Colorado's oil and gas industry responds to Hurricane Harvey

The energy sector's reaction, impact and give-back following the summer 2017 natural disaster

All eyes on are Hurricane Harvey this week, as communities in the southern part of the country have been hit – and hard – by the natural disaster. Tropical Storm Harvey descended on the Texas Gulf Coast late Friday, August 25 as a Category 4 hurricane, hitting the heart of the energy sector in dramatic fashion. Thus far, the effects are drastic and anticipated to worsen before they improve.

Harvey, which is the most powerful hurricane to hit the state of Texas in more than 50 years has already changed the dynamics of the energy industry throughout the country. At least 10 refineries in Houston and the Corpus Christi areas (including MOtiva's Port Arthur refinery, the largest in the nation and Exxon's Baytown refinery, the second largest in the country) have been shut down knocking down roughly 2.2 MMBbl/d of refining capacity, which led gasoline futures to spike. Future prices for gasoline are at their highest levels since July 2015.

Harvey has also had a significant impact on crude supply, with current Gulf of Mexico output down nearly 379 MBbl/d (21.6 percent of current output) and onshore production down approximately 300 MBbl/d, as estimated by the Interior Department's Bureau of Safety and Environmental Enforcement. This number will likely increase as producers assess the impact of the storm and full reports emerge, particularly in the Eagle Ford area where many producers had already started idling production.

Although crude production is down significantly, the impact is more than offset by the decline in refining capacity. Additionally, as the effects of tropical storms are typically short-lived, it is currently unclear how soon the refineries and production will be back up and running.

As it relates to natural gas, historically hurricanes have been bullish for natural gas prices because of the production impact in the Gulf. However, following the unconventional revolution and growth of onshore production, the impact of a major hurricane to prices changes the game. The severe weather and flooding have also disrupted NGL demand, with export facilities and steam crackers shutting down.

The market is waiting to understand of long-term damage to refining or production infrastructure. The NYMEX (Sept contract) traded as high as $3 per MMBtu as of August 22, and even a hurricane could not prevent a price drop; the contract closed at $2.89 on Friday, the 25.

For some local perspective, the six Colorado companies Drillinginfo could identify with operations in the path of Harvey with offices in Denver, include:

According to Scott Prestidge, director of communications and public affairs for the Colorado Oil & Gas Association (COGA) says his organization has helped the industry raise $1.5 million to support Red Cross initiatives in Texas as a result of Hurricane Harvey. 

Outside of the energy sector, Colorado brewers are pitching in to make access to clean water available in affected areas of Texas. Oskar Blues shut down production in Longmont Tuesday, filling 88,800 cans with clean water, while MillerCoors switched its Revolver brewing lines in Texas to can water as well.

The impact will be based on the extent of the damages and whether they are permanent or not. In the short-term, some revenue losses could have occurred as a lot of production operations had to be shut down, so Colorado companies with operations in the Gulf will inevitably see some impact.

Consumers should anticipate higher prices at the pump in the weeks to come as a result of Harvey. 

If refineries are damaged badly enough, in the long-run, Colorado crude will feel the effects, as it won't be able to move south for those purposes. In that case, companies will have to find a new place to move their production. Worst case scenario: decreased production levels can be expected. Otherwise, no significant impact should be felt in the Colorado energy sector.

Categories: Economy/Politics