Harvey disaster underscores the need for energy importers to rely on diverse energies, suppliers and transport routes.
By Agnia Grigas*
After devastating Houston and other parts of southeast Texas and continuing on to Louisiana, the hurricane known as Harvey put a spotlight on the rising role of the Gulf of Mexico in the global energy sector. The most powerful storm to hit Texas in half a century has already resulted in reduced shale oil and gas production as well as oil refining, and higher gasoline prices. Liquefied natural gas, or LNG, exports were not significantly impacted, but the storm’s aftermath and cleanup raise questions among energy importers across the globe who eye these resources.
The disaster underscores the need for energy-importing states to rely on diverse suppliers rather than become overly dependent on any one source. This means diversifying imports from more countries and regions, utilizing various land and sea routes, and relying on a mix of energy resources – including LNG, piped gas, oil and renewables. Despite the rise of renewables, oil and gas will remain key components of most nations’ energy mix, with natural gas consumption only rising during a “golden age of gas” as proclaimed by experts. Washington, industry regulators and importers across the world are watching how quickly Houston and the region’s energy sector recover.
Since the 1970s, Houston emerged as America’s energy capital and a top energy hub in the world. The city is the main gateway for exports of LNG produced from shale gas as well as a major center of oil refining, largely due to the region’s role in the US shale revolution, which boosted oil and gas production through a process known as fracking.
The impact of the shale revolution for global energy markets cannot be underestimated, and thus Harvey is significant beyond the regional economy. Largely due to the shale boom, the United States went from fearing energy security in the early 2000s to emerging as the world’s largest producer of natural gas in 2011, surpassing Russia and subsequently becoming the leader in refined petroleum products and among the leading producers of oil now rivaling Saudi Arabia.
As a result of the energy boom years, the US government lifted its historic ban on oil exports and launched LNG exports globally in 2016. The country is expected to become the third largest LNG exporter after Australia and Qatar by 2020. By the same year, it is also expected to add some 20 percent of the total LNG volumes traded globally in 2014 to the international gas market.
Houston, the country’s fourth largest city, is at the epicenter for many of these changes. It’s the home of Cheniere Energy – the only US company exporting LNG produced from shale gas. Starting last year, the company’s LNG exports went to Brazil, India, Kuwait, Spain, Portugal, China and Mexico and this summer made their way with great fanfare to Poland and Lithuania. Indeed, as explained in my book The New Geopolitics of Natural Gas, US LNG exports have a tremendous impact on the global natural gas markets and will transform the geopolitics of gas in Eurasia, especially between European states and Russia: “If the optimistic projections of the gas revolution come to fruition, American gas could secure and diversify Europe’s supplies, reign in Russia’s energy influence, woo energy-hungry Asia, and ensure that the twenty-first century once again remains in the firm grasp of the United States and its allies.”
Natural or manmade disasters could still play havoc with these ambitions. Cheniere’s main export terminal Sabine Pass is located on the Gulf Coast at the Louisiana-Texas border but export operations did not suffer, and the company opened an emergency office in Dallas to prevent service disruptions. Cheniere’s second Texas export facility in Corpus Christi, also on the Gulf Coast, is under construction and sustained minor damages. Another terminal under construction just outside Houston – the Freeport LNG – faced minor water damage.
Though natural disasters are part of life, the region around Houston and Gulf Coast is susceptible to extreme flooding, storms and hurricanes as seen from hurricanes Rita and Katrina of 2005 and Ike of 2008. While it’s been eight years since a hurricane hit this area, Houston endured three 500-year flooding events during the past three years.
The fact that America’s LNG export hub is emerging around this disaster-prone area, could raise questions about the reliability of Houston’s export capacities while raising concerns among European and Asian importers. Importing countries always seek substitutes to ensure reliable energy sources. On the positive note, many other LNG export facilities ae being built elsewhere in the country, with the newest Cove Point terminal due to open on Maryland’s coast this year. Still America’s pipeline infrastructure connecting many gas-producing regions with export infrastructure or domestic markets could use more improvements.
Houston and the energy industry remain confident. Houstonian and independent director of several energy companies Peter Ragauss states that storm disruptions are a common occurrence along the Gulf coast and the energy industry is well prepared: “Hurricane Harvey will be remembered for its severity, but will have no long-term impact on industry investment plans.”
Harvey’s limited impact on natural gas markets is reflected in natural gas prices, which increased only by 4 percent last week largely because less US gas production is located in the Houston area. In fact, the Gulf of Mexico’s share in American gas production fell from 25 to 5 percent since 2005 as shale-gas production has shifted to the Appalachian Basin in the northeast and other parts of Texas. Another reason for the relatively stable prices: Power outages and flooding tempered demand for gas in the Gulf region.
Moreover, while LNG exports have not been hard hit by Harvey, the region’s petroleum refining capacity has been. Nearly half of America’s refining capacity is on the Gulf Coast from Alabama to Texas while nearly a third of the county’s refining capacity is located between Lake Charles, Louisiana, and Corpus Christi, Texas. The Houston area is home to a number of refineries including the Marathon Galveston Bay, Phillips 66 Sweeny, Exxon Beaumont, LoyondellBasell, and the country’s largest refinery Motiva. Many report reduced capacity. The Koch Industries refinery in Corpus Christi also shut down following the storm. Partly due to a lack of supply from refineries, major regional pipelines such as the Magellan shut down while the Colonial and Explorer pipelines operated at reduced rates. As a result of Harvey, about 25 percent of the country’s refining capacity was shut down. Disruptions constrained flows of resources across the United States, leading to a surge in oil and gasoline prices, though the latter have stabilized since.
Many of the refineries are restarting operations, and the process is expected to take a few weeks.
As the United States solidifies its lead in the global energy markets, local natural disasters or manmade accidents will have cross-border implications on world energy pricing, supply and liquidity. Such disruptions are unlikely to significantly change the calculus of states from Europe to Asia looking to import LNG. Energy security depends on diversified supplies, and for now US LNG is perceived as an additional source rather than a sole provider for most importing states. Meanwhile, the industry is likely to take lessons from Harvey, considering additional safety measures and preparing for more regulations to ensure successful operations.