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Encountering extremities – part 1

Published by
World Pipelines,


Natural disasters are an inevitable hazard that come with living and operating in an unpredictable world. All forms of infrastructure are susceptible to the unforeseen circumstances that are associated with these phenomena. In recent years, various natural catastrophes have displayed their ability to impact pipeline operations, serving as a sobering reminder that the oil industry is exposed to such risk. The market’s susceptibility to extreme weather has heightened as the network of oil-related infrastructure has expanded throughout the US and Canada.

The North American crude industry has experienced a renaissance in the past 10 years. From 2011 - 2014, NYMEX light sweet crude oil (WTI) front month prices averaged above US$90/bbl, incentivising development and innovation in crude production. US crude production grew by more than 3.5 million bpd in the same time period due to new oil developments, mainly in North Dakota (USA) and Texas (USA). US domestic crude production peaked at 9.6 million bpd in April 2015, according to Genscape’s US Crude Oil Production report.

This new growth created transportation constraints on how to move barrels to market. With few existing pipeline connectivity options, rail transportation provided a stop gap solution until new pipeline projects were brought online. The industry became more geographically expansive with growing production and infrastructure.

Certain natural phenomena have increased in frequency and magnitude since the turn of the century, further amplifying the probability of damage to crude pipelines. Government data agencies report that Oklahoma earthquakes and Atlantic Basin hurricanes have been occurring more often and more powerfully in recent years. The escalation of extreme weather events combined with a growing infrastructure network could be a recipe for disaster. To understand the potential impact of these events, it is important to evaluate historical examples.

Shaken, not stirred

In the last 10 years, the number of earthquakes recorded in Oklahoma skyrocketed. Between 2014 and 2016, the state experienced 2111 earthquakes with a moment magnitude scale (MMS) of 3.0 or higher. This compares to 270 total quakes of a similar magnitude in the five years prior, and an average of 1.5 earthquakes per year for the 30 years before that, according to the US Geological Survey.

The Cushing (Oklahoma) storage hub serves as the delivery point for the WTI contract. Terminals in Cushing provide a total storage capacity of more than 90 million bbls, according to Genscape’s Cushing Crude Oil Storage report. Storage and pipeline capacity at the hub have more than doubled since 2006. Currently, over 6 million bbls of pipeline capacity are connected to the Cushing hub, providing direct access to more than 1.6 million bpd of refining capacity. Cushing receives crude barrels from production regions, such as west Texas and the Alberta oilsands, and delivers crude to US Gulf Coast and midwest refineries.

The 850 000 bpd Enterprise-operated Seaway pipeline system, which carries crude from Cushing to Houston (Texas), was shut on 23 October 2016 due to a spill in Cushing. Parts of the system were shut for eight days, with flows resuming on 31 October 2016.

The supply disruption and increased crude stocks contributed to lower crude prices following the pipeline outage. WTI prices declined nearly US$4/bbl, to US$46.86/bbl from 24 - 31 October 2016.

TransCanada’s 590 000 bpd Keystone pipeline, which carries crude into the US from Hardisty (Alberta), was shut from 2 - 10 April 2016 due to a leak. The eight day outage potentially prevented 4.6 million bbls of crude from entering the US, according to Genscape’s Canadian Pipeline report. For the week ending 8 April 2016, Cushing stocks decreased 1.5 million bbls. Meanwhile, inventories at the Keystone origin in Hardisty grew 1.8 million bbls, according to Genscape’s Canada Crude Oil Storage report. The lessened pipeline capacity into Cushing and subsequent inventory draws at the hub contributed to an increase in WTI prices, up US$0.61/bbl to US$40.68/bbl in the hour following Genscape’s 11 April Cushing storage report.

The Seaway and Keystone outages demonstrate the potential effect that pipeline disruptions can have on storage inventories and crude prices.

To date, no Cushing-connected pipelines are known to have taken damage from an earthquake. However, it is possible that a high magnitude earthquake in the wrong place could cause significant destruction to crude storage and transportation infrastructure in the area.

Part 2 coming soon!

Read the article online at: https://www.worldpipelines.com/special-reports/22122017/encountering-extremities-part-1/

 

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