How Extreme Weather Disrupts the Oil and Gas Sector

The volatility in the oil and gas sector can cause prices, supply, and demand to swing drastically within the hour — and with it, millions of dollars are won and lost. Weather plays a significant part in many of those disruptions in the United States. Frequent, significant storms contribute to lost supplies, logistical disruptions, and sharp price spikes. While shorter than recessions, weather events have super-sized effects on the entire oil and gas supply chain.

Hurricanes

Many kinds of weather can affect supply, from blizzards and ice storms to tornadoes and flooding, but perhaps the most notable are hurricanes. Nearly half of the total petroleum refinery capacity and 51% of the total natural gas processing plant capacity in the United States is along the Gulf Coast, according to the U.S. Energy Information Administration (EIA). This area is also in the path of most Atlantic tropical storms and hurricanes. Since storms develop hundreds of miles outside of landfall, bad weather can disrupt everything from ship routes delivering crude products to evacuating drilling platforms and closing refineries. According to the EIA, a “high-impact” hurricane that disrupts Gulf of Mexico crude production by 80pc could increase monthly average retail gasoline prices by up to 30¢/USG.

Source: U.S. Energy Information Administration

After Hurricanes Katrina and Rita highlighted the 2005 season’s 28 named storms, the industry improved the ability to get fuel in place ahead of and immediately following tropical events. Many refineries have hardened plants, taken steps to reduce flooding, and improved communications between retailers and suppliers to anticipate disruptions, but storms still impact production. In 2021, Hurricane Zeta drove an 8-million-barrel drop in regional oil stocks that affected the broader U.S. supply.

While shorter than recessions, weather events have super-sized effects on the entire oil and gas supply chain.

Even evacuation paths influence gasoline supply and demand. As Hurricane Ian made landfall and moved across Florida, major population centers of Clearwater-St. Petersburg and Orlando were forced to evacuate. Based on the chart matching Ian’s path with data from DTN Refined Fuels Demand, many evacuees fled to Jacksonville. One week prior to landfall was a modest 2.5m gallon replenishment order. But the replenishment for the Tuesday just before Ian’s landfall is almost a one-million-gallon increase. By the following Tuesday — October 4 — the replenishment order was back down to 2.1m gallons.

Extreme temperatures

Refineries are typically designed to operate between 32 and 95-degrees Fahrenheit, so when extreme temperatures occur, the plant can become inefficient, shut down, or create potentially dangerous working conditions. According to DTN Energy Analyst Brian Milne, extreme heat can lower a refinery’s output by as much as 4-5pc.

Extreme heat

Extreme heat hinders refinery activity as it impacts operational pressures and line flow of liquids throughout pipelines necessary to run refineries at full capacity, and it can limit the electricity supply refiners need to run their operations. Milne noted multiple extreme heat days and electricity scarcity in the southern states have disrupted field production operations of oil and natural gas and have reduced Gulf Coast refinery throughput, limiting the production of refined fuels like gasoline, jet fuel, and diesel.

In 2021, Hurricane Zeta drove an 8-million-barrel drop in regional oil stocks that affected the broader U.S. supply.

For example, the utilization rate in the Gulf Coast fell from nearly 97pc in May to just over 93pc in June and July, and there have been several sizeable outages in the region in July and August. This caused supply to dip and prices to increase.

“The operational disruptions caused by the extreme heat lowered refinery utilization during peak driving demand in the summer months when refiners typically run their facilities at maximum rates,” said Milne. “Reduced refinery output limited the supply of gasoline, diesel, and jet fuel, pushing prices higher.”

Maintenance work can also be challenged by hot weather. As ambient temperatures approach the flash points of chemicals used to clean tanks and equipment, crews may use a less volatile cleaner, which can extend cleaning times or delay cleaning until conditions are safer.

Extreme cold

Plunging temperatures can also significantly impact the oil and gas supply chain. In February 2021, a polar vortex shut down more U.S. refinery capacity than Hurricane Harvey. The extended cold spell caused 5.6 million b/d of outages along the U.S. Gulf Coast and Midwest compared to Hurricane Harvey, reducing production of nearly 4 million barrels of oil per day.

The bitter cold brought about by the 2021 Polar Vortex, which lingered for five days and caused an unprecedented ice storm in Texas, was a stark reminder of the profound effect weather can have on the oil and gas industry. The storm caused wellhead freeze-offs and power outages that debilitated gas producers, leading to a shortage of gas when demand was spiking. Gas shortages combined with iced-down processing units led to individual unit outages and entire closures at 25 refineries in Texas, New Mexico, Oklahoma, Louisiana, and Tennessee.

Freezing temperatures can cause malfunctions that might require a shutdown, such as flow control equipment failure or frozen product within the piping system. It can also create a hazardous situation when the weather warms up. When the temperature drops, the liquid freezes in the pipe and expands. This expansion can cause the pipe to crack, and once the temperature rises, the pipe will start to leak, creating a potential fire hazard.

Not only does cold weather have a supply and demand impact, but it also has a large financial cost to the company. According to Reuters, ExxonMobil and Phillips 66 reported a $6 million loss due to the extended cold snap in February 2021.

The future of extreme weather events

While most research points to extreme weather events increasing in frequency and intensity, the dynamic movement of the oil and gas industry forces companies to prepare for current weather impacts.

Initial forecasts for the 2023 Atlantic tropical season projected a below-average season due to an El Niño. But persistent warmer waters have prompted forecasters to revise the forecast to above average. And after some of the hottest months on record, DTN Risk Communicator Nick Lesser warns of a weakened jet stream in winter.

“This could result in a higher frequency of polar vortex ‘wobbles’ during winter, bringing additional shots of cold temperatures into the southern United States, as it did in February 2021,” Lesser said.

Regardless of the outlook, the oil and gas supply chain has shown itself to be adaptable and resilient, as evidenced by new standards, hardened equipment, and processes after disruptive weather events.

The oil and gas supply chain has shown itself to be adaptable and resilient, as evidenced by new standards, hardened equipment, and processes after disruptive weather events.

Nearly every oil operator conducts tabletop exercises months before hurricane season, regardless of the expected tropical storms. Often, a DTN Risk Communicator is asked to develop a mock weather scenario, provide briefings, and answer questions throughout the drill. This ensures a level of realism and allows the participants to become familiar with the products and guidance in a real weather scenario.

Leveraging expertise and insights to prepare ahead of weather events is beneficial along the oil and gas supply chain. From optimizing shipping routes for vessels carrying natural gas and petroleum to protecting crews at platforms and refineries, weather intelligence can enhance efficiencies and support safe operations. Forecasts coupled with fuel demand data enable a more profitable business no matter where the company sits in the fuel supply chain. Visibility into what regions, terminals, and refineries are likely to be hit the hardest enables supply chain players to plan ahead as they make business-critical supply, pricing, and purchasing decisions.

To find out more about how DTN insights benefit the oil and gas industry visit DTN Energy Insights.