By Lynn Cook, Bradley Olson and Alison Sider
HOUSTON -- Tropical Storm Harvey, the most powerful storm to hit
Texas in half a century, has shut a significant portion of the
state's shale production, cutting off as much as 15% of U.S. oil
supplies.
Now, in what is the first major storm to test U.S. shale, the
big question is how quickly the sector can make a comeback.
As the storm's widespread devastation has come into focus,
several analysts say that much, if not most, of the 1.4 million
barrels of oil produced daily in the Eagle Ford shale of South
Texas has been cut off and may not return for weeks. The Eagle
Ford, which is on the doorstep of Corpus Christi where the storm
made landfall, is second in output in the state only to the Permian
Basin of West Texas.
Early indications from a handful of companies are that the
severity of the storm was much greater than expected but damage to
fields was moderate, according to Paul Sankey, an equities analyst
with Wolfe Research. Many big shale producers in the Eagle Ford
shut their oil and gas wells before Harvey made landfall as a
hurricane Friday.
While some companies made efforts to restart production Tuesday,
a snarled supply chain is keeping a lot of oil in the ground for
now.
Shale producers rely on a vast, multibillion-dollar network of
energy infrastructure -- from ports to train tracks to pipelines --
that has developed in recent years along the Texas coast. Many
pieces of that network appear to be swamped, and since there hasn't
been a storm of this magnitude since shale drilling took off about
a decade ago, it is harder to predict how long it will take for the
infrastructure to recover.
ConocoPhillips, one of the biggest producers in the area,
normally pumps 130,000 barrels a day in the Eagle Ford; it shut its
wells ahead of the hurricane. As of Tuesday, it had restarted some
fields on a limited basis, but was struggling with the pipelines
and trucks needed to take the crude away.
"The effect to shale could linger given the extent and
catastrophic level of forecasted flooding, which interferes with
shale logistics," said Benny Wong, an analyst with Morgan
Stanley.
In the past, hurricanes have dealt a blow to the Texas energy
industry by knocking out offshore oil platforms in the Gulf of
Mexico; but in many cases, once storms passed, those big
installations could quickly return to pumping crude.
The fracking-induced boom in Texas has heightened the state's
role in the U.S. economy, which means that if the oil fields and
surrounding infrastructure are out of service for long, it could
have outsize economic impacts on the state and shave $20 billion or
more off U.S. gross domestic product, said Joe Brusuelas, chief
economist with RSM US LLP, an accounting and consulting firm.
More than 15% of U.S. refining capacity is closed in the wake of
the storm. That prompted crude prices to drop more than 2.5% since
Friday to $46.44 a barrel, largely because closed plants don't need
to buy any crude.
If they stay shut, or if the ports where they are located
sustained damage that takes weeks to repair, producers won't be
able to turn their spigots back on. Prolonged refinery outages
could lead to fuel shortages in different parts of the country.
Companies were trying Tuesday to assess the damage to their
facilities. But the sprawling nature of the storm -- it was
downgraded from hurricane status on Saturday -- and continued rain
in some areas hampered those efforts.
Wind and water damage and outages from the storm have doused
tens of thousands of square miles with torrential rainfall and
ravaged a wide swath of coastline, halting the flow of up to $800
million a day in energy industry revenue, analysts said.
Corpus Christi and Houston are the two major exit points for
U.S. oil, which is now shipped to the four corners of the
globe.
"The biggest contribution of shale is that it has given the U.S.
a much bigger foothold in the global picture as a supplier of oil,
gas, petrochemicals and refined products all over the world," said
Uday Turaga, chief executive of consultancy ADI Analytics.
As the hurricane's widespread devastation unfurled, some
companies confirmed their operations had come to a near
standstill.
Big producers in the area, including EOG Resources Inc. and
Chesapeake Energy Corp., stopped fracking, curbed production or
suspended operations completely, analysts said.
EOG wouldn't quantify how much of its production is shut down,
but the company said it is working to resume operations "where it
is safe to do so."
Chesapeake said that "while it is premature to speculate on the
ultimate impact to our production, we anticipate volumes will be
restrained until Gulf Coast and Houston refineries are back
online."
Shipping traffic in Houston, Corpus Christi and other ports may
not be fully restored for two weeks. That and other infrastructure
limitations will have a domino effect back to production, said Tony
Sanchez III, chief executive of Eagle Ford operator Sanchez Energy
Corp.
Restarting wells may not guarantee that they resume flowing at
the same rate, he said. On a technical level he fears that shale
wells, once shut off, could lose pressure. Most of his company's
production wasn't shut in as it lies in areas west of the storm's
path.
"It's not just a matter of flipping a switch," he said. "There
is significant risk in those wells not coming back to previous
levels."
The market may be underestimating Harvey's impact because
nothing like this flood has ever happened to the shale industry
before, said Giovanni Staunovo, a commodities analyst at UBS Wealth
Management.
"There is no historical comparison," he said.
Write to Lynn Cook at lynn.cook@wsj.com, Bradley Olson at
Bradley.Olson@wsj.com and Alison Sider at alison.sider@wsj.com
(END) Dow Jones Newswires
August 29, 2017 18:02 ET (22:02 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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