Hurricane Harvey – The Impact of Force Majeure on the Oil and Gas Supply Chain

As shut down notices continue to roll in, it appears that the level of damage wrought by Hurricane Harvey to oil and gas infrastructure along the Gulf Coast may vary significantly by asset class in the final analysis. Although a number of pipelines and upstream producers have curtailed operations due to the storm, the heaviest impact so far has been to oil refineries along the Gulf Coast. This is not a total surprise – Houston and Corpus Christi,two of the cities most affected by the storm, are both major refining centers, but nonetheless the total volume of refining capacity subject to curtailment has been a bit startling. Some of the largest plants in the United States have completely shut down operations, including the ExxonMobil Baytown refinery, Shell’s Deer Park plant and Valero’s Corpus Christi plant; further affecting the supply chain, both the Port of Houston and the Port of Corpus Christi were totally shut down and remained closed at the time of this writing. Perhaps most significantly for the broader industry, this loss of downstream refining capacity could cause a domino effect that rolls up the oil and gas supply chain, as oil continues to be produced upstream without any downstream outlet. Early indications are that this process has already started, with certain transporters with primary delivery points into affected refineries now being forced to curtail upstream receipts points as their systems back up, affecting buyers and sellers up and down the pipeline.

Force majeure analysis after hurricanes –

People living along the Gulf Coast have various rituals they perform whenever a hurricane comes ashore. Personal rituals vary from family to family, but one commercial ritual occurs at all companies up and down the oil and gas supply chain, including producers, shippers, processors, refiners, traders and lenders (and now add LNG liquefaction facilities, private equity investors and mineral interest investors), when commercial managers and their lawyers gather in half-empty offices and pull out their hydrocarbon contracts to determine what impact an announced or anticipated shut-down or curtailment will have on their business, including how to respond to a counterparty declaring force majeure, and whether, and how and in what form, to make their own declaration. If they have available hydrocarbons/capacity at a delivery point subject to curtailment, they may strategize a way to take advantage of price spikes caused by a localized scarcity or glut. But more typically their overriding concern is defensive – how to escape a situation where a counterparty’s failure to perform makes their own performance impossible (or grossly sub-economic) under their other obligations up or down the supply chain.
Source: King & Spalding