Onshore/Offshore Facilities

As Temperatures Rise, US Producers Expected To Recover Rapidly

Oil and gas producers in the southern US suffered from a historic disruption to their operations, but analysts say the effects will be short lived compared to what may be in store for downstream operators.

Source: Getty Images.

As Texas and neighboring US states begin to thaw out from a historic winter storm, its impact on the region’s oil and gas industry is coming into clearer view. The biggest takeaway of most upstream analysts is that while the production curtailments were dramatic, they will be short-lived.

After temperatures dropped as low as 0° F (-17° C) on Monday in Midland, Texas, production across the Permian Basin dropped off by an average of more than 2 million B/D over the next 3 days, according to Rystad Energy. The big dip means that the Permian is likely to produce an average of 3.7 million B/D this month—off by 660,000 B/D from the oil and gas consultancy's previous base scenario.

For context on the scope of this latest episode of unexpected shut ins, the Permian averaged more than 4 million B/D during the trough of the widespread shut ins that were driven by the onset of the COVID-19 pandemic last year. But unlike then, operators are relying on temperatures to rise, not prices.

With the warming now underway, Rystad said some shuttered volumes are flowing again and that it expects “a rapid reactivation” of the remaining shut-in population, with all but 160,000 B/D of baseline production back online by March.

“There is some talk that the current events could have a prolonged impact on statewide oil and gas production, however we need to remember that the US oil and gas industry has an exceptionally good track record for getting back up to speed quickly after extreme weather or market events—for instance after hurricanes or the COVID-related curtailments of 2020,” said Artem Abramov, the head of shale research at Rystad.

In other parts of Texas, New Mexico, and in Oklahoma, Rystad said the temporary production stoppages could be higher on a percentage basis than in the Permian but noted that it is too early to provide reliable estimates.

On Wednesday, industry executives and traders estimated that as much as 40% of US crude production, or more than 4 million B/D out of 11 million B/D, was shut in during the peak of the winter storm. This is according to a Bloomberg report which cited sources that said between 65-80% of Permian production was disrupted this week.

The winter storm turned into a major energy crisis shortly before midnight on Sunday when forecasted demand on Texas’ primary grid, operated by the Electric Reliability Council of Texas (ERCOT), exceeded supply by at least 30,000 megawatts.

This came as generation capacity was lost across nearly the entire spectrum of the state’s energy system: coal-fired plants, a nuclear facility near Houston, and wind farms in west Texas. A lack of cold-weather protection was blamed for the widespread failures.

Then, after midnight on Monday, many natural gas-fired power plants in Texas suffered from both the falling temperatures and a lack of pipeline supply as gas fields froze up too. Natural gas represents the single largest source of power generation on the ERCOT grid, providing around 40,000 of the more than 70,000 megawatts it may transmit during peak demand.

The situation began to normalize on Friday when ERCOT said it was suspending emergency operations as power was restored to most of the nearly 5 million homes and businesses in Texas that had gone without it since Monday.

Gas Down, But Not Out

Wellheads, production facilities, and pipelines in the southern US are not winterized as they are in colder areas of the US. This vulnerability led to widespread “freeze-offs” that blocked the flow of raw gas that contains water vapor and other liquids.

But as is the case with oil production, the mass freeze-off of gas wells is expected to be resolved within a matter of days. On Friday morning, the Permian Basin Petroleum Association said it was “seeing continued progress” in the restoration of natural gas production throughout the region and across Texas after crews worked throughout freezing temperatures to bring field systems back online.

Between 8-17 February, the US Energy Information Administration estimates that output from gas fields in Texas fell by over 10 Bcf/D. Total US dry gas production fell 21 Bcf/D to 69.7 Bcf/D, a net drop of about 23%, according to other data from IHS Markit.

In addition to upsets in the Permian, the gas-rich Haynesville Shale that is shared between Texas and Louisiana saw production fall by 4 Bcf/D to 8.2 Bcf/D, the lowest output in 3 years according to S&P Global.

Despite the wild price swings that resulted from these shortages and pushed some local gas supplies close to $1,000/MMBtu, a note issued on Friday by Morgan Stanley said to not expect long-term price impacts.

The investment bank pointed out that strip prices for Henry Hub gas—the main US benchmark—were around $3.03 on Friday, up less than 1% from the week prior. Morgan Stanley predicts the freeze offs will be largely reversed by next week.

US Downstream Needs Weeks

While US oil and gas production may return to normal levels in a matter of days, analysts are expecting it to take weeks for the downstream component to catch up.

More than 20 crude refineries in Texas, Louisiana, and Oklahoma have shut down a combined 5.9 million B/D in output, according to S&P Global. The refineries along the US Gulf Coast that were especially impacted, in many cases shutting down completely, account for about half of the nation’s processing capacity.

Most of the damage is reported to have been due to frozen pipes and the instrumentation that is required to operate the refineries. Multiple reports claim that the necessary repairs may take several weeks for the downstream operators to repair.

As a result of the impending downstream bottleneck, global oil prices were retreating from the gains seen earlier in the week. By Friday afternoon, West Texas Intermediate futures were down more than 2% to $58.94/bbl while Brent crude was down 1.25% to $62.68/bbl.

"Production can fall as it may, but if refineries cut their processing capacity to an even larger extent, the imbalance naturally pushes prices lower," explained Bjornar Tonhaugen, head of oil markets at Rystad.

Check JPT's earlier coverage of the storm: