoline prices higher at the pumps.

The tropical cyclone led to heavy downpour which surpassed the all-time rainfall in Texas, according to the National Weather Service.

The Goldman Sachs Group, Inc. (NYSE:GS) has estimated property damages in the range of $30 billion to $40 billion. In fact, the U.S. investment bank predicts third-quarter GDP growth to fall by 0.2%.

Oil Refineries Face the Brunt

The United States has major refining infrastructures along the Gulf of Mexico (GoM). According to The U.S. Energy Information Administration (EIA), more than 45% of domestic oil refining capacity and around 51% of the nation’s natural gas processing capacity are located in the GoM.

Super major Exxon Mobil Corporation (NYSE:XOM) has shut down the 584,000 barrels of oil per day Baytown refinery – touted to be the second largest in the domestic market.

Anglo Dutch energy giant Royal Dutch Shell (LON:RDSa) plc RDS.A has stopped refining activities at the Deer Park unit that has the capacity to process 325,700 barrels of oil daily. Three facilities of the largest U.S. refiner Valero Energy Corporation (NYSE:VLO) – Port Arthur, Three Rivers and Corpus Christi – have been affected by the storm as well.

Another downstream player Marathon Petroleum Corporation (NYSE:MPC) is operating its Galveston Bay refinery at reduced rates.

As per consulting firm WTRG Economics, the shutting down of leading gulf coast refineries translated into a daily loss of around 2 million barrels of production – mostly gasoline and diesel.

Crude Output Remains Relatively Unaffected

Per the EIA, the GoM area accounts for just about 17% of total domestic crude production and 5% of total natural gas output. This is in stark contrast to a decade ago when 30% of the domestic oil volume came from the GoM region.

This is mainly due to the spectacular boom in U.S. shale production. Arguably the biggest development in the global oil market over the last few years, the relentless increase in the low-cost North American shale output has taken the limelight away from the GoM. To maintain deepwater/ultra-deepwater drilling in the GoM – with its associated risks and steep costs – oil prices need to be much higher than the current level.

Hence, the majority of domestic oil and natural gas production comes from shale resources. Per data provided by the EIA, roughly 48% of the domestic oil output has been generated from tight oil plays in 2016. Moreover, the U.S. produced 60% of natural gas from shale resources like Marcellus and Utica in 2016.

As a result, the loss from GoM oil and gas output following Harvey is far less than that incurred in 2005, when hurricanes like Katrina and Rita had hit the region. As per the Bureau of Safety and Environmental Enforcement, almost 19% of the GoM volume, which represents 331,370 barrels of crude per day, was lost thanks to Harvey. This is significantly lower than the combined loss of 1.5 million barrels a day almost 12 years ago, according to WTRG Economics.

Among the few explorers that have been forced to cease operations following heavy winds and rains are Chesapeake Energy (NYSE:CHK) and Denbury Resources Inc. (NYSE:DNR) . In the Eagle Ford area of Texas, Chesapeake has decided to close drilling work of two new wells. Additionally, Denbury temporarily suspended its operations at its Houston area fields. Both Chesapeake and Denbury carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

On August 25, ConocoPhillips (NYSE:COP) decided to stop all activities in the Eagle Ford shale region of Southern Texas. Now, the upstream player is restarting some of its Eagle Ford wells.

How Did Commodity Prices React?

While oil companies are in a hurry to assess damages to refineries and offshore platforms in the wake of the tropical storm, the near-term impact to prices vary.

The decline in refinery operations from the temporary closure of the units led gasoline prices to jump to beyond a two-year high of $1.783 a gallon on anticipated supply outages.

On the other hand, with the expectation of lower crude demand due to major refinery shut downs, oil dropped to a one-month low of $46.57 a barrel on August 28. The commodity lost further ground the following day, closing at $46.44 a barrel.

Meanwhile, natural gas was down slightly on concerns of lower power and manufacturing sector demand due to temporary electricity outages.

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