Harvey's Widespread Destruction Tests U.S. Shale

By Lynn Cook, Bradley Olson and Alison Sider Features Dow Jones Newswires

Tropical Storm Harvey, the most powerful storm to hit Texas in half a century, has shut a significant portion of the state's shale production, cutting off as much as 15% of U.S. oil supplies.

Continue Reading Below

Now, in what is the first major storm to test U.S. shale, the big question is how quickly the sector can make a comeback.

Before Harvey made landfall as a hurricane Friday, many big shale producers in the Eagle Ford shale fields near Corpus Christi, Texas, shut down their oil and gas wells, and initial estimates for lost production were between 400,000 and 500,000 barrels a day.

As the hurricane's widespread devastation has become clearer, several analysts say it is almost certain that much, if not most, of the region's 1.4 million barrels a day of output is shut down.

Shale producers also rely on a vast, multibillion-dollar network of energy infrastructure -- from ports to train tracks to pipelines -- that has developed in recent years along the Texas coast. Many pieces of that network appear to be swamped too.

The need for that infrastructure may slow shale's ability to bounce back. In the past, hurricanes have dealt a blow to the Texas energy industry by knocking out offshore oil platforms in the Gulf of Mexico; but in many cases, once storms passed, those big installations could quickly return to pumping crude.

Continue Reading Below

"The effect to shale could linger given the extent and catastrophic level of forecasted flooding which interferes with shale logistics," said Benny Wong, an analyst with Morgan Stanley.

The fracking-induced boom in Texas has heightened the state's role in the U.S. economy, which means that if the oil fields and surrounding infrastructure are out of service for long, it could have outsize economic impacts on the state and shave $20 billion or more off U.S. gross domestic product, said Joe Brusuelas, chief economist with RSM US LLP, an accounting and consulting firm.

The Eagle Ford shale in South Texas produces 1.4 million barrels of oil a day, second in output in the state only to the Permian Basin of West Texas. There hasn't been a storm of this magnitude since shale drilling took off about a decade ago.

Companies were trying Monday to sortie out and assess the damage to their facilities in the Eagle Ford shale, which took a direct hit from Harvey. But the sprawling nature of the storm -- it was downgraded from hurricane status on Saturday -- and continued rain in some areas hampered those efforts.

Wind and water damage and outages from the storm have doused tens of thousands of square miles with torrential rainfall and ravaged a wide swath of coastline, halting the flow of up to $800 million a day in energy industry revenue, analysts said.

Corpus Christi and Houston are the two major exit points for U.S. oil, which is now shipped to the four corners of the globe.

"The biggest contribution of shale is that it has given the U.S. a much bigger foothold in the global picture as a supplier of oil, gas, petrochemicals and refined products all over the world," said Uday Turaga, chief executive of consultancy ADI Analytics.

As the hurricane's widespread devastation unfurled and companies confirmed their operations came to a standstill, it is now certain that much -- if not most -- of the region's oil production has been halted.

ConocoPhillips, one of the biggest producers in the area, shut its wells ahead of the hurricane. The company normally pumps 130,000 barrels a day in the Eagle Ford. As of Monday, it wasn't producing oil but said it hoped to restart in some areas.

Other big producers in the area, including EOG Resources Inc. and Chesapeake Energy Corp., stopped fracking, curbed production or suspended operations completely, analysts said.

EOG wouldn't quantify how much of its production is shut down, but the company said it is working to resume operations "where it is safe to do so."

Chesapeake said that "while it is premature to speculate on the ultimate impact to our production, we anticipate volumes will be restrained until Gulf Coast and Houston refineries are back online."

Restarting wells may not guarantee that they flow at the same rate as before the storm, said Tony Sanchez, chairman of Eagle Ford operator Sanchez Energy Corp., in an interview before the storm.

While Mr. Sanchez said he didn't expect the outages to be too extensive or last too long, he said that on a technical level he fears that shale wells, once shut off, could lose pressure.

"It's not just a matter of flipping a switch," he said. "There is significant risk in those wells not coming back to previous levels."

The oil also needs a home. Nearly 15% of U.S. refining capacity is closed in the wake of the storm, which means those plants aren't buying crude. If they stay shut, or if the ports where they are located sustained damage that takes weeks to repair, producers won't be able to turn their spigots back on.

U.S. oil prices fell more than 2.5% Monday to $46.57 a barrel, largely because so many refineries are closed down in the wake in the storm and don't need to buy any crude.

But the market may be underestimating Harvey's impact because nothing like this flood has ever happened to the shale industry before, said Giovanni Staunovo, a commodities analyst at UBS Wealth Management.

"There is no historical comparison," he said.

Write to Lynn Cook at lynn.cook@wsj.com, Bradley Olson at Bradley.Olson@wsj.com and Alison Sider at alison.sider@wsj.com

(END) Dow Jones Newswires

August 29, 2017 05:44 ET (09:44 GMT)