Texas Winter Storm – Lessons for Power, Gas, Oil

The extreme cold resulted in more than thirty thousand megawats of power plant outages in a situation where demand outstrips supply by thirty percent, and as most of us will know by now, this resulted in millions of Texans without power, heat, and clean water. We have to note that our hearts go out to our friends, family, colleagues, and everyone impacted by the storm, and we really hope things get back

online as soon as possible. This week on the show, we've got Anastasia Dialinas, head of US Oil Research, and Nick Steckler, head of North American Power Research for BENF. They're going to tell us about how the state's power, oil and gas sectors all went down at once, and what Texas might consider to build back and build back better being if users can find ongoing covers the US power, oil and gas markets on bef dot com, the benif

bobile app, and the Bloomberg terminal. As a reminder, be to not provide investment or strategy advice, and you can hear the full disclaimer at the end of the show. I'm Mark Taylor and you're listening to Switch on the BP podcast. Hi Nick, Hyanna, Hey, Hi make thanks for joining us today. So the first thing I guess we should jump into really with this topic is how did

we get here. One of the first things to specify comparing it to other blackouts is that it actually wasn't the grid itself as much that failed, but more the power supply. So if we break down the electricity chain as generators, big power lines, smaller power lines, and then customers and their meters and things, it's really a short fall on the power generation side that's being experienced right now, and it's one that we really have rarely ever seen before.

So the size of this capacity shortfall in Texas, the number of generators that are out of customers that have been cut off as a result is enormous. So how did this capacity shortfall happen? The timeline of events breaks

down like this. Texas was starting to see very unseasonably cold weather going into Valentine's Day weekend, so February twelve, by Valentine's Day, the electric demand in Texas was already at the extreme planning scenario, so not that what they were expecting, but already there percentile extreme case by Valentine's Day, and then by the next day, by President's Day, for demand was set to blow past that and hit summer levels.

And to to emphasize how critical that is, Texas is a summer peaking system, so winter is usually pretty relaxed in Texas. Generators generally their business model, especially if they're peaking generators, is to really gear for the summer. They make a lot of their money in the summer because demand is highest in the summer. It's about higher in

the summer. But this time we saw summer level demand just pop up in Texas and the grid operator going into that weekend under forecast demand by about and that led to a sizeable similar capacity shortfall and a lot of customers having to be shut off as a result. The second thing, which is also very important, which is once we account for the fact that plants weren't really ready for this. They weren't expecting this, They weren't expecting

such a rare storm to occur. That storm came through and knocked a lot of plants offline with his physical force, with the cold and with the ice. So it's really two parts. Plants weren't ready for just the sheer amount of demand, but then once it hit the ones that were online. The plants that were online got hit and taken out in record numbers. A couple of things. What does it mean to get ready for summer demand? What are they doing right now? Typic to prepped for for summer.

So normally ahead of the summer you'll see plants getting ready, you know, staffing, reviewing equipment, making sure that their failure rate is going to be really low, generally so they can capture price spikes, because that is when they make the most of their money. Some plants that don't see a big revenue opportunity in the winter will just sometimes shut down for for the time being and wait till summer, and so they rely on the guidance from the grid

operator to be ready to go. And in this case, the grid operator was expecting about fifty eight giga wats of demand for the winter as peak, and we ended up seeing about seventy five gigawatts of demand that customers wanted. I say wanted because thus customers never actually got to pull that much demand because they caught kurt tailed. But that's where it was headed going into February. Can you explain that a little bit, that concept a little bit

for people that might not be familiar. They got curtailed. What does that mean? Yeah, So the instruction from the grid operators called ARCOTT is to all the utilities, the different electric utilities in Texas to shut off different parts of their regional grids. And that's to conserve energy. Because there was no way that ARCOT had enough capacity to be able to meet all seventy five gigawatts of of

demand in the market. So as a matter of conservation and keeping the grid afloat, they had to tell the regional utilities, hey, go go flip off some of your different substations and pull customers offline. Okay, so some of them got curtailed, but you also said that some couldn't turn on at all. Why is that? You know? I heard on another podcast this morning that you know, plants in North Dakota, South Dakota they run in the winter, gas plants. Why couldn't the ones in Texas? Why did they?

I guess you said they froze. Looking at the data on outages, which is still coming in, right, we're still in the middle of this as of today. But plants across all different types, so all generation technologies cold nuclear, natural gas, wind have seen issues with freeze. So ice accumulating components locking up probably the biggest issue we've seen

so far. It makes sense. The biggest issue, because natural gas is the largest share of their cup power mix, is that that plants can't get fuel natural gas plants not getting fuel is probably the largest source of outage. I mean, the freeze not only affects plants and the machinery at the power plants themselves, but also is definitely hitting the oil fields. Texas is home to about of US natural gas and about half of oil production. Right, It's a huge state when it comes to supply of

oil and gas. But even some of the biggest oil fields like the Permian out in West Texas got snow and ice and freezing cold temperatures. And again, just like with power gin, cold temperatures are certainly not unique to oil and gas production. North Dakota gets them all the time, but you need to be ready for them. And the things that can happen in oil and gas production is that first all reservoirs not only have oil and gas

in them, but a good amount of water. That water has to be extracted with the oil and gas and then processed and separated from the gas stream and the oil stream that can then flow onto customers. If it's freezing, that water can freeze in the pipes and freezing the valves if they're not insulated and weatherized, and that is exactly what was happening, and so suddenly they couldn't extract

as much oil and gas. Liquids are freezing in the pipelines because a lot of pipelines, especially out in the fields in West Texas, are above ground because they're not used to being cold as opposed to in other parts of the country where they'll bury them to keep them a bit warmer. So a lot of the oil and gas infrastructure was also freezing up and having a lot of issues due to the cold weather, and that meant that a lot of producers had to shut in well

shut in production, and production has dropped off considerably. We've heard reports of up to you know, of some of the production out in Permian might be shut in occidental. Some other companies have announced that they've had to shut significant parts of their operations as well. So let's pause there for a second. And you know, we said to the top we're going to talk about building back better. So one issue I guess we've uncovered is supply what would it mean to build back better here, bury the

pipes or how else would they weatherize them? And would it be worth it? So I think one of the big questions here is just how do you solve this, Like what's the what's the answer to this problem to make sure it doesn't happen again. And one of the things that I think both regulators, policy makers, oil and gas companies themselves, power companies will have to determine is what's the likelihood of this type of event to happen again, Like what's the necessity to build back better or to

significantly change the infrastructure. Because there are things that can be done from the oil and gas perspective, you could insulate pipes, bury them, weatherize equipment. All of that is fairly costly. It has a lot of capital expense. You think about pipelines especially, I mean some of them are small, but some can go hundreds thousands of miles right, So to instigate reform at that level is going to be

a huge investment in infrastructure. Um. And this is oil and gas infrastructure that's trying to cut back on capital cost not grow them. In general, you know, there's a lot of hesitancy to even invest in new pipelines updated pipelines anyways. So whether or not you want to put all that money into investing in this infrastructure if this is a once in a hundred year storm, um, it's

unclear if that will be worthwhile. But there are maybe things on the especially on the oil and gas side, that you could do that could help at least alleviate it. Like one thing is Nick mentioned is there's a lot of policies and emergency measures being called in on the gas side to prioritize different customer bases. So like if you think about US natural gas, sure it goes to

power homes for heating, it goes to electricity generation. But we also have sizeable markets for exports, both pipelines to Mexico export via l n G terminals. A lot of industrial facilities utilized natural gas. Texas exports a lot of it out of state. Two places like California, the governor and the others have tried to put in emergency measures saying please like industrial facilities have kind of stopped running

for the most part. We've had oil refineries. A lot of X and refineries have shut down and are returning any gas in power that they would normally use to the grid to try and help increase that supply. A lot of the l G terminals have stopped exports and any gas that they usually would receive is therefore available to the grid. Does that help if the pipes are frozen? Well, so there's two things right, Like the pipes out in the oil fields are probably frozen and having trouble getting

gas back to supply. There's underground storage across the state. There are major pipelines that are underground and better protected. So there is some flexibility within the system where gas

can move. And that is that I think the question if any gas that is available should be prioritized to the customers that needed essentially, so if we're talking about frozen gas lines, you know, getting too gas plants, it's not necessarily like at the plant itself, but it's somewhere along the miles and miles of pipeline that's blocking the gas room getting to that plant most likely. Yeah, on natural gas. Another key thing to remember too is that the water vapor is only present in the gas until

it's processed. Once natural gas is processed at a processing plant, which is usually pretty close to the oil field itself, then it becomes almost pure methane or pipeline spec methane that is not going to freeze as easily at current temperatures. Right. The trouble is when it's still towards the wellhead mixed with water, that water vapor freezes and then you have sort of a slushy mix trying to flow through this pipe of sort of froze some of your frozen water.

And some natural gas oil pipelines have also seen some freezing issues where the oil thickens or starts to freeze, and so therefore some a lot of oil pipelines have

stopped flowing. But on the natural gas side. Once you're talking about pipelines kind of closer to the city center near the demand markets, those are probably able to flow any gas that is in them, but it's probably just not reaching that far because of the freezing at the source exactly, And any any gas that does get there, you want to make sure it's available for home heating and power gen and sort of the two prioritized uses

for it. And I like your point that investors and regulators are going to have to decide whether this is going to in the future going to be a likely enough occurrence to invest in these things. Texas an interesting situation on the power side because it's such a deregulated power market relative to the other regions that if things proceed as normal and regulators don't step in and start to require any of this stuff, the way the market

bakes in this probability is through power presses. So power presses are at their cap right now, but basically nine thousand dollars for the last few days. Generators that are able to survive this are making years worth of revenue

in just these few days. And if the market stays as is, you know, if something there's no major overall of the market going forward, Investors the only these power plants will say, maybe it's worth paying five percent more for our Win turbine kit to have a heater that can heat the blades and help us capture those price spikes when they happen. What's it going to be once every ten years? I don't I don't know, but that's the math that there the probability that they're going to

be looking at. We could also see, of course, regulators come in and just mandate something in PGM. In the mid Atlantic, in the Northeast US power markets, gas power plants are mandated for reliability purposes to have oil tanks on site so one to five days of oil, and also the gas ruins have to be able to burn that oil. So there's there's also regulatory measures that could

require plans to do those types of things. But investors, like I said, might also just choose to do it in arcot to be able to be available during these times and capitalize on really expensive power. And let's not forget this is Texas, right, It's pride itself on not too much regulation. Has there been a hint of which way it's likely to go? In investor driven or regulation driven. There's a lot of debate about it. There's a lot of philosophical debate about the markets, and there there was

even before this event. But we're still really dissecting what exactly happened. Orcott really hasn't released all that much information. I think they're busy taking care of get just getting people power as soon as possible, but it soon after. I think there will be a really really good debate about planning for this this winter going into it, and then the physical effects of the storm on the power plants,

and and which plants better. Right now, it's not obvious that one one particular plant was really guilty of failing more than any other. So we've talked about supply, We've talked about power plants and making those a bit more resilient, and the decision whether to regulate or invest in resiliency. We should probably talk a minute about Texas as an island. You know, they probably could have solved this if they were connected to another source of power, another market. Is

that is that fair to say? It is? There's very little electrical connection to the neighboring grids. Is a priority of the Biden administration to harden the transmission, the US Transmission Network improve electrical resiliency. Texas has kept did that way for you know, as long as they could. They benefit from not having to be regulated by the federal the Federal regulator FIRK, because they don't exchange much power with with their neighbors and so we could see more interconnection.

It definitely would have helped to be more interconnected with with the neighboring regions. It would have just been more supply that was available into the market when basically of the fleet was offline and they were had this this unprecedented capacity short falls. At the same time, like I said, they might be reluctant to make those connections because of the because of the regulatory implications. And there's a parallel here to what happened in California last summer. There were

impacts across the whole region. It wasn't just Texas. The reason we're talking about Texas today is because it was impacted the worse and the severity of the cutoffs was so extreme, and most of the millions of people that are without power are in Texas, but throughout the Midwest. This storm really took its holl and last summer when we were talking about California. It was a similar story.

California was was hit really badly by the heat wave, but so were its neighbors, and so the connections between regions were a bit a little bit contentious because when one region suffering, they're not necessarily gonna be pushing power to to the other. It's hard to predict what the

interconnections would really do. But I think in general there's a push to improve infrastructure and and build a more robust power I don't anticipate there'll be many regulatory changes on I haven't heard of much talk around regulatory changes on the gas side. So the things I could see happening would be requiring more winterization of gas infrastructure, and the other one would be some type of more formalized

prioritization of important customers if there is a shortage of gas. Right, But that's difficult because especially if you look at Texas and US gas markets in general. At sports are sort of a major story nowadays in a major port of revenue, and it's winter, and so to say that to try and be increasing our exports of things like l en G and then to suddenly tell all the customers that

are trying to buy it. Well, actually, there's also this big risk that in the middle of winter, when it might be cold in Asia and Europe, we might actually cut off that supply because we have cold here in the US. That's not a great story to customers, especially when there's already questions around the emissions associated with us L energy and you know, the cost and everything else.

So I anticipate there would be a lot of pushback in terms of formally mandating sort of stay within the state or prioritization of state actors outside of a free market sort of system um and better controls in place. You can also question, you know, Texas and all the storage that is in Texas is still a major supply to other parts of the country even right and a lot of the country is having a lot of cold weather as well. So this isn't just sort of Texas as an island and you can treat it as such.

You have to remember that there are other customers at the other or end of that who are also being cut off from supplies. It sounds like you're saying that the producers don't need regulators to tell them that they just missed an opportunity to sell a lot more gas. Yeah, I think that would be right. But whether or not they'll invest in winterization is another question too, because as I mentioned, a lot of producers are really really focused

on cutting capital expenditure right now. Investing in new production is not a priority. Certainly investing in new infrastructure is

probably not a priority. Their prioritization is debt reduction. Their prioritization is increasing cash flow, increasing dividends shareholders, And so to try and fit in, you know, increased expenditure on winterization might be also tough because they're trying to balance out whether or not they grow production five percent or two percent, let alone, you know, don't invest in new production, don't invest in new drilling, and instead invest in winter

rizing existing pieces. So again that comes back to do we think this is a fluke event or is it going to happen every winter? That will I think be the deciding factor there. There's so many parallels on the power side because the market has embraced these price spikes as the signal to investors, and when they miss them, they say, these are the steps that I need to take to be able to be there and capture that

that price spike. Next time. But the question going forward on the power side is just because so many people were adversely impacted and reliability is really so important for power that consumers and investors are like, I don't know if they're going to be able to tolerate this volatility going forward. So do you think there will be a policy intervention or do you think the market will figure it out itself on the power side, It's really hard to predict. Texas is the only market like this in

the United States. The other or regional energy markets have have opted for a capacity market mechanism where they do pay plants just to be there and be around and do all the accounting to make sure that there's enough megawatts on that it's you know, Super Bowl Sunday, that major day where everybody's going to be pulling power, and and Texas really just leaves it to the to the price,

the price opportunity for power plants to make money. So it seems like the standard way forward, if they weren't to change their market design, would be for our cot next time around, say okay, we need to in our long term planning signal that there should be more power in the winter and potentially juice up the one tool that they have, which is their scarcity adder, which adds a little bit of actually quite a lot of of potency to real time energy prices. But but that's really it.

So it would still be investors just betting that that there might be a scarcity in the winter and that they could make more money during those periods selling energy as opposed to getting a direct payment for being around and being available throughout the year. In the end, the retail consumer pays for all of this, I guess right under that model, right, So it's just gonna be end up being a bunch of angry Texans with high, very high electricity bills. The actual math could be a bit

hard for consumers to do. But what regulators and economists are gonna do is they're gonna look at the average price of power over time in Texas, which has been quite cheap in a lot of years because of competition because of this, right, because because of competition, because of cheap natural gas. But then you also have to count for these periods and these massive blow ups. And that's why I say, I don't know, We'll see when we average it out which region has cheaper power. If let's

say they work out to be roughly the same. I don't know if consumers would want to opt for this more volatile model. And then of course we need to look at the number of hours and the number of customers that were without power and compare that, because I

know this period is definitely way beyond what's what's considered acceptable. Nick, I have a question, what's the role if we think forward sort of longer term, what's the role of batteries and electric vehicles, Like are they going to potentially be a saving grace in a situation like this? I mean, I know there's a lot of stories of Texans at the moment going into their cars, turning on the engine and using that as a way to stay warm, heat

up during when their house doesn't have power. Like if everybody has electric vehicles, can they suddenly just charge your house off their car. Well, batteries perform better in a situation like this, And if there were more batteries in the grid, would that have helped or no? Yeah, it begs the question what other technologies might have helped? And then in the mediate term I listed some of the

possible solutions. Natural gas plants could have oil on site, consumers could definitely have more generation capacity at their homes. Home gen SAIDs batteries. Of course, potentially solar paired with batteries is going to be a rush for for consumers to you know, outfit their homes to be better equipped.

But in the longer term, when we look at the large scale fleet of generators, given that every single type of generator had had problems, I think it's kind of a win for the alternative technologies as we look to move to higher and higher pennetrations of clean energy on the grid. Let's say, let's take Biden's plan of getting a hundred percent clean to achieve that you need to replace natural gas, and this looks more like a mark on natural gases record than anything else, which means natural

gas is usually a fairly reliable feel. It's seen as the backup. It's there when when the wind isn't blowing. It's to be clear, no wind and natural gas are going to be very important for quite a while on the grid. But in getting to the high penetrations that a lot of policymakers want, this might be an indicator that we really do need some other technology that might be available, and I think people might look to more battery storage, of course, but will it have enough duration.

We're not sure yet. We're not sure if lithium ion batteries could ride through multiple days like this. Maybe it's a wind for small scale nuclear, for advanced nuclear reactors which have been getting slaughtered by cheap natural gas. No, you know, there's been R and D spending, but nobody wants to really take a bet on one of those

because there's so much more expensive. Well, small scale nuclear could have really raked it in during this period if it was available, and and it would have been a win for them over natural gas and potentially other technologies as well. So can you close this out with really,

just when do you think Texans will get power again? Yeah, so we've been talking about the long term implications of the power mix, but the truth is the situation is still really dire right now, and the grid operators bringing plants back online to have the capacity to be able to supply customers, and once those plants are ready, they're reconnecting customers. They are still right now, it's Thursday, and

they are in the worst form of cutoffs. So the most extreme conservation measures those This is going to extend until Friday, and at that point we could start to see if the generation capacity is ready, we could start to see more of the Texas power grid connecting back up to customers and people getting power. But that this weekend it feels like the most stoptimistic scenario for everyone having power back. I hope they get it back as soon as they possibly can. Nick Anna, thanks for joining

us today. Thank you, thank you. Today's episode of Switched On was edited by Rex Warner with gray Stoke Media. Bloomberginni App is a service provided by Bloomberg Finance LP and its affiliates. This recording does not constitute, nor should it be construed as investment advice, investment recommendations, or a recommendation as to an investment or other strategy. Bloomberginni App should not be considered as information sufficient upon which to

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