Its been a crazy weekend for the Houston Ship Channel from the closure of a section of it on Friday afternoon. The potential for this to turn into a major oil event was heightened thru Sat night by the US Coast Guard giving no indication of a potential reopen data or even providing what is needed to reopen. But this changed mid morning today with the first indications from the US Coast Guard of what is might allow it to be reopened and their hope it might reopen on Monday. We ended posting this blog fully recognizing it may just turn out to be a blog with a good detailed Houston Ship Channel map for future reference if the ship channel is reopened tomorrow. The Houston Ship Channel provides the only access to the Gulf of Mexico for a range of refineries, terminals and ports, and saw >10,000 tankers in 2018. There are still no guarantees for the reopening to happen tomorrow and, given the major impact on oil, petroleum products, propane and butane prices if the ship channel remains closed, we decided to post the blog.
US Coast Guard close a ~7 mile portion of Houston Ship Channel on Friday afternoon with no estimate for reopening. The big oil market news hit the wire after 2pm mountain on Friday with the reports that the US Coast Guard closed down a ~7 mile portion of the Houston Ship Channel. The Houston Ship Channel is the only available shipping lane for oil/petroleum products/propane/butane to and from the Gulf of Mexico. We posted our Friday 2:55pm mountain tweet [LINK] “Major disruption to US oil products exports/imports. Houston Chronicle [LINK] “roughly seven-mile stretch of the Houston Ship Channel has been closed due to contaminants”. The Houston Chronicle story noted the breaking oil market news on Friday afternoon that the US Coast Guard closing a stretch of the Houston Ship Channel on Friday following this week’s tank farm fires and breach of the containment wall. And there was no indication of what would be required to reopen the ship channel or when it might reopen. This uncertainly was why we wanted to highlight the closing because a shut down of this portion of the ship channel will immediately impact imports and perhaps more importantly, exports.
Up until this morning (9:22am mountain), the US Coast Guard had not mentioned any potential for reopening the ship channel. It was understandable that the US Coast Guard didn’t have a timetable to reopen and was very careful to not give any estimate or even the steps required to reopen the ship channel. And that was reinforced at yesterday’s press conference, the US Coast Guard was widely reported indicating there was no timetable for when the stretch would be reopened and that the stretch would be closed until further notice. Bloomberg terminal Sat story was titled “No Timetable For Reopening Texas Ship Channel Following Leak”. The portion closed is between Tuckers Bayou and Ship Channel Light 116, and this closure will cut off a number of refineries, oil and product export terminals from access to the Gulf of Mexico. The expectation as of this morning was that it could be days before the US Coast Guard determined the extent of any ship channel contamination, the risk to water and people, and the steps needed to provide the reopening potential. Our fear as of this morning was that the Houston Ship Channel could end up being closed for a week or possibly longer.
But that changed today starting at 9:22am mountain, the US Coast Guard first mentioned a potential time to reopen and what was required to do so.. We have focused on US Coast Guard comments (and not others) as they will be making the call to reopen. There were a number of local Houston and Bloomberg stories posted just before 5pm mountain that noted comments from the US Coast Guard. (i) Its still not clear when the Houston Ship Channel will be reopened, but the pieces of the multiple stories paint a picture that at least the US Coast Guard is now giving an indication of what could allow it to reopen and even when they hope they can do so. Ie. there is the potential or at least the point to a near term reopening in the next day or two. (ii) The first change we saw in the US Coast Guard position on reopening was in the Houston Chronicle 9:22am mountain story [LINK] “Coast Guard Petty Officer Kelly Parker says that remains closed Sunday and that the Guard hopes to reopen the waterway Monday morning. Parker says 52 vessels are waiting to move, but the channel won’t reopen until air and water quality has improved”. (iii) Houston Chronicle reporting on Coast Guard officials this morning was not changed in the update story at 3:38pm mountain [LINK]. It said “At least 52 vessels are waiting for the waterway to reopen, and the U.S. Coast Guard hopes to reopen the entire Houston Ship Channel by Monday morning, U.S. Coast Guard Petty Officer Kelly Parker said.” (iv) Click2Houston local news reporting at 4:33pm mountain [LINK] on Coast Guard officials “Toczko said there is no clear timeline to reopen the ship channel, but said crews are continuing to monitor the levels of toxic product in the air and in the water.” (v) Bloomberg terminal reporting at 4:12pm mountain on Coast Guard officials “The Houston Ship Channel won’t reopen until the U.S. Coast Guard verifies that a cloud of cancer-causing benzene has dissipated and oily runoff from the region’s worst chemical disaster in 14 years poses no threat to vessels or their crews”, and “The Coast Guard plans to move a test vessel through the channel’s 2-mile-long no-go zone to determine whether ship traffic can resume without disrupting efforts to skim gasoline ingredients that spilled into the waterway, Lieutenant Commander Jason Toczko said. He declined to estimate when the channel will reopen or specify when the test vessel will launch.”
This is cutting off a lot of refineries, oil terminals/ports, and petroleum products terminals/ports from the Gulf of Mexico. Followers of the SAF Group (Stream Asset Financial) know that we don’t press release or have our name included in press releases despite our being the most active Calgary based private equity group in the past three years. But one advantage of having a team of energy and commodity specialists with investments throughout the oil supply chain to international markets is that we follow in detail oil, petroleum products, NGLs, natural gas and LNG in the Gulf Coast. We haven’t provided our internal databases on items like the oil pipelines to the Gulf Coast, but we did want to share our Houston Ship Channel map, which is a good reference map for all the refineries, terminals and ports that are impacted by the Houston Ship Channel closure (marked by the red line). A picture is worth a thousand words and this picture shows why this closure, if it lasts for any extended period, will impact both imports and exports. There are too many impacts on pricing to include in one blog as any extended closure impacts prices of prices of oil, petroleum products, propane and butane. One basic example is that any restrictions on light oil exports will lead to widening differentials for US relative to global oil prices. Don’t forget that the US is more or less maxed out on US light sweet oil into US refineries. And as we know in Canada, any stranded oil leads to wider differentials. That is just one price impact.
SAF Energy’s Houston Ship Channel Refineries, Terminals, Plants Map
Source: SAF Energy, Company Reports, EIA
Houston Ship Channel saw >10,000 tankers in 2019, approx. 27 tankers per day. On Thurs, Platts posted a timely story “Houston’s shipping bottleneck could curb expansion of major US oil and petchems hub” [LINK]. The story may not have been linked to the events this week, and more to the general challenges facing the Port of Houston and the Houston Ship Channel, but it provided some excellent data on the Houston Ship Channel and the Port of Houston. The caveat to the numbers is that data for “Houston Market” looks to include other Houston area refineries that would not have been cut off by the ship channel closing such as Exxon Baytown. However, Platts notes there were >10,000 tankers thru the Houston Ship Channel in 2018, which works out to an average of approx. 27 tankers per day. This math just happens to tie to the math in today’s Houston Chronicle 3:38pm mountain story “At least 52 vessels are waiting for the waterway to reopen”.
Ship Movements, Houston Ship Channel 2018
Source: Platts
Storage, Export Capacity Houston And Corpus Christi
Source: Platts
Oil “tank farm” is the next dirty word, adds risk to proposed Gulf Coast terminals. We always find it interesting that politicians or environmental groups will use “tar sands” or “fossil fuels” to make sure the population knows it’s a bad or outdated (what can be older than a fossil) form of energy. Post this week, we expect the next dirty word will be oil “tank farm” presenting the image of a large number of oil tanks packed together with the fear that one tank explodes and then the next one catches. The Intercontinental fires enveloping several tanks will inevitably add scrutiny and scrutiny will add time for approvals for the next wave of oil terminals whether it be in Houston or elsewhere. It will favor the terminals that are under construction. And likely cause delays to ones waiting approval or to start. What it is likely to do is just make it easier to figure out which terminals don’t get built. Our SAF Gulf Coast proposed terminal database reminds that all terminals are not needed and many will get cancelled. This added scrutiny may just help weed out unneeded terminals quicker.
But it will also add risk to wider differentials in future years if proposed oil terminals are delayed and don’t match up to the timing of new pipeline capacity. We have been highlighting the risk that new oil terminal additions on the Gulf Coast aren’t ready in time to match the new oil pipeline capacity to the Gulf Coast and this adds risks in particular to Permian oil diffs. Oil tank farms or oil tanks are the essential part of any oil export terminal. Oil export terminals can’t exist without oil tank farms. This was a growing issue prior to this week. Our latest mention was last week’s (March 17, 2019) Energy Tidbits memo that noted the Enterprise Products CEO Teague comments at CERAWeek warning on this issue. The Houston Chronicle reported [LINK] “Enterprise Products CEO: Flood of petroleum products to overwhelm Gulf Coast ports” and “Enterprise Products Partners CEO Jim Teague said Wednesday that a flood of oil, natural gas and other petroleum products could soon overwhelm ports in Houston and Corpus Christi. Speaking at the CERAWeek by IHS Markit conference, the pipeline CEO said the volumes of product moving to the Gulf Coast for export were increasing at a fast clip. “Corpus Christi can’t handle what’s coming, and Houston can’t handle whats coming,” he said. “It’s not just crude. It’s not just LNG. It’s all of the above.” The problem is that any added scrutiny will typically lead to more time for final approvals for export terminals. And this will only make this timing mismatch worse than currently expected. And as we know from any area, stranded oil means wider diffs.
Tankers are already backing up, which will increase the focus on what the US Coast Guard found out today and tells the market tomorrow. We ended up writing this blog recognizing that it may just turn out to provide a good reference map for the future if the US Coast Guard says tonight or tomorrow the Houston Ship Channel is reopened. But with the reports that there is a backup of tankers, we decided to post the blog just in case the Houston Ship Channel isn’t reopened tomorrow.