Monday, September 05, 2005

Damage to Oil and Gas Facilities Pushes U.S. Closer to Energy Crisis

September 2, 2005; Page A1

Hurricane Katrina's continuing disruption of a substantial portion of the Gulf Coast's vast network of refineries and pipelines is pushing the U.S. closer to a 1970s-style energy crisis, straining the oil industry's ability to deliver gasoline from Florida to Colorado, sending prices into uncharted territory and triggering panic among drivers in some areas.

Long gas lines were reported in Denver, Indianapolis, Hartford, Conn., Atlanta and Orlando, Fla., among other cities. In Charlotte, N.C., between 13% and 15% of stations had no gasoline and prices have soared as much as 70 cents a gallon in those stations that still have fuel to peddle, said Tom Crosby, a local AAA official there.

President Bush took the unusual step yesterday of urging Americans not to buy gasoline if they don't have to. "Americans should be prudent in their use of energy," he said in brief Oval Office remarks. "Don't buy gas if you don't need it."

The president also made it easier for tankers to bring in gasoline from Europe, which has excess capacity for the fuel as motorists there increasingly buy diesel-powered cars. Wednesday, Mr. Bush temporarily lowered U.S. environmental standards that also eased the way for European gasoline.

The core of the unfolding situation is that four days after Hurricane Katrina pummeled the Gulf Coast, eight major refineries are still shut down and several could require a month or more to restart. In addition, there are early rumblings in the industry of significant, unreported damage to offshore pipelines, energy-gathering hubs and producing platforms that could take months to repair.

Neither Exxon Mobil Corp. nor Chevron Corp. released more than the briefest details about their offshore facilities. Royal Dutch Shell PLC reported damage to three key facilities: offshore producing platforms Mars and Cognac and a hub facility that gathers oil and gas from large deep-water platforms.

Shell reported yesterday that its Convent, La., refinery could initiate a restart in "about a week." Chevron said its large Pascagoula, Miss., refinery had been saved by a dike built in 1998 that "prevented catastrophic damage." Exxon said its giant Baton Rouge refinery was having pipeline and transportation issues and running at "reduced rates until normal feedstock supply and product movement is restored."

Last year, Hurricane Ivan, a less-powerful storm, hurt oil production for months, pushing up energy prices world-wide after it upended pipeline networks in the Gulf of Mexico. The price of crude rose from $44 to above $50 for two months.

There was some good news. Valero Energy Corp. said power was restored to its St. Charles, La., refinery and Marathon Oil Co. said its Garyville, La., refinery could be producing gasoline by early next week. Two idled pipelines that had hampered fuel deliveries to the East Coast are now being brought back on line. Colonial Pipeline Co., knocked out of action by Katrina, said it was operating at 40% of capacity, with about 61% of capacity expected by day's end. Plantation Pipe Line Co., which is majority-owned by Kinder Morgan Energy Partners LP, said it resumed limited service Wednesday. Plantation said it had been able to restore about 150,000 barrels of capacity per day, or nearly 25% of its average daily throughput.

Whether a true energy crisis emerges -- with persistent fuel shortages, soaring gas prices and a wallop to the economy -- will depend on how quickly the onshore and offshore infrastructure gets back up and running, how deftly the industry and government handle fuel distribution in the meantime and, critically, whether large numbers of consumers panic.

A rush to fill gasoline tanks in large parts of the country would quickly drain stockpiles, leading to shortages, hoarding, long lines and even sharper price spikes. If every driver in the U.S. fleet of 220 million vehicles topped off his tank with 10 gallons, that would be an additional 2.2 billion gallons of demand for gasoline and diesel inventories that stood on Aug. 19 at 8.19 billion gallons and 3.23 billion gallons, respectively.

"In terms of the scale and impact on the American market, this is comparable to the oil embargo" of 1973 and 1974, said Jay E. Fakes, head of the federal Energy Information Administration from 1993 to 2000. The only answer, he says, is immediate conservation. His call for drivers to cut back was echoed by such oil-industry heavyweights as the American Petroleum Institute and the Petroleum Marketers Association of America.

The industry's ability to snuff out the gasoline-price spike is critical because if the crunch persists, it has the potential to significantly slow the U.S. and global economies or even trigger a recession. American consumers kept spending strongly through this summer even as crude-oil prices soared, largely because other factors -- low interest rates, rising home values and cheap imports -- offset the sting of higher prices at the pump. Their spending has been a linchpin of world-wide economic growth.

But signs of stress are emerging. Home values may be peaking. The government reported yesterday that the personal-saving rate dipped into negative territory for just the first time since the weeks after the Sept. 11, 2001, terrorist attacks, suggesting consumers are going into debt to support their spending habits. A sustained gasoline-price shock, many economists warn, could help tip the economy into a recession.

Gasoline stations in some parts of the country say supplies are drying up. Worst hit are the unbranded retailers -- stations that aren't affiliated with a major oil company such as Exxon or Chevron but still account for about one-third of U.S. gasoline sales. Jenny Love, a spokeswoman for Love's, an Oklahoma City-based chain of 160 interstate and highway locations, said some of the company's outlets were out of both gasoline and diesel fuel. "The unbranded retailer is at the bottom of the totem pole," she said. "There's nothing we can do about it."

Some service stations in gas-crimped areas like Atlanta were charging in excess of $5 a gallon for gas, before a gubernatorial state of emergency forced them to lower the price. The White House warned that federal officials would have "zero tolerance for price-gouging."

Cary Gavant, a 58-year-old Atlanta broker, says he conserved fuel last night by driving more slowly than usual on the 50 miles north on I-75 toward his suburban home from Atlanta and noticed that many other drivers were doing so, too. "The thought of not having gasoline was terrifying," he said.

While the triggering event for the country's energy squeeze was the destruction Katrina unleashed on the vital gasoline-producing region of Louisiana and Mississippi, the scene was set for this catastrophe by both drivers and the energy industry. U.S. drivers pump 11% of the world's crude oil into their tanks in the form of gasoline, and increasingly over the past couple of decades they have been buying gas-guzzling SUVs and pickup trucks.

At the same time, the oil industry has been reluctant to invest in new refinery capacity because of historically low returns, even while refiners have pared back inventories to beef up margins. This reluctance has shrunk U.S. and international spare refining capacity, creating a world-wide gasoline-delivery system hard-pressed to cope with a major disruption such as the one wrought by Katrina.

Even though these twin trends were well-known, the scope of the disruption has caught even long-time oil-refining veterans by surprise. "In my 30 years, I do not remember a time like this," says Tom O'Malley, former chairman of Premcor Inc., a major U.S. refiner acquired this year by Valero. "It is absolutely clear that a significant amount of refining capacity that is currently down will take time to come up. And I don't think it's a matter of days. For some refineries, it could be a matter of months. There is certainly going to be a domestic product shortfall."

Still, Mr. O'Malley doesn't believe the U.S. is headed for an energy crisis. The rocketing wholesale and retail gasoline prices should fall back soon, as tankers full of gasoline from Europe begin arriving. "I think the industry, you will find, will do an amazing job of coming up with supply. It's a question of weeks, but this is no long-term problem."

Industry experts said they expect the refineries hardest hit by the hurricane to be out of service for more than a month since flooding can ruin the electric pumps that send crude oil through a refinery's complex system of pipes. "It looks quite serious," said Bob Funk, who recently retired as head of planning from Citgo Petroleum Corp., a U.S. refiner and subsidiary of Venezuela's national oil company. Mr. Funk expressed particular concern for a plant run by Exxon Mobil and Petroleos de Venezuela in Chalmette, La., which is on the Mississippi River near downtown New Orleans. Exxon Mobil said it couldn't provide any information on potential damage at the Chalmette refinery.

The extent of the probable damage to the plants struck by the storm, he says, is likely to be more than the Gulf Coast work force can repair, meaning refiners will have to bring workers in from other parts of the country. That and the extensive flooding are likely to slow refinery repair efforts. Even when the refineries are up and running it is unclear whether they will have adequate staffing, given the flood damage in surrounding communities and neighborhoods where workers live.

And while European traders reported as many as 20 bookings in the past two days for tankers to carry gasoline across the Atlantic, the shipments won't provide immediate relief. The ships are scheduled to load gasoline at European ports later this month but will take as long as three weeks before reaching East Coast ports like New York. On top of that, traders are finding it difficult to find available ships. Rates for trans-Atlantic voyage have soared in the past few days as shipbrokers try to line up tonnage.

While most attention was on the onshore infrastructure, there were ominous signs of damage to the offshore platforms and pipelines that produce one-quarter of U.S. oil. Shell reported that its West Delta 143 platform, which serves a pipeline hub, needed substantial repairs. Less than 20% of energy production within the Gulf of Mexico had been restored yesterday, according to the federal Minerals Management Service. Four days after Hurricane Ivan last year, 60% of production had been restarted, the agency said.

Ivan scrambled numerous critical underwater pipelines, essentially leaving functional producing platforms with no way to get the oil and gas to shore. Robert Bea, Shell's former chief engineer in the U.S. and a longtime student of the impact of hurricanes on the Gulf's energy infrastructure, says he has heard from a network of oilfield workers that the damage to pipelines and platforms could be "10 times what we saw in Ivan."

Even before Katrina, the refining industry faced a severe capacity crunch, a problem that promised to limit the prospects for cheaper gasoline, diesel and jet fuel for at least several years. Nor is it exclusively a U.S. problem: Growing demand for oil from China, India and other rising powers is aggravating the shortfall in refining and threatening to keep prices elevated for years.

While global demand is expected to grow by nearly two million barrels a day this year -- from 82.5 million barrels a day last year -- the world's capacity to refine and process crude oil is expected to grow by less than half that, according to the Petroleum Industry Research Foundation.

For these reasons, Larry Goldstein, president of the Petroleum Industry Research Foundation, a New York-based group, said that the release of oil from the Strategic Petroleum Reserve and increased gasoline imports from abroad won't fundamentally address the situation. "How could this not be a major problem for an indefinite period of time?" he said. Mr. Goldstein said he expects sustained high gasoline prices as demand exceeds supply. "It's powerful and it's ugly," he said. "But it's true."


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