One thing to start: The Colonial pipeline, the primary energy artery supplying fuel to the US east coast, remains offline.

Welcome back to another Energy Source. In the newsletter today, we explain what is going on with the Colonial disruption and just how significant it could be.

Our second note is on more mergers and acquisitions activity in the US shale patch, as the deal flow continues.

Thanks for reading and see you on Thursday. Please let us know your thoughts by emailing us at — Derek

On Friday, America’s biggest refined products pipeline was shut down after a cyber attack.

The Colonial Pipeline supplies about 45 per cent of the fuel used on the US east coast, making it one of the most important arteries in the country. On a daily basis it pumps 2.5m barrels of gasoline, diesel, jet fuel and heating oil from Texas refineries to main hubs including Atlanta, Washington and New York.

“The Colonial Pipeline is not just a pipeline, it’s the pipeline that moves refined products from the US gulf coast to the US east coast,” said Hillary Stevenson, director of oil market and business development at Wood Mackenzie.

Authorities have blamed a hacker group known as DarkSide for the attack. DarkSide said yesterday it only wanted to make money and regretted “creating problems for society”.

For now, modest. But the infrastructure is crucial at both ends of the pipe: an outlet for gulf refiners and a supplier for east coast markets that don’t have enough plants of their own to meet local demand.

Lacking their usual outlet, some refiners, including Valero, the US’s biggest independent refiner, have chartered vessels to hold products, said market sources and industry reports. Others, including the Saudi-owned Motiva plant in Port Arthur, Texas, have throttled back fuel production. All told, up to 500,000 b/d has been cut from gulf refining runs, said market sources. Valero and Motiva didn’t respond to requests for comment.

But if the outage lasts longer, “you’ll see 2m barrels a day come out of the refining side awful quick”, said Robert Campbell, head of oil products at consultancy Energy Aspects.

European refiners have a chance to meet this demand. Wood Mackenzie says that with the opening of this arbitrage window, gasoline shipments across the Atlantic could increase by 500,000 b/d.

Line chart of $ per tonne showing Freight rates shot up after the closure of the Colonial Pipeline

Shipbrokers in Europe said tanker rates had increased by almost 30 per cent since Friday — from $15.39 per tonne of product to $19.70/tonne — amid a scramble for vessels.

Prices for biofuel credits have risen too, as exporters to the US scramble to secure the credits they need for their gasoline to be in compliance with American regulations under the Renewable Fuel Standards programme.

In the US gulf, available oceangoing barges were all booked within half an hour of Colonial saying it was stopping shipments, said John Demopoulos, head of Argus Media’s products business development function in the Americas.

Some analysts said that if the shutdown lasts longer than a week, the US will need to consider temporarily waiving the Jones Act, which bans non-US-flagged vessels to carry cargoes between American ports.

All this would take a while. Shipments from Europe, for example, would take a week or so to arrive, plus the time to load and discharge cargoes. Prices will have to rise “very significantly” to keep this arbitrage trade open, said Campbell.

Line chart of US cents per gallon showing Gasoline prices have largely held steady

The most visible impacts will be in stocks. If the shutdown lasts for a week or more, stored petroleum levels on the gulf coast will rise to fill available storage, said Richard Joswick, head of global oil analytics for S&P Global Platts, while in the north-east stocks will fall to their lowest in five years.

But the gasoline price rises in the north-east should at least be modest — because the market will find ways to keep supplies ticking over. “There will be no shortages,” said Campbell.

So long as drivers don’t get spooked.

“If the consumers panic, then you may see prices really strengthened over the next few days,” said Alan Gelder, vice-president of refining and chemicals at Wood Mackenzie. “A lot will depend, I suspect, on the US evening news.”

Line chart of US cents per gallon showing Jet fuel prices are also little changed

This is the key question, which will determine how severe the impact on suppliers, consumers and prices will be. But the short answer is that no one really knows.

Colonial said yesterday that it had brought some small parts of the system back on line as it pursues a “phased approach” to restoring service. It said it hoped to have most of the system back online by the end of the week — although it cautioned that the situation “remains fluid and continues to evolve”.

Meanwhile, the US government has used emergency powers to lift limits on transporting fuel by road to allow deliveries by truck to pick up some of the slack. Analysts said that does not bode well for hopes of a swift reopening.

For the second time this year, the vulnerabilities of America’s energy infrastructure have been laid bare. Texas showed an electricity network could be shut by an ice storm; Colonial that the country’s most important fuel infrastructure can be crippled over the internet.

US energy politics are already fraught — and now everyone with an axe to grind is weighing in with complaints and advice for the federal government.

“Our community institutions, businesses, and critical infrastructure are all under threat from cyber attacks,” Andrew Garbarino, a Republican congressman from New York, told a press conference yesterday.

One industry lobbyist called for retaliatory action — if it was found that a foreign state was behind the attack.

The remarks echo those made by Chris Krebs, the former head of the government cyber security agency, earlier this year. Krebs told the Financial Times that the US military should consider taking action against ransomware groups, such as by publishing the personal information of individual members.

Also, was a ransom paid? Colonial has not said. But the situation has prompted the White House to open a debate over the merits of companies making such payments.

Anne Neuberger, US deputy national security adviser for cyber and emerging technologies, said yesterday that the Biden administration was looking into its “approach to ransomware actors and ransoms overall”.

(Derek Brower, Myles McCormick, Anjli Raval and Kiran Stacey)

Another week, another shale patch deal. Yesterday, Bonanza Creek Energy announced it was buying Extraction Oil & Gas in an all-stock “merger of equals” to create a new producer, Civitas Energy, in Colorado. Its enterprise value will be $2.6bn.

Ben Dell, the Kimmeridge private equity boss who is Extraction’s chair, will take on that role for the merged company as part of his quest to build a new model shale operator that is both profitable and relatively clean. Civitas will be the “first net-zero oil and gas producer” (scope 1 and 2) in Colorado — a Democratic state with much tighter pollution rules than other jurisdictions.

The pace of consolidation is likely to remain brisk this year as a fragmented industry continues to go through a needed corporate reshaping.

After last year’s epic oil price crash decimated the sector’s finances, US crude prices — having now rallied to around $65 a barrel — and a strong economic recovery are breeding optimism, spurring more deals. And they have come thick and fast in recent days.

EQT Corporation, the US’s largest natural gas producer, said it was buying privately owned Alta Resources for $2.9bn, as it continues to stitch together a dominant position in the Marcellus’ gas-rich fields in Pennsylvania. The global trading giant Vitol entered Texas’ Permian basin with a $1bn purchase of privately owned Hunt Oil’s assets. Oasis Petroleum, fresh out of bankruptcy, bought Diamondback’s assets in North Dakota’s Bakken oilfields for $745m. Laredo Petroleum said it was buying Sabalo Energy’s assets.

Ryan Lance, ConocoPhillips’ chief executive, whose $9.7bn takeover of Concho Resources was one of last year’s biggest takeovers in the shale patch, told analysts he expected more to come. “I don’t think M&A is done in our business. I still think there is consolidation that will occur and needs to occur. There [are] too many players,” said Lance.

Even with the recent wave of dealmaking, the best shale areas are still divided up among scores of producers, including many privately held companies.

Andrew Dittmar, senior M&A analyst at Enverus, a consultancy, said the focus for buyers this year has been on “rolling up” some of those private operators. Laredo’s Sabalo deal, which pays private equity group Encap Investments $715m, is an example.

Derek Brower and I wrote recently about private equity’s retreat from the shale patch, which has private operators looking at this price rally as an opportunity to exit investments made years ago.

Dittmar argues that the recent increase in public shale company’s share prices could accelerate the trend because it has given them a “more potent currency” when shopping for private companies. Buyers often use their shares to finance deals.

Private producers have accelerated drilling activity on recent higher prices much more quickly than their publicly owned rivals, which are under shareholder pressure to keep growth in check.

Some in the industry fear this increase in private drilling could undermine the larger public companies pledge to investors to keep a lid on the sector’s spending.

Pioneer recently acquired private equity backed DoublePoint Energy, which had become one of the Permian’s most prolific drillers, for $6.4bn — and promptly pledged to rein in its growth. (Justin Jacobs)