Oil producers to feel Harvey’s wrath
Oil producers, consumers set for wrath of storm as offices close, gas prices spike
Canadian oil producers and consumers are set to be lashed by the powerful storm that has battered Houston and the wider Gulf Coast region, a key oil and natural gas refining and processing hub.
Hurricane Harvey, which has so far poured 42 trillion litres of water on Houston, has knocked out 2.2 million barrels per day, or 24 per cent, of the Gulf region’s refining capacity, hitting Canadian energy companies in its wake.
Calgary-based Encana Corp., which produces 77,000 barrels of oil per day in the U.S., primarily from the Eagle Ford and Permian shale formations in Texas, said it had been affected by the storm, but declined to say how much of the production was offline.
“We continue to restore production and are working with our midstream providers,” Encana Corp. spokesperson Jay Averill said in an email. “Our staff are safe and our assets were not damaged.”
Canadian pipeline companies Enbridge Inc. and TransCanada Corp. said they had shut their offices in Houston. TransCanada spokesperson Matthew John said the company is assessing “the extent and duration of this historic flood” and the company’s oil and natural gas pipelines are safe.
Precision Drilling Corp.’s investor relations manager Ashley Connolly said her company had 300 employees in Houston, in addition to a corporate office, technology centre and other facilities. All were closed Monday, but undamaged.
Baytex Energy Corp., which produced an average of 21,000 barrels of oil per day from the Eagle Ford in Texas in the second quarter, did not respond to a request for comment. Baytex shares were down 4.23 per cent, Precision was off by two per cent, and Encana was 1.5 per cent lower, underperforming the S&P TSX Capped Energy Index, which fell 0.90 per cent on Monday.
Even though most Canadian crude oil production is shipped to refineries in the U.S. Midwest, there has so far been a modest impact of $1 per barrel on Western Canadian Select, the domestic heavy crude benchmark, according to Calgary-based GMP FirstEnergy economist Martin King.
King said the discount for WCS relative to U.S. benchmark Western Texas Intermediate prices could increase depending on the length of the refinery outage in Houston. For the moment, however, he expects most Canadian barrels en route to the Gulf Coast to be stored in the Midwest, where there is available storage capacity.
Kevin Birn, IHS Markit’s director of oilsands dialogue, said the storm’s impact on Canadian producers depends on how long the refineries are offline. “Refiners will work hard to come up, but the longer they are down, as a major demand centre for Canadian heavy, differentials to offshore crudes could widen,” Birn said.
The storm has already hit Canadian pockets, with wholesale gasoline prices shooting up four cents since the middle of last week on average across Canada, according to Dan McTeague, GasBuddy senior petroleum analyst. Wholesale gas prices could rise another two cents on Wednesday, he warned, though retail prices can vary.
“There are economic reverberations beyond the pumps,” he said, noting diesel and jet fuel prices across Canada would also rise.
The storm’s forced shut down of Gulf Coast refineries, the largest refining hub in the U.S., is already affecting the supply of gasoline in North America and also hurting the demand for crude oil. Spot prices for U.S. gasoline futures rose seven per cent to a peak of $1.77 per gallon, the highest since late July 2015, before easing to $1.70, up 2.5 per cent.
“Refineries that are shut in or sidelined can’t take delivery of oil,” McTeague said, adding, “it’s no wonder that crude has dropped.”
Morgan Stanley analyst Benny Wong said in a research note the outages currently affect 12 per cent of the total refining capacity in the U.S., but there is a risk of more outages and potential flood damage.
In addition to knocking refineries offline, the storm — classified as a category 4 hurricane over the weekend but downgraded to a tropical storm on Monday — is also affecting oil production in Texas’ important shale oil formations.
“Harvey is the first hurricane to materially impact the heart of U.S. energy production, refining and infrastructure in almost a decade,” RBC Capital Markets analysts wrote in a Monday note, adding that one-month gasoline contracts “have surged 25 per cent since last Wednesday’s close en route to multi-year highs.”
Wong said 39 offshore Gulf Coast platforms are also shut in, affecting 150,000 bpd, and activity has “likely slowed to stopped in the Eagle Ford shale, which represents 1.4 million bpd of production.”
West Texas Intermediate benchmark oil prices slipped 2.7 per cent or US$1.30 to US$46.57 per barrel.
Refiners will work hard to come up, but the longer they are down ... differentials to offshore crudes could widen.