The Crude Report: Hurricane Ida's impact at the US Gulf coast

Author Argus

Hurricane Ida landed along the Louisiana coast on 29 August 2021 as a category 4 storm, affecting not only the region’s refineries but also offshore production operations of a lot of the country’s medium sour crude oils.

In this episode of The Crude Report, Argus Americas Crude Associate Editor Amanda Hilow and Deputy Editor Amanda Smith discuss the hurricane’s effect on the region’s oil refining, production and prices, as of the recording date of 5 September 2021.

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Transcript

Amanda Hilow: Hello, and welcome to The Crude Report, Argus' podcast series covering global oil markets.

I'm Amanda Hilow, associate editor of the Argus Americas Crude report, and I'm here with my colleague and deputy editor, Amanda Smith. Today, we'll be focusing on Hurricane Ida, which landed the 29th of August as a category 4 storm and may just be the second most damaging storm to ever hit Louisiana.

Amanda Smith: So before we start discussing the situation, I wanna just note that we are recording this on September 5th. So by the time our listeners do hear this, most likely there will be some updates to the details of what's going on, but we can discuss what we know now.

Ahead of the storm, you know, we saw both onshore and offshore infrastructure, which so that's comprising both supply and demand, shut down in anticipation of a Hurricane Ida developing into a major storm. And we have seen some impact on prices for the US spot crude prices in the October trade month, which is the prompt trade month right now. And as more information becomes available, we are likely to see prices move more and things to solidify more for the expectations in the market of what damage there is, what will continue, might take longer to come back online, etc.

We've been waiting for information about the damage of restart times to trickle in, and Argus has been updating this regularly, but at this time, it seems really like the demand side – the refineries in Louisiana – are being quicker to restore operations overall than the offshore US crude supply from the Gulf of Mexico, but it's still early stages at looking at this. We'll just go over what we are seeing as of today. On the demand side at the height of outages, operations at 9 refineries were shut in curtailing throughputs by more than 2mn b/d.

Amanda H: But we are indeed seeing these refineries begin to return online with the latest estimate being that 5 refineries were still shut in representing a little over 1mn b/d of capacity as companies still assess damage. Marathon Petroleum had said it sustained minor damage at its Garyville Refinery, which is the largest in the state at 565,000 b/d. But that's already in the process of restarting. Part of what these refineries need in order to be able to restart and repair is electrical power, but utility company Entergy is beginning to offer some timetables for restoring electricity throughout the state. Some areas hit by Ida are still difficult to reach because of the level of devastation that caused blocked roads, but Entergy is using helicopters, drones, and other tools in order to assess these damages. And it said on Friday that power should be restored to most parishes around Baton Rouge and several near New Orleans by the middle of the week starting September 5th.

Amanda H: And a couple of refineries that have applied for loans from the US Strategic Petroleum Reserve – the US SPR – and they're gonna get them. So that really does suggest that they're going to be running that soon. So for like ExxonMobil's Baton Rouge refinery at 500,000 b/d, it's restarting, and it's going to be getting a loan of 1.5mn bls of SPR crude. Placid's 300,000 b/d Port Allen refinery is getting a 300,000-bl loan of SPR crude. And those companies will pay those loans back in two to three months along with premium barrels.

And then we do know some refineries have separate damages. There's been unspecified damage confirmed by Shell's Norco refinery, so that's a 250,000 b/d refinery. And then Phillips 66's Alliance refinery, that's also 250,000 b/d, Phillips 66 acknowledged at the Alliance refinery that there was a breach of a bank that allowed the Mississippi River to temporarily flow in.

But a lot of the companies haven't really confirmed that they've had damage. So in terms of power, we know that both Shell Norco and Valero's 215,000 b/d St. Charles refineries are located in the St. Charles Parish. Entergy's update today said that power in St. Charles Parish, it could possibly be out longer than some of the others. It said no later than September 29th, but that does lend more uncertainty to plants located in that parish.

Amanda H: So as of now, we don't really have a solid feel about how long some of these refineries are going to be down. And you could say the same for the offshore production facilities. About 88% of offshore crude output, or 1.6mn b/d, was still shut as of this afternoon compared to about 93% on Friday and 95% of production that was out the same day of Ida's landfall.

Amanda S: Yeah. And we do know there were some delays, even in getting people to see the facilities and to see what damage there was and to get people out there because Hurricane Ida, where it came through in Louisiana, it damaged facilities at Port Fourchon and Houma, Louisiana, where some companies have their onshore bases, so like their helicopter pads and such. So this has caused, for example, BP and BHP to have to relocate their onshore bases to other locations. We know that some platforms have had visual inspections that the companies have announced already, that they see no visible, obvious major damage to like BHP's Shenzi platform and BP's offshore facilities. They've said that, you know, they didn't see any obvious major damage, but companies, even after they get people out there, they're gonna have to run tests and make sure that they can safely restart the offshore production.

Amanda H: And we know that some offshore producers are beginning to return workers to their platforms, but it's still going to take time. One source at a platform in the Main Pass area near Plaquemines Parish has said that they've restaffed, but they might not actually be able to restart for at least a week.

Amanda S: One notable thing that was observed is we know that Shell observed damage at its West Delta 143 offshore transfer station, so they'd put that in a press release to let people know that. That platform is located where pipelines from multiple producing platforms meet. So like Mars, Olympus, Ursa, that production meets, and it goes into where the Mars pipeline capacity increases at that point to carry the crude to shore further downstream at Fourchon. Mars gets more volume from the Amberjack pipeline also. But the crude that goes through that one point, that West Delta 143 point, it's a fair amount of crude. So from Louisiana state data online, we can see that the Mars pipeline crude that it carried that wasn't sourced from that Amberjack pipeline further downstream was about 233,000 b/d each month between the beginning of the year in July. And so that's out of a total of about 376,000 b/d, monthly average, of crude that the Mars pipeline carried to LOOP facilities and Covelli during that same time period.

Amanda H: So because the market knows that there's this issue that has the potential to affect Mars and other sour crude deliveries to the coast, we've been seeing the prices for these grades and other Louisiana crudes start to strengthen against the light sweet crude benchmark in Cushing, Oklahoma. Mars, which is the bellwether medium sour grade produced offshore, has risen about $1.65/bl to a premium of 25¢/bl since the 27th of August and that's the final trade session before Hurricane Ida made landfall. And it's moved to a price that reflects its highest since the 18th of May. Similar quality Poseidon, which is also delivered by pipeline from offshore facilities to the Louisiana coast, is up $1.70/bl to a 45¢/bl discount reflecting its highest in roughly the same amount of time.

Southern Green Canyon, or SGC, was up by $1.49/bl on the week to a discount of 75¢/bl. SGC is another medium sour grade produced offshore like Mars and Poseidon. But instead of being delivered to Louisiana, it's delivered to Texas instead where refinery demand has not been impacted by Ida damage. So we were initially seeing SGC firm much more quicker than the Louisiana-delivered grades, but following news of the West Delta 143 platform, we've seen the Louisiana grades boosted much more quickly.

Amanda S: And those increases on those Louisiana-delivered grades might've been even more, but the news of these SPR loans may have helped temper gains on them. And really it's still pretty early on in the October trade month, the October trade month ends on September 24th. And then deliveries, of course, don't start until the beginning of October. So we really do have some more time to figure things out before the end of the October trade month and to still see changes in the pricing, and that those SPR loans are gonna be a faster way to increase crude supply for refineries coming back online who can't access their usual supply. So maybe either offshore supplies, or in ExxonMobil's case at the Baton Rouge refinery, that 1.6mn bls is meant to alleviate logistical difficulties of supplying the refinery by way of the Mississippi River. And if there's extended outages of offshore crude production, the refiners could also, you know, run more imports, but those are gonna take time to get to the US before they would be able to run it.

Amanda H: And I really think that we have to note too that the Louisiana Offshore Oil Port is reporting some unspecified damage. They haven't released any details or a timeline to bring it back online, but for now, it is not loading or offloading any crude. No, the offshore outages are also having relatively substantial impact on the sweet-sour spread at the US Gulf coast. And we can see that particularly if we look at the Argus Sour Crude Index, or ASCI, reflecting the price of Mars, Poseidon, and SGC, and if we compare it to the AGS index, which reflects Permian-quality WTI at the US Gulf coast. The ASCI discount to AGS narrowed by $1.69/bl over the week to a discount of 71¢/bl, or its narrowest since the 25th of May. And the ASCI diff to the WTI benchmark in Cushing was up by $1.78/bl to a discount of just one penny.

Now, if you look at the ASCI differential to Ice Brent, which is the international benchmark for light sweet crude, that was up by $2.42/bl on the week to a discount of around $3.30/bl. Now, that's a much higher gain, but it's not quite as rare due to global market fundamentals that reflect a more volatile international benchmark. So that's only its highest since early July.

Amanda S: Something else I wanted to know is that we saw widening of the Mars October premium to November. So with the news of that West Delta 143, the flyover seeing the visible damage, we saw the backwardation in the Mars market increase. So at the beginning of the October trade month, October Mars was about 45¢ over November Mars. And then this was about the same as during the September trade month, the month one, month two spreads were in September, Mars averaged about 45¢ over October as well, I think it was 48¢. But in the first three days of September, so after Hurricane Ida, we saw that spread between $1 and $1.20 as October's premium was boosted, you know, by the offshore issues. And then the information later that Shell had seen damage to that West Delta 143 platform and its flyover. So as we gain more information regarding timelines for restoration of both supply and of the demand facilities with the refineries, we may see this relative price fluctuate further.

Amanda H: So we know from previous hurricanes that it can take a while for infrastructure and production to return online. For example, if you look at the case of Hurricane Harvey, which landed in August of 2017, around 3.7mn b/d of refining capacity had been shut in, and the downtime of some of those refiners lasted between four to six weeks. The impact at the time though was more focused along the Texas coast instead of Louisiana. Less than 400,000 b/d of offshore production was left shut in the day following Harvey compared to 1.7mn b/d or more after Ida, but flooding in Texas had compelled a lot of producers to limit onshore operations after Harvey, particularly in the Eagle Ford Shale.

And the largest impact that we had seen in prices from Harvey was in Texas light sweets rather than Louisiana sours because pipeline closures from the Permian basin to the Texas Gulf coast had boosted WTI values in Houston to two-year highest at the time. WTI Houston values now are remaining relatively steady in the aftermath of Ida, but we may see those start to draw some pressure if Louisiana refineries experience any longer-term outages, which would result in loss of a major demand outlet for Texas crude. But again, for now, the large impacts in the oil market that we're seeing are in sour grades like Mars as these ongoing disruptions offshore may require companies to find alternative prompt supply.

Amanda S: It's also worth noting that some offshore production can be rerouted at times. So for example, when Hurricane Laura came through in August of 2020, so August last year, there was damage to a platform and it made it so that crude wound up being rerouted, diverted from the Cameron Highway Pipeline. So that's the pipeline that takes crude that's sold as Southern Green Canyon and takes crude to Texas. And it rerouted some of the supply that would typically go into SGC, it rerouted it into pipelines going to Louisiana, and so it wound up getting into the Bonito and Poseidon crude streams. And that crude was rerouted for like over five months as pipeline company Genesis. They suffered several delays and they built a bypass around that damaged platform. And they operate both the Poseidon Oil Pipeline and also Cameron Highway, so they were able to shift deliveries in that way, I think pretty easily in terms of, you know, as they’re saying to customers, you know. And in that situation, there was an alternative pipeline to ship crude, so they were able to do that. And there is some redundancy at different locations offshore, but that's not always the case.

Amanda H: So it's definitely still a wait-and-see situation. We will, of course, continue to monitor operations as they return to service. And we'll publish our findings online daily, but that'll be all from us for now.

For more in-depth daily coverage of US crude oil markets, consider subscribing to Argus Americas Crude. You can find more information on this service at www.argusmedia.com. And thanks again for tuning in, we look forward to you joining us on the next episode of The Crude Report.

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