The Editor's Perspective and Market Hotline (OGJ, Oct. 14, 2002, p. 80) brings to mind the importance of maintaining standby infrastructure so that fluctuating demands and emergency scenarios can be properly accommodated. Providing such "excess infrastructure," particularly under the "earnings pressure" corporations currently experience, is a function the free market system cannot easily deliver. That presents a significant risk to a "free market."
In the case of oil, normal "market" demand will be satisfied from "somewhere," be it Russia or the Kingdom of Saudi Arabia. There is no doubt that diversified sources of supply, like a broad customer base, should provide optimal commercial results. However, excessive diversification and abandonment of historic "strategic alliances" makes those former "key trading partners" less able (willing) to solve emergency problems. And, as to gas, while the development of storage infrastructure goes a long way towards providing a "post-sausage" safety net, reserve development must resume to offset current North American declines in production.
A microcosm of what could happen in oil and gas supplies is actually occurring this year in the availability of another material produced through oil and gas processing. Sulfur, the quintessential industrial raw material (to some) is viewed as a waste by the hydrocarbon industry. These producers have historically paid little attention to its marketing or logistical infrastructure. That aspect of sulfur's commercial path had, until the year 2000, been left to Freeport Sulphur Co., a unit of McMoRan Oil & Gas. Now, with Freeport Sulphur's financial demise, producers and consumers are left with inadequate logistical infrastructure and a dysfunctional market:
Exports to China virtually ceased. Refineries along the Gulf Coast were almost forced to curtail operations due to the inability to dispose of sulfur. Prices, in many cases, became "disposal costs." Canadian suppliers, faced with losses in excess of US $20/ton at gas-plant-gate largely withdrew from the market. Burlington Resources, along with other Wyoming gas suppliers, saw its small positive revenue converted into a US $50/ton disposal cost.
Market demand reversed in 2002, but refinery slates are sweeter, operating rates are lower, sulfur inventories have been depleted, and Canadian suppliers are avoiding the US market following last year's experience. Of even greater importance, and pertinent to the infrastructure issue, is that there are now insufficient railroad tank cars capable of meeting increased liquid-sulfur shipments from Canada. Even if US buyers were willing to pay any price for a reliable supply of sulfur, it is impossible to deliver the product. As a result, chemical plants and fertilizer plants are curtailed for lack of sulfur.
The root cause of such inefficient swings is, among others, the lack of sufficient infrastructure to meet even "normal-plus" consumption or manage "less-than-normal" demand. Companies (sellers or buyers), pressed for capital, do not want the expense of dealing with normal demand or supply cycles despite its eventual cost. Could the hydrocarbon industry, searching for ever cheaper and streamlined supply chains, allow a "sulfur" scenario to develop in the sourcing of oil or gas supply? The critical danger is that such an eventuality would provide ample justification for reregulation.
How can such an eventuality be avoided? That is the issue we must resolve in order to ensure a vibrant, independent US hydrocarbon market. Energy is too vital to have companies over-promise what they can deliver, under-deliver what they promised, or under-deliver what the user expected. I would much rather pay a little more and get precisely what I counted on. From a sulfur perspective, my specialization, I can assure you that today most chemical companies are willing to pay "anything" for this raw material. Oil can never be allowed to reach that level due to logistical-supply chain "streamlining."
G. d'Aquin, President
Con-Sul Inc., Tulsa
