What the Texas energy production boom means for the world's supply chain
As the U.S. becomes the largest energy producer in the world with Texas leading production, it has created the biggest challenge the energy industry has seen in a generation and demands for creative solutions for the supply chain have never been so high, a Texas official said.
If Texas were a country and Texans like to think of it that way, it would be the third largest energy producing country in the world behind Saudi Arabia and Russia, Texas Railroad Commissioner Ryan Sitton said.
Commissioner Sitton was speaking at Petrochemical Update’s Supply Chain and Logistics conference in Houston.
U.S. crude oil production and subsequently petrochemical production has increased significantly during the past ten years, driven mainly by production from tight oil formations using horizontal drilling and hydraulic fracturing.
At this rate, many analysts are predicting that Texas will surpass Iraq and Iran and pave the way for the U.S. to become the world’s leader in oil production.
Most recently, U.S. crude oil production reached 11.3 million barrels per day (b/d) in August 2018, according to the U.S. Energy Information Administration’s (EIA) latest Petroleum Supply Monthly in November, up from 10.9 million b/d in July.
This is the first time that monthly U.S. production levels surpassed 11 million b/d.
U.S. crude oil production exceeded the Russian Ministry of Energy’s estimated August production of 11.2 million b/d, making the U.S. the leading crude oil producer in the world.
Texas had the highest production of U.S. states at 4.6 million b/d.
The Permian Basin region accounts for about 63% of total Texas crude oil. From January 2018 to August 2018, Texas crude oil production increased by 683,000 b/d, the EIA said.
The growth in the Permian Region since the start of 2018 surpassed the EIA’s previous expectations, which assumed that pipeline capacity constraints in the Permian region would dampen production growth.
However, industry efficiencies in pipeline utilization and increased trucking and rail transport in the region have allowed crude oil production to continue to grow at a higher rate than the agency expected.
The oil and gas industry are around 15% of the state’s economy, but several industries support the sector making that number higher.
“Consider the ancillary industries that support the industry. Consider a guy who owns a hotel in south Texas but 90% of his guests are staying there working on an oil project, so we can say that it is nearly 1/3 of the state’s economy,” Sitton said.
While the economy goes through cycles, and technology and other industries are changing quicker than ever, one thing that does not change is the world’s need for energy.
“As the population of the world grows, the hunger for basic products such as energy, water and commodities never go down. It only goes up,” Sitton said. “Everything from oil to natural gas to petrochemicals like polyvinyl chloride (PVC) to wood. All these things have gone up for the last 50 years with only two years where they were level and never dropped.”
Texas oil production has grown from 1 million b/d to more than 4.5 million b/d, according to the EIA.
Texas now refines 6 million b/d of crude oil. The Port of Corpus Christi exports 1 million b/d of oil, more than all the other ports in the country combined, Sitton said.
Texas is clearly getting a pretty major footprint when it comes to oil and gas. The main issue our state faces is the supply chain, getting the product to market domestically and globally,” Sitton said.
The Permian basin is now the largest producible oil reserve in the world.
“We look at that and we must consider how to get that to the market,” Sitton said. “All over the world, these products are needed.”
U.S. energy is needed in places like China, where they are building more refineries today than any other place in the world and would love to run with light sweet crude, as well as places like Mexico where they want to double electricity generation in the next 10 years based largely on U.S. natural gas, Sitton said.
“Trucks, rail, ships, shipping containers, everyone plays very important roles,” Sitton said. “When you talk about the supply chain today, it is an obstacle and opportunity bigger than we have ever had.”
The world’s demand for natural gas is bigger than all other energy sources combined. The supply chain is concerned not just with how to get the product to global customers, but also the best way to get it to the U.S. manufactures using it to create end-products.
Natural gas prices surge
“This week natural gas prices jumped, the biggest jump U.S. natural gas prices have seen in 10 years,” Sitton said. “World demand for natural gas is growing. We have a lot of it here. We can do a lot with it here. This is not simply an industry challenge. This will be an industry challenge, a regulatory challenge, and a technology challenge.”
Natural gas prices this week soared the most in 10 years as forecasts for lingering U.S. cold weather spurred concern that supplies may not be adequate to meet demand over the winter.
Gas for December delivery rose as much as 20% to $4.929, the highest since February 2014, when a polar vortex brought an arctic chill to the Midwest and Eastern parts of the U.S.
End of day price quotes for natural gas (NYMEX)
Ports, rail, trucks, packaging and other major logistical providers in export supply chains stepped up operations in the last two years to handle the extra petrochemical exports from the U.S., which arose from ‘first wave’ investment.
The supply chain will have to keep it up as the next wave in new U.S. petrochemical infrastructure is coming, Bob Rhoades, general manager, global supply chain at Chevron Phillips Chemical said.
Rhoades was speaking at the Petrochemical Supply Chain and Logistics Conference in Houston as well.
Rhoades said that since the first wave of projects came online, 25-30% of US polyethylene (PE) production now is exported.
More than likely, that percentage could increase to as much as 90% because of another wave of new US polymer capacity scheduled over the next few years.
The supply chain expanded and improved services to handle exports for first wave investment such as adding capacity, improving technology, and extending port hours.
More such improvements will be needed, because the US isn't finished, Rhoades said.
Eight new ethane-fed steam crackers and 13 new polyethylene plants are planned to come online from 2017 to 2019. All or most of that 6.4 million tonne/year of new output -- 5% of which is operational -- is targeted for exports.
Another 14 new PE plants are planned along the U.S. Gulf Coast, and Northeast U.S. beyond 2020.
Trucking companies, railroads, packagers and ports need to foresee bottlenecks and other problems and plan to better address them, Rhoades said.
The energy industry must not rely on government alone, but also work with corporations, government entities, and one another to improve the supply chain.
“This is even more on suppliers to make these advancements. The time for innovative ideas is now. To understand the magnitude of the supply chain today, think in a macro level, think global demand, global supply.”
In other countries, many refiners and chemical facilities are government owned and do not have the opportunity that U.S. owners have today to think about the huge macro things and their impact on the supply chain, Sitton said.
The U.S. is forecast to contribute 40% of global natural gas production by 2025 and nearly 75% of oil growth in the next six years, driven mainly by unconventional onshore supplies, the IEA said in November.
By Heather Doyle