Late summer is always an interesting time for the oil and tanker industries. The summer driving season is coming to an end, and the stockpiling of heavier fuels for the winter is getting underway at a time when the threat of hurricanes and typhoons is at its greatest. The weather event of late summer so far this year has been Hurricane Isaac in the US Gulf. As the storm approached New Orleans and the Louisiana coast seven years to the day after  Hurricane Katrina impacted the same spot, picking up strength en route, fears of a repeat performance spread.
Hurricane Katrina, which swept through New Orleans on 29 August 2005, was one of the most devastating storms to hit the US. The death toll topped 1,500; the bill for damages exceeded USD 40 billion; and the city where jazz was born was virtually destroyed.
Furthermore, Katrina knocked out a swathe of oil and gas production in the Gulf of Mexico and forced the medium-term shutdown of eight refineries in the region. Fuel prices across the US jumped, not least due to panic buying, and numerous non-oil sectors of the country’s economy nosedived.
As Hurricane Isaac approached the same Gulf landfall this August, preparations, not surprisingly, were especially rigorous. The imminent storm coincided with an explosion at the 645,000 barrels per day (bpd) Amuay refinery in Venezuela, the world’s second biggest, and the two events sent gasoline futures to their highest levels in four months due to worries over fuel availability.
Over 50% of the drilling rigs and platforms in the Gulf of Mexico were evacuated in advance of the storm. By 28 August, the day before the storm’s arrival, 95% of offshore oil production capacity and 67% of that for gas were shut in. The Gulf of Mexico region accounts for about 25% of US oil production, 7% of its natural gas output and 43% of its refining capacity.
The Louisiana Offshore Oil Port (LOOP), which is situated 18 miles offshore and receives about 1 million bpd of crude oil for US Gulf Coast refineries, suspended tanker deliveries two days before Isaac’s arrival. Ship bunkering on the Lower Mississippi River was halted and Gulf refiners closed down about one-quarter of their facilities. The shut-ins were carried out in such a way as to facilitate a rapid renewal of operations once the all-clear was given.
In the event when it came ashore Isaac caused relatively minor damage. Although great parts of the states of Mississippi and Louisiana were deluged and suffered some flooding damage, the levee flood defences erected in the wake of Katrina on the Lower Mississippi River, including around New Orleans, performed as required. They coped with a three-metre tidal surge and only one spillage over a retaining barrier in the city was reported.
Furthermore, just two oil industry installations were swamped by rising water levels, namely a refinery and a bulk liquids storage terminal. The majority of the facilities that had been shut in, offshore and onshore, were restarted within a few days. Most oil and gas producers self-insure their weather-related production volume losses, further alleviating the pain of downtime.
Gasoline prices, already volatile, did spike once more in the days following Isaac’s appearance, but only in parts of the US Midwest and to nothing like the same extent as the jump following Katrina. While the fuel price impact tends to vary with the ferocity of a hurricane, prices will return to their pre-storm levels in due course. With Isaac the return to the status quo occurred sooner rather than later.
At the same time Isaac was approaching New Orleans, South and North Korea were being buffeted by Typhoon Bolaven, the strongest to hit the two countries in a decade. The death toll from the storm reached 17, some seven of which were Chinese fishermen. A maximum wind speed of 214 km/hour was recorded, well ahead of Hurricane Isaac’s 130 km/hour top speeds.
No sooner had Bolaven blown through than South Korea was pounded by a second typhoon, Tembin, on 31 August. The country’s major refineries were forced to stop bunker vessel loading operations once again, only two days after they had been reinstated following the Bolaven shutdown.
The oil and tanker industries have the ability to offset the negative impact of major hurricanes and typhoons on the markets by working in unison to make strategic reserves and inventories of oil more generally available. As many major economies are now particularly susceptible to unwanted rises in the price of key commodities, contingency planning is more important than ever.
On the occasion of Hurricane Isaac the Group of Seven (G7) nations were quick to call on oil producers to increase output in order to offset potential US Gulf Coast supply disruptions. A measure of the success of this simple statement of intent, as well as of Isaac’s limited strength, is given by the fact that the world’s benchmark crude oil prices began to fall as the hurricane swirled over New Orleans. Also, tanker freight rates remained immune to developments in the Gulf of Mexico.
The current subdued demand for oil in the US also helped minimise Isaac’s impact, as did the high inventories of fuel in place across the country. Going forward, the US will be less reliant on tanker deliveries of overseas crude oil and Gulf of Mexico production than is currently the case.
The steady buildup in the production of oil from unconventional onshore sources, both domestically and in Canada, will ease the late summer pressures to which the US Gulf oil infrastructure is susceptible. Industry analysts are predicting that US crude oil imports, which averaged 6.6m bpd in 2011, will fall at least sevenfold, to under 1m bpd, over the next decade.
Theoretically, this development should also help minimise the impact of adverse weather events on US fuel prices and ease the fears prompted by the arrival of hurricane season. However, as the events of seven years ago, when Katrina unleashed her full fury, made abundantly clear, it is best not to underestimate Mother Nature.
Source: BIMCO