It’s been tough times in Texas, as the ERCOT market has suffered from sustained electricity outages amid bitterly cold weather. Many individuals went multiple days without running water or electricity. While the full human and economic cost will not be known for some time, the winter storm/electricity outages have led to dozens, probably hundreds, of excess deaths across Texas. Initial estimates suggest that the nearly weeklong involuntary shutdown has cost tens of billions of dollars. The last few weeks have been brutal.

We’re not going to discuss the outage’s causes at length: for that, we’d encourage you to read this shocking Bloomberg investigation (one of the most insane tidbits: ERCOT employees were forced to bring in portable toilets after ERCOT’s control center lost water). Instead of discussing the past, we’ll focus on the short and longer-term implications for oil, gas, and electricity markets.

How long will upstream and downstream outages last?

Let’s start with the short-term implications. Uri brought impassable roads and literally froze significant portions of the supply chain. Domestic oil and gas production will suffer for days or even weeks, while some estimates placed outages as high as 3 million barrels per day. We’ve heard that even production at some offshore rigs slowed down due to the freezing weather. Warmer temperatures have de-thawed rigs, pipelines, and plants, so production seems to be up and running. ERCOT has stabilized the grid (knock on wood), so upstream production issues will largely be resolved, enabling large industrial users (LNG, petchems, etc) to restart production, if they can.

Downstream issues are a much more serious concern. Dozens of ethylene crackers will face weeks (potentially months) of outages. Around 7.6 MMBPD of crude refining capacity was affected by the storm, and up to 5.4 MMBPD of USGC refining capacity was offline for the week ending February 26. It’s expensive to shut down and restart refineries, not to mention technically complex: some of the refineries will take weeks to return to pre-Uri conditions. Uri is hitting retail markets: about 1-in-7 gasoline stations in Texas were without fuel on Feb 24^th. Of course, downstream operators that managed to remain open are now reaping the twin windfalls of higher prices and capacity utilization.

What are the risks from future polar vortexes?

Risk is a function of two elements: consequence and probability. In a Reuters explainer on polar vortexes, Northern Illinois University meteorology professor Victor Gensini said that parts of the United States have been 50 degrees (28 degrees Celsius) colder than usual. Dramatically colder temperatures can affect oil, gas, and electricity production while dramatically increasing demand.

Even while the past week has demonstrated that polar vortexes are enormously consequential, the probability of future polar vortexes is hard to determine. Most scientists are still debating whether Winter Storm Uri is an aberration, or if it foreshadows a new dynamic of frequent and deadly storms. We will keep an open mind about this probability: it is neither 0%, nor a 100%. 

Are U.S. Natural Gas and U.S. LNG as reliable as we thought?

We are revising some prior assumptions due to new data. First, barring significant and expensive weatherization investments, natural gas may not be as reliable a fuel source as we had previously thought. All aspects of the natural gas supply chain – from upstream dry gas production in the Permian to pipelines to baseload power plant production – were inadequate in Winter Storm Uri. The state of Texas even ordered a halt in Texas natural gas exports to other states, to Mexico, and to LNG facilities. If polar vortexes occur more frequently in the future, and absent any winterization investments in the field, Texas natural gas may again fail to meet demand during critical moments, raising doubts about its reliability.

Despite Winter Storm Uri, we still regard U.S. LNG as more operationally reliable than Australian LNG, less politically risky than Qatari LNG, and more geographically flexible than Russian (often ice-constrained) LNG. Climate risks from hurricanes and polar vortexes are not likely to cast a shadow on the reliability of U.S. LNG supplies, nor reduce offtakers’ willingness to commit to long-term contracts with U.S. LNG brownfield, quasi-brownfield, and greenfield projects. There are other commercial factors at play that can trump reliability concerns (if any). Still, Uri has been a negative for U.S. LNG.

We don’t want to overstate Winter Storm Uri’s damage to U.S. natural gas and LNG: while reliability is indeed important at the margins, it is hardly the only input buyers consider. Winter Storm Uri is, for now, only a tremor: if Texas/USGC natural gas are to avoid an earthquake, they may need to prepare for more severe winter storms and prevent large-scale outages like this from ever occurring again. 

Weatherization for gas (and wind)?

A lot of commentary in the media has turned on the relative performance of Texas’s wind and natural gas production. We think, to be blunt, that neither fuel source performed well in ERCOT – but both fuel sources held up better in much colder climates, including North Dakota and Iowa, where the supply chain is weatherized. Instead of squabbling over which fuel source is better, it may be more productive to weatherize energy production in Texas and Oklahoma. This would be an expensive undertaking, of course, but it could very well prove necessary.

Don’t sleep on this

Consumers are unlikely to tolerate another major outage. The entire Texas economy was shut down for days, and some projections hold that the crisis has destroyed $50-100 billion in wealth. If another outage occurs at this scale, policymakers, businesses, and consumers are likely to seek root-and-branch reforms – and not necessarily in ways that will favor oil and gas. If we experience another similar outage, the consequences for the U.S. oil and gas complex could be more damaging.