The slow recovery after Hurricane Ida

At the beginning of the 20^th century, a hurricane remade the industrial landscape of the US. The great storm that hit Galveston in 1900, generally described as the worst natural disaster in US history, is estimated to have killed up to 12,000 people. Its impact on the port of Galveston was so devastating that it encouraged businesses to shift to the greater safety of Houston, 40 miles inland. It was one of the factors driving investment locations as the oil industry of Texas began to boom in the early 1900s.

Today, the refineries and petrochemical plants along the Gulf of Mexico coast are not going anywhere, despite their vulnerability to hurricanes. No-one is going to build new facilities on greenfield sites in the US, and the advantages of being near both the region’s oil and gas reserves and its accumulated port and pipeline infrastructure far outweigh the costs of storm damage and disruption. Hurricanes are an unavoidable risk.  

Hurricane Ida, which made landfall in Louisiana on August 29, has been one of the most disruptive in recent years, with a significant impact on both oil production and on refining. This aerial photo of Phillips 66’s Alliance Refinery, near Belle Chasse south of New Orleans, shows the extent of the flooding.

At the time of writing, about 1.5 million barrels per day of oil production in the Gulf of Mexico and 1.7 million b/d of refining capacity are still offline. That lost output is in line with the impact of other hurricanes, but the recovery this time has been slower, and the storm’s effects are expected to last longer.

Upstream, production was running at about 500,000 b/d this week, compared to about 2 million b/d before Ida hit, Wood Mackenzie’s short-term oil market service showed. That production is well below the rates achieved at the equivalent time after hurricanes Laura and Delta last year. Shell reported that its West Delta 143 facility, a transfer station for production from the Mars, Olympus and Ursa platforms, which normally transports about 200,000 b/d of oil, had been damaged. Port Fourchon, the largest base in the US for supporting the offshore industry, suffered severe damage, and helicopter facilities that serve offshore platforms were put out of action. 

Downstream, flooding and power outages continued to affect operations at refineries in Louisiana this week. Hurricane-related refinery outages can last anywhere from a few days to a few months, and Wood Mackenzie analysts expect some of the disruption to last at least another week. 

Crude prices surged in late August as Ida approached the US, rebounding from their dip earlier in the month, and they have held on to those gains, with WTI trading on Thursday at a little under $70 a barrel and Brent a little under $73. Wholesale gasoline prices in New York Harbor also rose sharply last month, although they have since given up some of that rise.  

 The sixth Assessment Report on climate science from the Intergovernmental Panel on Climate Change, published last month, noted that scientists had low confidence in identifying any long-term trends in cyclone frequency worldwide.

However, they have high confidence in saying that global warming has been associated with heavier rainfall when storms form, and they expect that globally, peak wind speeds will increase with rising global temperatures. Hurricane risk may have been always present, but the nature of that risk appears to be changing. 

The resilience of EVs put to the test 

One of the issues in the aftermath of Ida has been the resilience of electric vehicles compared to internal combustion engine vehicles at a time of widespread power outages. By the middle of this week, hundreds of thousands of customers in Louisiana were still without power, particularly to the north and southwest of New Orleans. EV owners who fully charged their vehicles before Ida hit can use them, but they will have shorter range than those with ICE vehicles who filled their tanks.

Anyone who is reliant on public stations for charging is likely to face particular difficulties, says Wood Mackenzie’s Isaac Maze-Rothstein: “That is a tough situation.” Elon Musk of Tesla highlighted this issue as a concern for EVs back in 2019, announcing a plan to add storage to Supercharger stations to provide backup power when the grid went down, but that initiative was focused only on California.

Of course, gasoline and diesel supplies have also been severely disrupted by Ida. More than 55% of the fuel stations in New Orleans had no gasoline on Wednesday, according to GasBuddy, the consumer information service. But storing liquid fuels for emergencies is relatively straightforward. If the US vehicle market shifts massively towards EVs, as the manufacturers plan, the question of building in greater resilience in the event of a disaster will have to be addressed. Solutions such as microgrids and distributed energy resources to provide power when the grid goes down will become even more important.

Meanwhile, the outages following Ida have also underlined the value of EVs as sources of backup power. An electric Ford F-150 Lightning, for example can provide 9.6 kilowatts of output, and if fully charged can cover the average US household’s daily consumption of 30 kilowatt hours for three days. If you can afford the $40,000-plus price, and can add modify your home to add a transfer switch, it could look like a very attractive solution in a crisis.

In brief 

Electricity and gas prices in Europe have been soaring again, with some reaching new record highs this week. The October 2021 contract for UK benchmark NBP gas hit 144 pence per therm, almost four times its level of a year ago.

One key factor in soaring European gas prices has been that the UK’s production has dropped sharply this year. For the eight months January to August, UK gas output was down 28% from the same period in 2020, despite the high prices. The key factor has been maintenance put back from 2020 to 2021, including work on the Forties Pipeline System in June, which resulted in all 67 users shutting down for about three weeks.  

Soaring retail energy prices have brought into focus the failures of government programmes to improve household energy efficiency. The UK government last year launched a Green Homes Grant Voucher Scheme, offering people up to £10,000 to make energy efficiency improvements and cut emissions, but it fell well short of expectations. The National Audit Office this week published a detailed report on what went wrong. 

Natural gas prices have also been surging in the US. Front month Henry Hub gas futures rose above $5 per million British Thermal Units this week, for the first time since 2014. The disruption following Ida has also played a role in the US gas market: Wood Mackenzie estimates that about 1.8 billion cubic feet per day of production is still offline this week. 

TotalEnergies has signed a series of agreements in Iraq to invest US$10 billion in projects including capturing gas for power generation and increasing output at the Ratawi oilfield. Wood Mackenzie’s Tom Ellacott commented that the agreements were evidence of the group’s dual growth strategy in action. It is becoming a broad-based energy company, with investments in solar, storage, wind and other low-carbon technologies, but has signalled that large-scale upstream business development is still on the agenda. The agreements in Iraq also have strong sustainability angles: reducing flaring, managing water resources and developing solar generation.

Chevron has put up for sale some of the assets it acquired when it bought Noble Energy last year. It is working to divest over 30,000 acres in Webb and Dimmit counties in Texas that sit in the southwestern window of the Eagle Ford play. 

Meanwhile, Chevron has agreed a deal to take a stake in a project to produce, store and transport green hydrogen at utility scale for power generation, transport and industry in the western US. It has agreed on a framework to acquire an equity interest in ACES Delta, a joint venture between

Mitsubishi Power Americas and Magnum Development, that owns the Advanced Clean Energy Storage project in Utah.

CAISO, the California gird operator, has warned that it is facing “extremely challenging conditions including extreme heat waves, multiple fires, high winds, and various grid issues”, and has asked the federal Department of Energy for an emergency order to give it more powers to bring additional generation online.

The world’s largest Direct Air Capture plant for trapping carbon dioxide came online this week. “The world’s largest” is not much of a claim, however: it can capture just 4,000 tons of carbon dioxide per year, equivalent to the emissions from about 800 cars.

The US Department of Energy has published scenarios showing how solar energy could provide 40% of the country's electricity in 2035, without driving up prices  

And finally, a plan for improving ESG standards in an industry not generally known for its social responsibility: the music business. The trip-hop group Massive Attack, one of the best bands of the 1990s, has been working with the Tyndall Centre for Climate Change Research, backed by a group of British universities, to produce a report on how the UK music industry can “play its part in tackling the climate crisis”. The report, titled Super-Low Carbon Music, sets out wide-ranging recommendations, including ending by 2025 the use of diesel generators at festivals, cutting the weight of gear that bands take on tour, and seeking to eliminate the use of private jets. The proposals are a good illustration of how, although some emissions reductions can be managed without massive disruption — switching from internal combustion engine cars to electric vehicles, or making venues energy-efficient — getting to net zero emissions will also require some quite fundamental changes to long-standing habits and practices.

Other views

Simon Flowers — Booming LNG industry’s energy transition challenges 

Gavin Thompson — Carbon capture and the future of LNG in Asia 

Xiaojing Sun — US renewables project finance: five things to know 

Robinson Meyer — The planet needs Jerome Powell 

Paul Musgrave — There’s no wake-up moment on climate in America 

Noah Smith — People are realising that degrowth is bad 

Richard Kauffman — The Valley of Death and the business of asset management

Quote of the week 

"I would not like to see oil prices above $100 per barrel again, as this can stimulate investment in low-profit, ineffective projects and then again lead to what we have already gone through - the collapse of the market. The oil price of $65-$75 per barrel is comfortable for consumers, and the OPEC + countries are aiming to maintain it by regulating volumes.” — Vagit Alexperov, chief executive of Lukoil, gave an interview to Kommersant newspaper in which he defending the OPEC+ group’s strategy, and suggested its restrictions on production would remain as planned, easing steadily between now and around September 2022.

Chart of the week 

Falling costs have been a reliable trend in the solar industry for decades. Occasionally that trend gets interrupted, though, and this looks like being one of those years. For the first time in over a decade, the average system prices for residential and commercial PV rooftop projects will increase year-over-year in 2021, according to new Wood Mackenzie research.

Commodity prices and skyrocketing freight costs are the main culprits. Average residential system prices are projected to increase 1% on average year-over-year in 2021, and average commercial rooftop projects by 3%.