Updates on May 11th and 13th posted below
Key Takeaways:
- This event, like winter storm Uri in Texas and California blackouts, highlights the need to invest in critical energy infrastructure to increase reliability and decrease vulnerability to outside interference.
- These events increase the likelihood of some form of infrastructure legislation getting passed.
- Investor-owned pipeline and power utilities will see the most spending and therefore experience the most earnings growth as the capital markets will provide ready financing while government owned infrastructure will lag.
- The current inflationary environment for commodities has, thus far, been demand driven. Any failure of critical infrastructure like the Colonial Pipeline would only exacerbate price increases.
What Happened:
Late on Friday May 7, Colonial Pipeline—which is owned by Koch Industries, Shell, pension funds and private equity—shut down its operations due to a ransomware attack on its information systems. Importantly, this breach did not affect the pipeline’s system control and data acquisition (SCADA) systems, there was no physical attack, and apparently no damage to the pipeline system, but the company was still forced to halt operations and doesn’t expect to resume service until the end of the week of May 10.
Why it Matters:
Source: Colonial Pipeline
Colonial (shown in the map to the right) is the largest U.S. liquid fuel pipeline and carries gasoline,
diesel, jet fuel from Gulf Coast (Houston, TX area) refining complex through the southeast, the Washington D.C. area, and northward to Linden, New Jersey just south of Newark airport. The system transports up to 2.5 million barrels of product a day and supplies just under half of the gasoline demand for the east coast. About a quarter to a third of the New York area’s gasoline is supplied by Colonial. The southeastern U.S.—Atlanta, Charlotte—is particularly dependent on the Colonial system as there are no oil refineries in those states and being landlocked, the ability to substitute with waterborne supplies is limited.
If Colonial’s planned return to service by the end of this week succeeds, disruptions will be minimal. As of April 30, eastern U.S. gasoline inventories were 65 million barrels according to U.S. Department of Energy data, enough to supply about 3 weeks of average consumption for this time of year. However, if the outage goes longer, inventories could get drawn down on panic buying, driving higher gasoline prices and shortages in markets dependent on the system, particularly the southeast. Summer driving season is getting underway and Covid recovery has more people on the road. Air travel is also returning quickly, and several major airports depend on Colonial for jet fuel, including Atlanta, Charlotte, Dulles, and the NYC airports.
What are the Alternatives:
New York can also get gasoline from European imports, but it takes a ship about two weeks to make that crossing. Gasoline could be shipped from the Gulf Coast into New York and other harbors but that takes about six days and is further limited by availability of U.S. flagged vessels. To recruit international vessels to pick up the slack would require a presidential exemption from the Jones Act. Federal truck driver hour limitations were relaxed temporarily on Sunday to allow more fuel to be trucked, perhaps a sign that Colonial’s recovery is expected to persist into the current week. Finally, Kinder Morgan is working to accommodate additional volumes on its Plantation Pipeline, which moves refined product from the Gulf Coast to as far north as the greater Washington, D.C. area.
*UPDATE* Tuesday, May 11, 2021
Restoration: In an 18 minute virtual meeting yesterday with government officials, refiners, and retailers, Colonial Pipeline indicated that it expects to substantially restore all service by the coming weekend, but as of 10:00AM eastern time today, the company’s website is down.
Shortages: As we noted yesterday, once the news gets out, worries of a shortage can quickly become self-fulfilling; news outlets across the nation are reporting on gasoline retailers running dry in the western Carolinas, a situation that’s now likely to spread in the coming days. A similar string of events unfolded almost 20 years ago in Phoenix following a refined products pipeline rupture, or more recently when news of a possible shortage of bathroom tissue caused one as customers needlessly hoarded.
Stopping for Fuel: Concerns over jet fuel supplies have prompted American Airlines to send long haul flights out of its Charlotte-Douglas hub partially fueled, with intermediate refueling stops added in Dallas for westbound flights and Boston for transatlantic routes. The world’s busiest airport, Atlanta’s Hartsfield-Jackson, also depends on Colonial for jet fuel.
It’s Complicated. Unfortunately, restarting a pipeline is not a matter of simply throwing a switch. Apart from making sure systems are secure and the malware has been excised, there are myriad logistical issues ranging from managing pressure to keeping the different “batches” of product that were in transit (gasoline, jet fuel, heating oil, diesel) separated. Upstream of Colonial, the largest U.S. refinery has curtailed
production due to the outage; product can’t go on the pipe right now. Refinery restarts are also highly complex. The bottom line is that the echoes of this disruption could continue for weeks, as was the case in Arizona back in 2003.
*UPDATE* Tuesday, May 13, 2021
Moving again. Colonial Pipeline announced that it began moving product on its system yesterday (5/12/21) at 5:00PM eastern time, bringing its physical operations on line ahead of its scheduling and nomination systems. Restarting the pipeline is the first of many steps needed to alleviate fuel shortages all along the East Coast triggered by panic buying as news of the outage spread. Now, a massive “last mile” delivery effort is needed to move gasoline from terminals and tank farms to depleted gasoline stations.
That’s nice, but… The Biden Administration also issued a temporary Jones Act waiver for an “individual company”, allowing foreign-flagged vessels to move fuel from the Gulf Coast to eastern ports, but the length of that journey—roughly six days—probably means minimal incremental relief.
Long Transition. While not triggered by a weather event, the Colonial disruption carries the same messages as the Texas and California power crises—that energy infrastructure is critically important to a U.S. economy that remains highly dependent on fossil fuels even as a transition to renewables accelerates. Ninety-nine percent of vehicles on the road today still run on petroleum fuels, and natural gas currently supplies about 40% of U.S. electricity.
Bottom Line-while development of new pipelines has effectively stopped, there remains a need for substantial investment to preserve and protect existing infrastructure. Gasoline shortages and rolling power blackouts are hard for politicians to ignore.
The above is Energy Income Partner LLC’s (EIP) opinion on the cyber-attack that disabled the Colonial Pipeline system. EIP’s opinion may change without notice or duty to update. Discussions about particular securities are provided for informational purposes only and are not an offer to buy or sell or solicitation to buy or sell a particular security. The information is based on data obtained from third party publicly available sources that EIP believes to be reliable but EIP has not independently verified and cannot warrant the accuracy of such information.