Energy infrastructure is very vulnerable to hurricanes in the gulf region, which:
- Produce or imports 60% of the country’s supply of crude oil
- Supplies a third of U.S. natural gas supplies
- Generates half of the United States refined products
- supplies nearly all of the the Gulf region, the East Coast, and most of the Midwest
- The vast majority of the petroleum and natural gas products consumed in the eastern half of the country find their origin in markets, storage, processing, and pipeline capacity concentrated in Gulf states.
- The sheer magnitude of fossil fuel operations in the Gulf make them the centerpiece of U.S. natural gas and refined petroleum product supply and pricing
- Processes 75% of the dry natural gas in the USA at natural gas processing plants before injection into inter- and intra-state pipelines. Most of the natural gas processing capacity is located in the Gulf region.
The Midwest and East Coast are heavily dependent on deliveries of natural gas, crude oil and refined products via a few major pipelines emanating in the Gulf region. Loss of these pipelines meant the nearly full disruption of pipeline supply of gas, crude oil, and refined product to the consuming regions. Shut-in supply and refining/processing capacity, combined with the loss of electric power to key pipeline operation and support systems (such as compressor stations), dramatically reduced the flow of product out of the region.
The hurricanes highlight a unique and timely infrastructure challenge relating to natural gas supply. This industry is on the brink of moving from a largely continental supply resource dominated by supplies from the Gulf, to one increasingly reliant upon imports of liquefied natural gas (LNG). On the one hand, this technology will provide flexibility and opportunities for diversification that do not exist with continental sources of gas. But unfortunately, existing proposals to site LNG imports are dominated by sites in the Gulf region. To some extent, this makes sense because the Gulf is a location of major natural gas processing, storage, and transportation infrastructure, as well as a region where domestic supply productivity is decreasing. The siting of LNG import capability in the Gulf can thus prolong the utilization of existing gas system infrastructure in that region. But if we end up siting most LNG regasification and storage capacity in the Gulf, we risk remaining in the kind of geographic dependency we have experienced for years.
Prices With the hurricanes coming on the heels of already tight oil and gas markets and refining capacity, prices shot up dramatically with the news of the storms in the Gulf. Prices stayed high, dropping gradually as capacity came back on line. More severe price impacts were avoided in part by lower-than-expected demand as the major gasconsuming regions experienced extraordinarily warm winter conditions.
Our dependence on the refined products of crude oil is pervasive – geographically, economically, socially, historically, culturally, and militarily. Oil goes into nearly everything we come into contact with in our daily lives – the production and distribution of food; the building, furnishing and heating of our homes; the wheels of commerce; the building and maintenance of roads and other public infrastructure and services; and work and leisure transportation. We are completely dependent on oil for work and play, health and security. The affordability of oil-based transportation fuels drives economic activity and provides the freedom of motion that is so important to Americans. This pervasive demand for oil – along with its relative inflexibility to price changes in the short run, and the lack of significant alternatives – remains our most important energy vulnerability.
Crude oil supply is only the first piece of the domestic oil infrastructure chain, which also includes critical refinery, storage, pipeline, and other transportation/delivery infrastructure. Each of these can have an important influence on delivered product supply and price conditions across U.S. regions.
Liquid Natural Gas (LNG)
While historically most of our supply of natural gas has come from domestic and Canadian sources, the productivity of this supply base is in decline, and the U.S. will become more and more dependent over time on the global market for gas to meet growing demand. But there are key differences in infrastructure vulnerabilities and challenges between oil and gas. Once gas is injected into the national or regional gas pipeline networks, it exits at the point of consumption. There is little or no opportunity for alternative transportation or delivery mechanisms in the event of major pipeline disruptions. This also means that as demand grows, pipeline infrastructure must also grow, and it must do so in a way that makes sense in the context of the sources of new demand and supply. Also, the level of reliance upon international markets for gas – through the addition of liquefied natural gas (LNG) import terminals in the U.S. – will be a new reality for our country. How (or where) infrastructure is developed to accommodate the needed increase in LNG to meet growing demand in the coming decades will significantly influence the vulnerability of natural gas consumers to supply disruptions and price spikes.
In 2004 the U.S. consumed roughly 22.4 trillion cubic feet (TCF) of natural gas – 7.8 TCF (35 percent) in the residential and commercial sectors, 7.4 TCF (33 percent) in the industrial sector, and 5.4 TCF (24 percent) for electricity generation.13 U.S. production nearly matched that amount, totaling roughly 18.9 TCF – or 84% of U.S. demand – for the year. Most of the remainder needed to meet demand in 2004 was imported via pipeline from Canada.14 In recent years, the U.S. has met nearly all of its demand in this way via pipeline from continental sources of gas in the U.S. and Canada, with small (but important, particularly during winter peak seasons) contributions from existing LNG import facilities. For the future, EIA projects natural gas demand in the U.S. to grow to 26.9 TCF in 2030, with demand growth initially dominated by the electric generation sector, followed by a decline in the contribution of the electric sector towards the end of the forecast period. See Figure 14. This projected strong growth in demand for natural gas comes at a time of declining productivity for the conventional continental sources of natural gas supply. While recent drilling activity has increased substantially, the productivity of rigs drilled continues to decline on average. See Figure 15. EIA projects that in order to meet increasing demand for natural gas in the U.S., we will thus rely more and more upon non-conventional sources of gas, primarily from the Rocky Mountain region, and on imports of LNG.
Hibbard, Paul. March 2006. US Energy Infrastructure Vulnerability. Lessons From the Gulf Coast Hurricanes. Analysis Group.