Dr. Daniel Fine: Hurricanes, strategic implications, royalties and prices

Hurricane Harvey last month shut down more than 3 million barrels of oil refinery output or nearly 17 percent of the nation's capacity. Refinery capacity in the Gulf Coast was down over 30 percent on Aug. 30.
Whatever caused this hurricane, there is now a risk of future size and scale to be reckoned with. Gasoline prices in Albuquerque, normally lowest in the state, moved from $1.94 to $ 2.49 per gallon.

Strategically, there is over-dependence on the Gulf Coast and the East Coast for refining capacity. This is the consequence of imported crude oil from U.S. petroleum investment in the Middle East beginning in the early 1950s. The largest refinery there is Motiva, owned by Saudi Refining Incorporated, at Port Arthur.
Venezuela owns the next largest refinery for its heavy, sour crude on which the U.S. based its diversity of supply counter to the OPEC embargo on exports to America in 1973 (this column in the August Energy Magazine assessed the issue of Venezuela import restrictions).

Forward, long-term strategic planning and investment considerations would revive the Eisenhower Administration (1959) emphasis on Inland oil and refining in contrast to U.S. East Coast concentration.  While this was a Cold War reaction to the Soviet Union threat to the Middle East, what is to be done to mitigate hurricane (wind and flooding) risk?

New Mexico has three Inland refineries. The Department of Energy Minerals and Natural Resources prepared an “Energy Plan” – signed by New Mexico Governor Susana Martinez in September 2015 – which called for refinery expansion. This could be part of a new strategy for Inland crude refinery strategy to lower supply risk as a consequence of Gulf Coast vulnerability.
Inland refinery capacity expansion is economic and in natural as it is located where the shale oil predominates from the Permian-Delaware Basin to North Dakota through a Rocky Mountain energy corridor.
The Trump Administration, notably Secretary of the Interior Ryan Zinke, has initiated a study of federal land and oil gas royalty determination. This will include tribal oil and gas.

This is overdue, as smaller and independent operators in the San Juan were exposed to arbitrary and threatening retroactive royalty/tax and penalty edicts under the Obama Administration's U.S. Department of the Interior.  
One Farmington company was partly forced into Chapter 11 bankruptcy. The entire effort is part of a new Federal land management program.

If it is true that Saudi Aramco will postpone its Initial Public Offering (IPO) until 2019, this offers a glimpse at the internal conflict within Saudi Arabia under the control of the Crown Prince, now in control of the Oil Ministry. Earlier this year, in this column, Saudi Arabia was analyzed and noted to be unstable.

The price of world crude oil with a small differential between the North Sea Brent and the West Texas Intermediate will be impacted by the delay.  
It is assumed that much of the production cutback agreement between OPEC members is its relation to the Saudi Aramco IPO, that is, a higher price of world crude leads to a higher price for a share of Saudi Aramco when sold on the world stock markets.

The delay of the IPO could mean that the failure of the world price of oil to reach $60 per barrel or more, with less supply due to the OPEC agreement at Algiers, is at work to undermine the Crown Prince.  
This would ultimately unleash OPEC members to restore 2014-2016 production-at-will or flood the market against U.S. shale producers.

This will end the boom in the Delaware Basin (Lea and Eddy Counties) for all operators but a small number which are large, integrated (with refineries) and lease prolific wells.

Daniel Fine is the associate director of New Mexico Tech's Center for Energy Policy. The column is the independent analysis of the author.

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