The Path of Least Resistance Looks Closed
It might seem callous to start talking about long-term implications of the storm damage from Katrina, even as the rescue effort is underway and New Orleans remains inundated by floodwater. Unfortunately, our attention span has diminished to the point that we must discuss these things while both the public and our leaders are focused on them, and not on the next problem. The next few weeks will be dominated by the aftermath of the hurricane, and every trip to the gas pump will provide a vivid reminder. Now is the time to start thinking about how many of our energy eggs we should keep in this particular basket.
There are natural reasons why the Gulf Coast should have a large concentration of the country's energy infrastructure. Nature has provided a bounty of hydrocarbon reserves in this area, with sizable fractions of our oil and natural gas production coming from the coastline between Brownsville, TX and Mobile, AL. It was natural that so much of our refining system and crude and product pipelines would be concentrated in the same area, given their access to domestic, and later imported crude oil. But we need to talk about the additional concentration that is due, not to the natural incidence of resources, but to the difficulties entailed in building energy facilities elsewhere in the country.
When a company looks to add refinery capacity to its network, it is logical to add on to an existing facility, rather than start a new one from scratch, which requires a lot of extra investment in basic infrastructure, including water and power. But for the last two decades, there has been little choice available to these companies, even if it made more economic and logistical sense to start a new refinery elsewhere. Environmental regulations and permitting bureaucracy simply foreclosed this option. Refiners had to take the path of least resistance.
The result is that 10% of the country's refinery capacity was sitting in the path of Hurricane Katrina, and even this was a stroke of luck. Had the storm tracked further west and barreled down the Houston Ship Channel, instead of the Mississippi basin, the damage to our refined products infrastructure might be worse. Houston and the Texas coast is home to nearly 4 million barrels per day of refining capacity, in contrast to the 1.8 MBD or so that is shut down now in Louisiana.
We can't change this disposition now, nor should we contemplate it, but we can avoid repeating the same mistake with regard to another strategic energy input, natural gas. This morning's Wall Street Journal indicated that Katrina has knocked out nearly 20% of the country's natural gas production, due to the high proportion of supply coming from shallow and deep water gas platforms in the Gulf. This is nature's part of the equation, and we can't change where the gas reserves are found. However, we can rethink the default option for natural gas imports in the form of liquefied natural gas (LNG,) along with the offshore drilling bans that have contributed to the concentration of our supply.
A few months ago, I described the LNG scenario that I see taking shape: nearly all of the LNG terminals proposed for the East and West coasts are meeting fierce resistance, and the path of least resistance will see the majority sited in the Gulf Coast, adjacent to existing infrastructure. This approach has the advantage of filling in for declining onshore and shallow-water production, and tapping into existing pipelines for delivery to markets in the lower Midwest and East. However, not only will it do nothing to unravel existing transportation bottlenecks that make gas unduly expensive for customers in the Northeast, but it also further concentrates our key infrastructure into the area just hit by Katrina.
If last year's Ivan was a warning shot, Katrina should be the proverbial two-by-four between the eyes. It is time to diversify our energy risks to the degree we can, and that means siting LNG receiving facilities close to the markets they are intended to serve, not a thousand miles away in a zone that environmentalists have written off, because of its existing petrochemical base. If the damage to the Louisiana and Mississippi natural gas platforms turns out to be severe, we will have a long, chilly winter in which to contemplate this choice.