After the Texas Freeze

Exceptionally cold weather conditions in mid-February throughout Texas triggered a large number of outages across the thermal and wind fleets, forcing ERCOT, the operator of the electrical grid, to resort to rolling blackouts throughout the state. Data that has emerged since then points to few measures that, in hindsight, could have reduced the severity of the consequences. Here are some of the main learnings from the extreme weather event

The prolonged power outages that left millions of Texas customers in the dark during a February winter storm point to natural gas's long-haul role in the energy transition, one market expert said.

"To me, having wind [account for] north of 40% [of power generation] one week and then less than 3% the next week and expecting gas that's really spot market-based to have to ramp from 35% of generation to over 80% … it may be both a flawed design and a flawed expectation, but clearly there is some rationale," Sam Andrus, executive director for North American Gas at IHS Markit, said during an April 15 LDC Gas Forums webinar, referring to gas's function as a bridge fuel.

"Natural gas will be the marathon runner in the energy transition," Andrus added. "There may be some ways to go before that gets generally accepted.

Global gas demand is expected to increase by 3.2% year on year in 2021, enough to more than offset the lost consumption in 2020, the International Energy Agency said in its latest quarterly market report published April 15.

Gas demand fell by 1.9% -- or some 75 Bcm -- in 2020, but recovery is expected this year, driven by demand in the industrial sector.

"We expect globally to see a rebound, sufficient in our view not only to offset last year but also show some growth compared with 2019," IEA senior analyst Jean-Baptiste Dubreuil said during a webinar presenting the report. However, he said, the forecast demand growth was "highly fragile" and dependent on the path of global economic recovery. Consumption in the industrial sector, which remained resilient in 2020 with an estimated 1.2% annual decline, is expected to take the lead in 2021 with 5.4% year-on-year growth -- close to 55 Bcm.

2020 was very much a litmus test for governance and preparedness by management and boards. The pandemic laid bare companies' resilience (or lack thereof) in dealing with a crisis and being responsive and adaptable. There will be a lot to draw from the experience in the coming years, particularly when assessing how ready companies are to prepare for another systemic challenge: climate change.

The recent events caused by February's winter storm, which left millions of homes in Texas without power have shown the need to prepare for the unexpected.

Financial losses due to a severe winter storm in February should not materially overshadow the outlook for demand recovery in the natural gas midstream sector as companies release first-quarter earnings results, industry experts said.

The extreme winter weather in Texas and nearby states in February disrupted gas transportation and distribution operations and seasonal maintenance at LNG export facilities, and it is expected to be a factor heading into the summer.

The Electric Reliability Council of Texas expects to hit a record peakload amid worsening drought conditions in the summer of 2021, but growing solar and battery storage capacity may mitigate scarcity pricing conditions, stakeholders learned May 3.

However, Texas lawmakers and regulators have so far made no significant revisions in weatherization rules since the mid-February winter blast cut power for about 4 millions customers for as long as four days, during which scarcity conditions prompted ERCOT and regulators to set real-time systemwide prices at the $9,000/MWh estimated value of lost load.

Therefore, generators are required to make weatherization plans, and ERCOT can only report on whether generators have implemented those plans, according to a written presentation by Woody Rickerson, ERCOT vice president of grid planning and operations, posted online for the May 3 Summer Preparedness Workshop of ERCOT's Technical Advisory Committee.

As policymakers continue to assess the damage wrought by devastating blackouts in Texas and neighboring states, the Federal Energy Regulatory Commission on Feb. 22 announced it will look into potential market manipulation as natural gas and electricity prices soared during the days-long event.

Temperatures dipped far below normal levels in the mid-region of the US during the week ending Feb. 19, causing substantial production freeze offs and power outages at refineries, terminals, and processing plants. Oklahoma and Texas were particularly impacted by the extreme cold weather, with portions of those regions dipping to 40 degrees below normal temperatures for this time of year.

On the supply side, the impact from freeze offs peaked on Feb. 17 with 4 million b/d of crude being offline, resulting in production being down 2.5 million b/d on average during the week. Approximately 90% of the losses were estimated to be back online early the following week. The freeze offs also caused 20+ Bcf/d of natural gas to be offline at the storm's peak.

Soybean futures continue to support RVO prices as the US market awaits a Supreme Court decision to determine the future of small refinery exemptions.

European exports continue to head toward the East Coast on improved gasoline cracks and market optimism, pressuring New York Harbor prices lower.

Gulf Coast prices have spiked to three-year highs as refineries restabilize operations.

Forward gas traders in East Texas are pricing in tighter market balances than previously expected for 2021, as the lingering supply impact of this winter's historic freeze meets with stronger export demand.

Month to date, cash prices in East Texas have remained steeply discounted to Henry Hub gas. At Houston Ship Channel, prices have averaged 17 cents below the U.S. benchmark.

At the nearby Katy Hub, prices have traded at an average 13 cent discount, S&P Global Platts data shows. By later this year, forward traders are anticipating a major turnaround, pricing both locations at near-parity to Henry Hub during the upcoming summer months.

Historically, the East Texas price discount to Henry Hub often narrows during peak-demand months. The outlook for this summer, though, has strengthened over the past five weeks following this winter's historic freeze-off and its impact on Texas gas production and storage.