A recent report from the US Energy Information Administration (EIA) highlighted the impact of the energy shifts of the last decade in reducing the vulnerability of US energy supplies to Atlantic hurricanes. The report was issued just in time for the 10-year anniversary of Hurricane Katrina. As the Houston Chronicle noted, It illustrates another benefit of the revolution in shale oil and gas. However, with oil below $50 per barrel, it is also worth considering how durable these particular effects might be if low oil prices were to persist.
Following hurricanes Katrina and Rita, which made landfall on the Gulf Coast within a few weeks of each other in 2005, I recall some lively discussions concerning the concentration of US energy assets in the region, and what that meant for US energy security. There was talk of new inland refineries, and even proposed legislation to promote them. With the exception of one small refinery in North Dakota, which came online earlier this year, most of this talk led nowhere. The synergies of the Gulf Coast refining and petrochemical complex were and still are overwhelming.
From the perspective of diversifying US crude oil and natural gas supplies, the situation looked equally daunting in 2005, excluding higher imports of both--an outcome that already seemed unavoidable. The country's main onshore oil fields, including the Alaska North Slope, were in decline. In 2004 their combined output averaged less than 4 million barrels per day for the first time since the 1940s. The deep waters of the Gulf of Mexico were where the majority of accessible, unexploited US oil and gas was expected to be found.
From our current vantage point we can see that in 2005 the first large-scale application of hydraulic fracturing ("fracking") and horizontal drilling to shale in the Barnett gas field near Dallas, TX was pointing to an entirely different set of possibilities. It had just passed a major milestone: one billion cubic feet per day of production. However, other than visionary entrepreneurs like George Mitchell, few energy experts then foresaw how rapidly shale could scale up elsewhere.
Fast-forward to 2015, and the country has experienced a profound geographical diversification of its energy sources. As the following key chart from the EIA's analysis shows, since 2003 the offshore Gulf of Mexico's share of US production has fallen by 40% for crude oil and by nearly 80% for natural gas.
The divergence in those figures may seem surprising. "Tight" oil from deposits North Dakota, onshore Texas and the mountain West supplemented deepwater production that post-Deepwater Horizon has recovered to roughly the level of 2004, bringing total US oil output close to an all-time record this year. Meanwhile, rising shale gas output in Arkansas, Louisiana, Ohio and Pennsylvania more than compensated for the steady, long-term decline of Gulf of Mexico gas production. The extent of the shift in US gas sources has even raised questions about the viability of the benchmark Henry Hub (Louisiana) trading point for the main gas-futures contract.
In fact, when we look beyond oil and gas to factor in the growth of renewable energy and the recent decline in coal consumption in the power sector, since 2004 the equivalent energy dependence of the US on the Gulf of Mexico--including imports--has fallen from 7% to roughly 4%, in terms of total energy consumption.
If oil prices had remained where they were a year ago, at above $90 per barrel, there would be little doubt that this trend would continue. However, the latest short-term forecast from the EIA suggests that US onshore oil production will fall by about 6%, due to reduced shale drilling, while Gulf of Mexico production ticks up about the same percentage, as more projects that were begun under higher oil prices come onstream. This is generally consistent with the latest outlook from the International Energy Agency. By itself that could cause a small increase in Gulf of Mexico dependence.
As for gas, EIA projects that US onshore natural gas production will continue to grow, though at a slower rate than recently, while offshore gas continues its decline, reinforcing the shift away from the Gulf. The technology and techniques for developing onshore shale gas continue to improve, even with low natural gas prices, while the identified gas resources of the eastern Gulf of Mexico remain off-limits.
The relative importance of the large refining centers on the Gulf Coast may be evolving, too, for different reasons. US refined product exports have grown substantially since the financial crisis, with most of them sourced from the Gulf Coast. To the extent such shipments could be delayed in an emergency or swapped for product sourced abroad to be delivered to their original destinations, that effectively creates a buffer against storm-related disruptions in domestic deliveries.
Nature and the legacy of decades of infrastructure investment guarantee that the US Gulf Coast will remain a key region for US energy supplies. However, the technology for tapping resources elsewhere has greatly reduced the chances for a repeat of the events of 2005, when a pair of hurricanes set the stage for the highest natural gas prices in US history. Low oil prices might slow down further reductions in the relative energy contribution of the Gulf, but a significant reversal of this trend looks unlikely under either low or high oil prices.