Houston analyst: How Covid-19 hits downstream Gulf Coast energy

A lot of attention has been paid to the plight of upstream oil and gas companies — the hardest-hit subsector amid the Covid-19 pandemic — but further downstream, refiners and LNG companies are also feeling some pain.

Refinery utilization rates — a measure of how much of their production capacity refineries are using — are down 20% to 25$ across regions. Along the Gulf Coast in particular, utilization dipped to 71.8% in May, its lowest point since 2017, according to data from the U.S. Energy Information Administration. And at 77.8% during the first week in June, Gulf Coast utilization is still lower than any other week since the EIA began recording the data in 2010, aside from the trench in 2017. A more normal June utilization rate would historically have been between 90% and 95%, according to the EIA data.

The pressure on refiners will continue as long as the pandemic is still suppressing demand, said Clint Follette, a Houston-based Boston Consulting Group managing director and partner. If social distancing continues deep into 2021, some of the smaller refineries might end up having to shutter their operations permanently, he said.

But refineries generally aren’t as cash hungry as the companies producing crude oil upstream. They still have certain sustaining costs, but most of the larger facilities, like those near Houston, are pretty resilient, Follette said.

“It’s not like the upstream, where it’s sucking up capital,” Follette said.

Petrochemical companies are also having a tough time, though demand for their products hasn’t sunk quite as low as that for fuels, Follette said.

“It was already a tough environment for the chemical industry because a lot of capacity had already come online. You had a little bit of oversupply even before this disruption,” Follette said. “They went from a bad margin year to a worse margin year.”

LNG

Houston’s burgeoning liquefied natural gas industry is also contending with issues. Natural gas production as a byproduct of crude production, called associated gas, has gone down as oil companies cut spending. That has reduced U.S. feedstock supply for LNG exporters and pushed domestic natural gas prices up, making exports to international destinations — where the pandemic is hurting demand — less attractive, said BCG analyst Alex Dewar.

“It’s a bizarre situation where U.S. gas is pricing above Europe and Asia,” Dewar said.

LNG facilities along the Gulf Coast have been built or modified at great expense over the past several years to export the incredible quantity of natural gas being produced via onshore drilling.

That means that, even in a world where the pandemic ends in the short term, that probably pushes up domestic supply more quickly than international demand, further hurting LNG exporters in the short- and medium-term, Dewar said.

As an industry in its early stages, many U.S. LNG export hopefuls are still working on projects to increase their capacity. But none of those projects are likely to move forward as long as current conditions persist, Dewar said.

“It’s challenging to see how anyone reaches a final investment decision in the next several years,” Dewar said.

In fact, the Netherlands-based Royal Dutch Shell PLC — whose U.S. operations are headquartered in Houston — walked away from an LNG export project in Lake Charles, Louisiana, earlier this year, and Houston-based Liquefied Natural Gas Ltd. sold out of its flagship development project for just $2 million. Houston-based Tellurian Inc. (Nasdaq: TELL) also is behind schedule on reaching a final investment decision on its flagship project, the Driftwood liquefied natural gas export facility to be built in Louisiana.

By Joshua Mann – Senior Reporter

Courtesy of the Houston Business Journal

https://www.bizjournals.com/houston/news/2020/06/12/how-covid-19-hits-downstream-gulf-coast-energy.html