Hurricane Laura intensifying to Cat 4, threatens oil refineries in its path

Regina Mayor, KPMG Global Head of Energy weighs in on the potential devastation on Hurricane Laura as it heads toward the Gulf Coast.

Video Transcript

JULIE HYMAN: Let's get to what's going on in the Gulf of Mexico now. Laura has strengthened into a Category 3 hurricane as it approaches the US Gulf Coast. It may be a Category 4 once it arrives in Texas and Louisiana. More than half a million people have been ordered to evacuate. And 84% of gulf oil production and estimated 61% of natural gas production have been shut down.

Oil prices holding at their highest level since March. To talk about all of this, let's bring in Regina Mayor. She is KPMG Global Head of Energy. And she's joining us from Houston. So in the path there Regina, so hope you stay safe. Let's get that out of the way and talk about that first.

So when we look at the percentage of production that's being shut down, it's approaching the levels that we saw with Katrina. So talk to us about the severity of this storm in terms of the impact on the energy industry.

REGINA MAYOR: Well, it is-- we have about 1.5 million barrels per day of Gulf of Mexico production that is shut in. And it does sound like a high number. But let me put that in context. That's less than 10% of what the US produces overall. And because we are still in the throes of the COVID-19 situation and the pandemic, our oil stocks are considerably higher than they have been in the past.

So while we did see a nice bump on WTI, it's up about $2 since last Friday. I'm not concerned about long term repercussions about what the storm might do on the crude supply front.

JULIE HYMAN: Regina, It's Julia La Roche. And to that point, I know you have been talking quite a bit about just the impact that the COVID-19 pandemic has had on this sector. Elaborate a bit more on that. So there's-- sounds like you're not seeing, or you won't see, any sort of long term impact. What kind of impact though can we expect if you also tie-in what's happening in the backdrop of COVID-19?

REGINA MAYOR: Yes, so clear-- great question, because clearly we are seeing a big destruction of demand. And that's where I would worry about the potential for the storm's impact. If it is more severe than it is to be expected and if it slows down, then that could reduce people's ability to move around. Because we had seen lots of [AUDIO OUT] starting to come back.

We suspect it to be higher than about 90 million barrels per day on average for the whole of 2020 against 2019, which was 100 million barrels per day. So I do see potential impacts on gasoline demand if the storm lingers. And it has severe repercussions as it comes onshore.

- Regina, just broadening out, what is your target for where WTI might end 2020 given some of the uncertainty because of demand as you were talking about with the pandemic? Now with this storm, we do have the commodity trading around 43 a barrel, so ticking up here slightly compared to what we've seen in recent months but still, of course, pretty depressed compared to where we were last year.

REGINA MAYOR: Absolutely and I think the high in January was somewhere around 65. So we're still off where we were when we started the year. I think I'm still pretty bearish about WTI long-term price. I mean, OPEC's trying to thread the needle with regard to bringing back some production but doing it very slowly, so that they don't unleash shale-- shale drilling to further offset the crude price gains.

We've had relative stability in crude price for about six to seven straight weeks, which is quite different from where we started the pandemic where we saw enormous swings in price. Remember when it settled at negative $37 per barrel on April 20. So I think the industry is breathing a sigh of relief that we've got some level of stability, nice to get a bit of an uptick for the storm. I don't see that lasting. And I think we'll be surprised if it goes above $45 per barrel before the end of the year.

JULIE HYMAN: Regina, it's early on in the hurricane season as we see these strong storms hitting, even though we saw Marco weaken a bit. Has the industry made any more long term changes to deal with increasing weather events? I mean, you've got platforms in the Gulf. I guess there's not a whole lot you can do about that to keep-- you can't keep drilling when a storm comes. But are there other changes that have been made?

REGINA MAYOR: I do think so. And you're right, we faced the start of the week with two potential hurricanes forming in the Gulf, really quite a scary sight. So I do think we're more accustomed to storms coming through more often. The changes that the industry has made is more in the downstream area, so I think the refineries and petrochemical facilities that line the Gulf Coast of Texas and Louisiana.

Because remember that 50% of gasoline production capacity is in that broad window. So they've done a lot around retaining ponds, improved infrastructure to prevent flooding, improved pardoning of control rooms so that they can operate safely as these storms come through. And I think they've figured out ways to shut down parts of the plant without bringing the entire thing down, so that they can cycle it up and cycle it back down more effectively.

So the industry has taken some great strides that prepare and to be more resilient in the face of these storms that do come more frequently now.

JULIE HYMAN: Regina, thank you. And again, stay safe there. I know that you are getting out of town soon. KPMG Global Head of Energy, Regina Mayor.