Thursday, August 28, 2008

The Path of Least Resistance, Revisited

Three years ago, in the aftermath of Hurricane Katrina, I posted some remarks concerning the concentration of our energy infrastructure in the Gulf Coast. As we head into the Labor Day weekend with Tropical Storm Gustav bearing in a similarly threatening direction, and with the nation embroiled in a debate about expanded offshore drilling and refineries, many of these points still seem timely, with a few updated comments in italics below:

There are natural reasons why the Gulf Coast should be home to 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 build a new one from scratch, incurring extra investment in basic infrastructure, including water and power. But for the last two decades, there has been little choice available to oil 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 were forced 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 have been worse. Houston and the nearby Texas coast are home to nearly 4 million barrels per day of refining capacity, in contrast to the 1.8 MBD or so that Katrina shut down in Louisiana. That was still enough to boost the US average regular gasoline price by 45 ¢ per gallon in one week, giving most of us our first taste of $3 gasoline.

Katrina 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. It also took 900,000 barrels per day of oil production offline. Most of that came back, gradually, but for the year after Katrina, Gulf Coast output averaged 300,000 bbl/day less than the previous year. A number of new projects were also delayed, including BP's giant Thunder Horse platform. This is nature's part of the equation, and we can't change where the oil and gas reserves are found. However, we can rethink the default option for natural gas imports in the form of liquefied natural gas, along with the offshore drilling bans that have contributed to the concentration of our supply.

We've made some progress since 2005. The Gulf's share of US natural gas production has dropped to about 12% today, partly due to the decline of offshore gas fields, but also to the rapidly-increasing output of unconventional gas from sources such as the Barnett Shale. Biofuels and other dispersed forms of alternative energy also contribute to diversification, although it will be some time before they scale up to a magnitude comparable to oil and gas. Unfortunately, our tendency to follow the path of least resistance remains largely intact. Even the Congressional "Gang of 10" energy compromise exhibits this trait: expanded offshore drilling, yes, but mainly in the eastern Gulf of Mexico. And despite years of talk about new refineries outside the hurricane belt, when the expansion of Motiva's Port Arthur, TX refinery and Marathon's Garyville, LA facility are completed, the Gulf Coast will account for a larger share of US refining capacity than when hurricanes Katrina and Rita came though.

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