September 1, 2017 ... Post Harvey

September 1, 2017 ... Post Harvey

1st September 2017

Oil Drilling Activity

Despite Hurricane Harvey, drillers increased onshore rigs by 3 this week reversing a three-week decline and bringing the total to 923. Across the three major unconventional oil basins, the rig total increased to 497(up 2).  However, growth remains weak in the major oil basins which continue to tread water with crude prices holding below US$50 WTI.

Sources: EIA Weekly Update and GCA analysis

Natural Gas: micro-grids to the rescue

The main post-Harvey focus for natural gas has been on the likely lost production in the coming weeks, and the consequent jump in Natural Gas Futures.  However, looking behind the headlines, there are some other lessons to be learned from Harvey where the impact from the storm has not only been from flood waters, but also power failures which have significantly impacted gas production relying on electrical equipment.

Based on data from insurer Munich Re, quoted by the Economist this week, hydrological events such as Harvey have quadrupled in the last 25 years and significant rain and flooding have become a much greater risk than at any time in recent history.

As both businesses and homeowners learn from bitter experience, one trend that has been quietly gathering pace, and will likely receive a boost post-Harvey, is from homes and businesses looking for a reliable means of standby generation.  In that regard, natural gas is outpacing the competition with a 10% CAGR in demand for standby generation since 2010, according to one of the major suppliers.

In Houston one such success story has been the supermarket HEB, who have developed a micro-grid natural gas fired system for many of their stores.  On Friday (just before Harvey hit landfall) they disconnected their stores from the grid, and switched on their onsite generators, with the result they were one of the first stores to reopen.  Unlike diesel, where on-site storage can be a logistical barrier, the reliability of gas distribution systems during weather events becomes a major advantage.

As the search continues for new, practical and economically viable markets to make better use of low cost, plentiful supplies of natural gas, natural gas micro-grids may take on a much more prominent role in power generation, and not just as a reliable back up when storms like Harvey wreak their havoc.

Crude Oil – Texas refinery demand down 3.36 million barrels per day

The devastation caused by Hurricane Harvey has cast a great deal of uncertainty with regard to what may happen over the next few weeks. On August 28, the U.S. average retail gasoline price was US$2.40 per gallon, the second-lowest price on the Monday before Labor Day since 2004.  While the average Monday price was up over the previous week, prices do not yet reflect the full effects of Hurricane Harvey.

The recovery will mimic the storm's path from west to east. Refineries in Corpus Christi, where Harvey made landfall, could begin to restart — a process that takes days — as early as this week. Other refineries in the area are likely to do the same, a sign that damage from the storm could be short lived and refinery demand in the area will ramp up quickly.

Moving east, it could take two weeks or longer before refineries in the Houston area can recover from a record-setting rain fall and resume normal operations. That assumes they didn't suffer serious damage, which is still unknown.

Exxon, Shell and other companies have reported that some of their storage tanks and other facilities near Houston were damaged by the torrential rains and flooding. Most of the reports seem to indicate relatively minor damage. However, even once the refineries are running, pipelines and ports are needed to carry their gasoline, diesel and other fuels to consumers.

A major pipeline supplying the East Coast with gasoline remains shut down — partly because with refineries closed, there is nothing to ship, but also because of some damage. Another pipeline that carries crude from the Permian Basin field in Texas to Houston-area refineries remains closed awaiting refineries to restart.

Shipping channels and ports in Eastern Texas have been disrupted this week and the Houston shipping channel remains shutdown. Tankers are sitting in the Gulf of Mexico awaiting operations to return to normal. At this time, neither crude nor petroleum products are coming to, or going from, Eastern Texas. However, for the most part, Louisiana ports continue to operate normally.

Roughly 2.33 million barrels per day of Texas refining capacity remains down, or 12.6% of US capacity. In addition, refineries that are still online are also slowing run rates. With those plants operating at ~50% capacity, that would put the demand loss at ~3.4 million barrels per day.

Sources: EIA Weekly Update and GCA analysis

US crude production was essentially unchanged at 9.53 million barrels a day, still near the record high of 9.61 million reached in June 2015. But that masked a drop of 12,000 barrels per day in output in the lower 48 states, offset by an increase in Alaska.

Offshore drilling in the Gulf has fallen off since the shale boom took off more than 10 years ago, shifting more production inland to less hurricane-prone areas like the Permian Basin. However, operations in the Eagle Ford shale formation in south Texas may take a hit from Hurricane Harvey and could show up in data next week, when crude inventories could continue to see significant draws.

Unlike after other Gulf of Mexico hurricanes, there is no expectation of a shortage of crude due to the excessive oil already in storage tanks. The near term issue is ensuring that active refineries can access that crude.

The US Energy Department released 500,000 barrels of crude oil from the Strategic Petroleum Reserve this week. The oil will be delivered to the Phillips 66 refinery in Lake Charles, Louisiana, a plant not been affected by the storm.

Weekly Recaps

Oil Drilling Activity

Total US rig count (including the Gulf of Mexico) stands at 943, up 3 this week with rigs targeting oil flat. The horizontal rig count stands at 794, down 2.

The total number of active onshore rigs increased to 923.  When compared to a November 2014 figure of 1,876 active rigs, the current level remains 50% below the 2014 high.

Across the three major unconventional oil basins, the oil rig total increased to 497, with Permian up 3, Eagle Ford down 1 and Williston flat.

Crude Oil Price

Brent, the global benchmark for oil, rose US$0.05 to US$52.48 a barrel, reflecting a gain of 0.10% on the week.

WTI crude decreased US$0.69 to US$46.85 a barrel, down 1.45% on the week. .

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA analysis

US crude oil refinery inputs averaged 17.7 million barrels per day, with refineries at 96.6% of their operating capacity last week. This is 264,000 barrels per day more than the previous week’s average.

US gasoline demand over past four weeks was at 9.7 million, up 0.2% from a year ago. Total commercial petroleum inventories remain flat last week.

On the supply side, EIA data indicated that total domestic crude production increased 2,000 barrels to 9.530 million barrels a day. The Lower 48 crude production now stands at 9.07 million barrels per day, down 12,000 this week.

US crude imports averaged 7.9 million barrels per day last week, a decrease of 885,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 8.1 million barrels per day, 4.6% below the same four-week period last year.

Crude oil inventories decreased 5.4 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) increased 0.7 million barrels; total storage is 57.2 million barrels (~63% utilization).


September 1, 2017 ... Post Harvey

Nick Fulford

Global Head of Gas/LNG -
September 1, 2017 ... Post Harvey

P. Kevin Galvin

Facilities/Cost Engineer -
September 1, 2017 ... Post Harvey

Bob George

Global General Manager -

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