How Hurricanes Can Impact the Energy Sector

Summary

Hurricanes in the Gulf of Mexico can interrupt offshore energy production, which can be supportive for oil prices.
Midstream infrastructure like export facilities, offshore pipelines, and pipelines servicing refineries can see reduced volumes around hurricanes.
Refineries may shut down or reduce rates during hurricanes, which can lead to higher gasoline and diesel prices and stronger refining margins for those that continue operating.

Hurricanes represent a risk to energy assets along the Gulf Coast given the potential for property damage and operational interruptions. With Colorado State University predicting an extremely active hurricane season and recently raising its forecast for the number of named storms expected in 2024, this note reviews how hurricanes can impact the energy sector -- upstream, midstream, and downstream.

Upstream: Hurricanes pose risks to producing assets in the Gulf of Mexico.

Hurricanes and severe storms in the Gulf of Mexico (GOM) can interrupt production activities at offshore platforms. Typically, producers will evacuate platforms and shut in production ahead of a major weather event.

In 2023, production in federal waters of the GOM accounted for 14.4% of total U.S. oil output and less than 2% of total natural gas production, according to the Energy Information Administration (EIA). As such, hurricanes tend to have a bigger impact on U.S. oil prices, with curtailed production supportive of higher prices. For natural gas, supply interruptions may be more than offset by reduced consumption due to power outages.

One of the more prominent storms for the energy sector in recent years was Hurricane Ida. It made landfall in Louisiana as a Category 4 storm in August 2021. As a result of the storm, 96% of federal GOM oil production and 94% of natural gas production was shut in. Hurricane Laura in 2020 also led to a significant interruption in GOM output. Assuming platforms are largely undamaged, shut-ins tend to last for a matter of days, and production can resume fairly quickly.

Severe storms can lead to prolonged outages and expensive repairs. Hurricanes Katrina and Rita are estimated to have destroyed over 100 offshore platforms and damaged more than 50 platforms. For context, over 3,000 platforms were thought to be in the direct path of the two hurricanes. For its part, Shell (SHEL) spent approximately $300 million making repairs to its GOM facilities. Notably, the oil and gas industry did not report any deaths or major spills associated with the storms. But the significant damage prompted improved safety measures and precautions.

Midstream: Exports and offshore pipelines can be impacted.

Hurricanes can also impact midstream assets, both above and below ground. Export facilities can see interruptions as ports close during storms. For example, the ports of Houston and Galveston were recently closed for a few days surrounding Hurricane Beryl. Clearly, other above-ground infrastructure could be damaged if in the path of a hurricane.

Back in 2020, Cheniere (LNG) and Cheniere Energy Partners (CQP) halted operations and evacuated employees from the Sabine Pass LNG export facility as Hurricane Laura approached. Ultimately, there was no significant damage to Sabine Pass. LNG export facilities may reduce rates during storms to accommodate shipping interruptions and/or to allow for reduced headcount on site.

Even though pipelines are largely underground, they can still be impacted by hurricanes. For example, pipelines that service refineries by bringing in crude or transporting refined products to end markets can see lower volumes if refineries are shut down (see more below). GOM production shut-ins reduce volumes for offshore pipelines. Following Hurricane Laura in 2020, Genesis Energy’s (GEL) offshore CHOPS pipeline was inoperable for months due to damage to a platform that the pipeline went up and over. Volumes were diverted to other pipelines until the line resumed operations in February 2021.

Downstream: Refinery shutdowns and benefits for those that keep operating.

The Gulf Coast is home to almost half of U.S. refining capacity. And refineries may reduce rates or shut down ahead of a storm to lower headcount on site or allow employees to evacuate. During Hurricane Ida in 2021, at least nine refineries halted operations or reduced rates, according to the EIA.

When refinery capacity is taken offline, prices for refined products like gasoline and diesel can increase, leading to better crack spreads (i.e., refining margins). Typically, refineries that continue to operate can benefit. Gulf Coast refiners may run at higher utilization rates and be comfortable holding more product inventory during hurricane season in case of a storm.

Insurance may not be helpful unless damage is severe

Companies typically carry insurance for property damage and business interruption. But it may not always be used -- similar to how a homeowner is unlikely to file an insurance claim for just a broken window. The cost of repair is lower than the deductible, and that can be the case for the energy industry in a hurricane as well. For example, Enterprise Products Partners (EPD) has a stand-alone deductible for property damage of $30 million. EPD’s business interruption claims require physical damage, over $30 million in lost value, and more than 60 days of interruption. Those requirements are probably not met by the typical hurricane.

Bottom Line

Hurricanes represent a potential risk for assets across the energy value chain that are located along the Gulf Coast. While operational interruptions tend to be measured in days, the weather will bear watching as this year’s active hurricane season continues.

For more news, information, and strategy, visit the Energy Infrastructure Channel.

A message from Advisor Perspectives and VettaFi: Join us on July 25 for the Q3 Fixed Income Symposium, where advisors will gain insights into essential fixed income strategies and market trends to navigate 2024's challenges.