Chinks in the chain: What causes disruptions to the supply of oil?

30 January 2011

On 6th January, an explosion and subsequent fire at the Horizon Oil Sands site in Canada injured five workers and damaged crucial equipment.

A stop-work order was swiftly put in place, halting all production at the facility, which provides around 3% of Canada’s total oil production and has the potential to produce 110,000 barrels of synthetic crude oil a day.

| When a full damage assessment has been completed it will become clearer exactly when production at the site will be up and running, but it is expected to remain at a standstill until at least March.

Two days after this blast in Canada, the 800 mile Trans-Alaska pipeline also had to be shutdown, following the discovery of a leak. This steel pipeline, which carries around 630,000 barrels of oil a day, ships over 10% of US crude oil output.

After three and a half days a temporary restart went ahead to stop oil in the pipe from freezing, while efforts focused on constructing a bypass of the leak. By 20th January, the pipelines operator, Alyeska Pipeline Services Ltd, reported that the oil pumping levels were almost back to normal rates.

Complexities

Both of these incidents were flagged in the International Energy Agency’s latest Oil Market Report (OMR), a monthly publication which provides a view of the state of the international oil market. Analysts at the IEA follow short- and medium-term developments of this market, looking in detail at world oil supply, demand, stocks, prices and refining developments. The OMR provides forecasts on these areas through to the end of the following year.

“The two recent examples of disruptions in Alaska and Canada highlight the complexities and dangers involved in all stages of producing oil – from pumping it out of the ground to transporting it and processing it into refined products,” said Julius Walker, a Senior Oil Analyst at the IEA.

“There are a number of concerns – from the safety of workers to potential environmental impacts – which companies and governments must always take into consideration. Any one of these can lead to a potentially serious gap in the supply chain,” he added.

Knock-on effect

Despite disruptions like these, Mr Walker points out that most incidents involve relatively minor volumes of oil, so do not have a significant impact on either the oil markets or the consumer.

“Around 87 million barrels of oil are produced and refined everyday, so common, smaller disruptions which cause production at a site to temporarily grind to a halt rarely have much of a knock-on effect,” the IEA analyst said. “It is only very large outages, like those seen after Hurricanes Katrina and Rita in 2005, which will affect the markets significantly.”

Causes

The two most common reasons for disruption in the supply of oil, Mr Walker explained, are unforeseen technical hitches and the weather – from extreme cold in Russia to seasonal storms in the Gulf of Mexico.

While less frequent, thieves who tap into pipelines to illegally siphon oil are another cause of disruptions. As well as the obvious loss in revenue, there are also significant safety concerns when attempts of this nature are made. Last month in San Martín Texmelucan in Mexico, for instance, oil thieves were blamed for a pipeline explosion that claimed the lives of at least 28 people, 13 of whom were children.

While rare, military attacks – including from terrorist cells – which target energy infrastructure for political motives, are another significant concern for companies and governments alike.

One such attempt was made last March, when 113 al Qaeda militants were arrested in Saudi Arabia after plotting to attack energy facilities in the country.

“Were an attack of this kind on a large-scale energy facility to succeed, it would have a large and severe impact on the supply of oil,” warned Mr Walker. “Consequently, oil companies and governments plough huge sums of money into security in order to foil these plots.”

Another rare but potentially significant cause of disruption to the supply of oil is political disputes played out by governments.

“Countries have been known to flex their muscles and control distribution of their oil and gas production to neighbouring countries that are dependent on limited sources of energy supply,” Mr Walker said.

Oil embargo

One of the most famous disruptions to the supply of oil came in 1973 when Middle Eastern oil producers stopped selling oil to both the US and The Netherlands following their support for Israel in the Yom-Kippur War. South Africa, Rhodesia and Portugal were later added to the list of embargoed countries.

This resulted in a shortage of oil as well as spiralling prices. The crisis led countries to seriously examine their energy security, for at that time, many were reliant on only one region for oil and had failed to invest resources in developing other sources of energy.

“The IEA was born out of this embargo and ensuing crisis,” said Mr Walker. “Our raison d’étre is to stand ready to add liquidity to the market if such a disruption were to occur again.”

IEA involvement

The IEA, which was established in November 1974 shortly after this oil crisis ended, promotes energy security among its member countries by helping co-ordinate a collective response to major disruptions in oil supply.

Each of the IEA’s 28 member countries is required to hold oil stocks, which are the equivalent to 90 days of its net imports.

These stocks are in place so that in the event of severe oil supply disruption, countries can make available their stocks in order to ensure a steady supply of oil. Although such a release is not undertaken specifically to moderate prices, it can have that impact by calming the market, thus helping to minimise the pinch felt by consumers because of rising prices.

The last occasion oil stocks had to be released was after Hurricanes Katrina and Rita ripped through the Gulf of Mexico, damaging offshore oil rigs, pipelines and oil refineries. Before that, the IEA last mandated a stock release at the time of Iraq’s invasion of Kuwait in 1990/1991.

“On these occasions the IEA was at the heart of international efforts to minimise the impact of the supply disruption,” said Mr Walker. “This is a role we will continue to play in the future whenever major disruptions occur.”

Oil – the facts

How many gallons of oil are there in a barrel?
42 US gallons (35 imperial gallons), which is 159 litres.

How many barrels of oil are produced and refined a day?
Around 87 million barrels. That works out at nearly 32 billion a year.

What is crude oil?
Crude oil is a mineral oil consisting of a mixture of hydrocarbons of natural origin and associated impurities, such as sulphur. It exists in liquid form under normal surface temperatures and pressure. Its physical characteristics (e.g. density) are highly variable.

Photo: Offshore oil rig platform, Marseille, France. ©GraphicObsession