Houston We Have a Problem: Key Closure Exposes Big Risks to the Fragile Oil Industry

By Markets Fool.com

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Port of Houston. Photo credit: Flickr userRobert Huffstutter.

Part of the Houston Ship Channel, which is an important piece of Houston's port system, closed earlier this week after two ships collided on Monday amid heavy fog. That closure has caused a ripple effect within the energy industry as the waterway is vitally important to the petrochemical sector. Energy giant ExxonMobil , for example, was forced to cut production rates at its massive nearby Baytown refinery, while midstream operator Enterprise Products Partners L.P. suspended docking operations at its facility on the channel where it loads petroleum products like propane for export. Enterprise also declared a force majeure, meaning it wouldn't be able to meet its contracted obligations due to an event beyond its control. Other petrochemical-related facilities were at risk being shut down if the closure remained in effect for a few more days, but the channel did reopen on Thursday morning after being shut three days.

While there's unlikely to be any long-term damage to the port or the companies involved in the closure, this incident does highlight a major risk to the oil industry -- its significant dependence on this key location.

The key port
The Port of Houston, which is a major part of the Houston Ship Channel, is vital to the energy industry. It is home to the largest U.S. petrochemical complex, which is also among the biggest in the world. The portusually ranks first in foreign import and export volumes in the country. It is the nation's busiest petrochemical waterway, handling oil imports, petroleum product exports, and pretty much everything in between. The affected section of the channel alone is home to five refineries that process 1.34 million barrels a day or 7% of America's refining capacity. Of those oil volumes, 700,000 barrels of oil per day were imported through the ship channel as of last December.

Meanwhile, in the Houston regionthere are 10 refineries representing 13% of the country's total refining capacity. The risk here is that a major catastrophe that forces the port to shut down not for a few days, but for months, would have a far more drastic impact on the energy industry than we saw this week. That's because many of America's key refineries are located in the region. ExxonMobil's Baytown facility is the nation's second-largest oil refinery, processing 560,500 barrels per day. Other key refineries in the area could also be affected by a long-term shutdown of this key port. For example,Royal Dutch Shell was evaluating if the channel's recent closure would impact its refinery in Deer Park, which processes327,000 barrel per day. WhileLyondellBasell has a 236,000 barrel per day plant in Houston that was not affected by the recent shutdown, it too is at risk should a longer-term problem occur.

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Exxon's Baytown Refinery. Photo credit: Flickr user Roy Luck.

Loaded with key energy infrastructure assets
The Houston Ship Channel is also important to other energy-related facilities. For example, Enterprise Products Partners and Targa Resources Partners LP combine to export 600,000 barrels of propane and butane out of the channel each day. Meanwhile, Enterprise is building an ethane export facility on the channel, which would be the first such facility in the Gulf Coast. These export facilities are a key to keeping America's natural gas liquids supplies from getting out of balance with regional demand as excess NGLs can be exported to regions that are short on supply.

Meanwhile, other energy infrastructure companies have key assets located on the channel.Kinder Morgan , for example, has invested over $2 billion on projects along the channel since 2011 as part of its terminals business. It has about a dozen key assets there, from petroleum product storage to export terminals.

Clearly, an extended closure of the channel would have a deep impact on these companies' operations in the region.

Investor takeaway
The U.S. energy industry is heavily concentrated in the Gulf of Mexico, and in Houston in particular. That concentration is only expected to grow as the energy boom creates incentives to build new projects around existing infrastructure in the Gulf. The issue with this concentration is that if the Houston Ship Channel was ever closed for an extended period of time due to a major collision or a hurricane it could cause long-term problems for the energy industry, as well as energy stocks. That's a good reminder to investors about the importance of investing in energy-related companies that have good geographic diversification.

The article Houston We Have a Problem: Key Closure Exposes Big Risks to the Fragile Oil Industry originally appeared on Fool.com.

Matt DiLallo owns shares of Enterprise Products Partners. Matt DiLallo has the following options: short January 2016 $32.5 puts on Kinder Morgan and long January 2016 $32.5 calls on Kinder Morgan. The Motley Fool recommends Enterprise Products Partners and Kinder Morgan. The Motley Fool owns shares of Kinder Morgan. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.