Oil Feels Rita's Pinch

Analysis from Platts shows the Category 4 hurricane will further delay refinery repairs, and fuel shortages are spreading

By Beth Evans, Gerald Karey, and Kevin Saville

From Platts Oilgram News

In an unprecedented disruption of the U.S. petroleum industry, the vast bulk of Gulf Coast refining and offshore production was shut down Sept. 22 as Hurricane Rita spun toward Texas. Industry and government officials warned of supply disruptions, with U.S. Energy Secretary Samuel Bodman telling reporters the country will be "dependent on attracting [refined product] cargoes from abroad" for the next several weeks.

Bodman said the Strategic Petroleum Reserve (SPR) would be used "if it's appropriate" and crude loans to refiners would probably be negotiated, rather than having another SPR sale, since the process is quicker. He noted that Gulf Coast SPR sites are designed to withstand a Category 5 hurricane -- Rita dropped to a still-dangerous Category 4 on Sept. 22.


  Most of the 4.7-million barrels a day of Texas-Western Louisiana Gulf Coast refining capacity, or 27.5% of total U.S. capacity, was shut down ahead of Rita's expected landfall early Sept. 24, adding to the almost 900,000 barrels a day still off-line around New Orleans from Hurricane Katrina. Even if damage from Rita is minimal, refinery restarts could take a week or more and aggravate an already tight U.S. gasoline-inventory scenario.

Just under 92% of U.S. Gulf oil output was shut in, along with nearly 66% of natural gas production, according to the Minerals Management Service. "There is certainly not a sense of comfort here," said Bodman.

Rita is likely to cause major national disruption of gasoline and other fuel supplies due to refinery closures along the Gulf Coast, causing "serious" problems for pipelines. It could also cut 10% to 15% of U.S. oil imports due to port closings, American Petroleum Institute (API) President Red Cavaney said on Sept. 22.

"We're facing an unprecedented situation with a Category [4] hurricane bearing down on the heartland of our operations along the Gulf Coast at a time when our companies are still in the early recovery stages from Hurricane Katrina," Cavaney told a press briefing.


  Though Rita rivals Katrina in intensity, Cavaney said it's impossible to forecast comparable damage or flooding to coastal Texas refineries. But refiners have drawn lessons from Katrina, and "whatever action they could take is going on" to minimize impacts, he said.

Cavaney said it was too soon to estimate Rita's disruption to fuel supplies. "However, even if we are fortunate enough to escape with minimal damage, the shutdowns in preparation for Rita will have some effect," he added.

The Explorer products pipeline, a major line coming out of the region, was already down Sept. 21, and most of the refineries that supply it were down or closing as well, according to API. "Because of the way the Explorer system operates, there is no fuel going north of Tulsa, which should affect the St. Louis and Chicago areas," API said.


  Bodman said it was "likely there will be some disruption in terms of supply of motor fuel" along the Gulf Coast. He noted it was already "almost impossible" to buy gasoline in Houston, under evacuation orders ahead of the storm. Local press reports told of massive traffic jams and cars without fuel on evacuation routes, as well as long lines at gas stations and dwindling supplies.

Royal Dutch Shell reported on Sept. 22 that it was running out of gasoline at its Houston stations. "We are experiencing product run-outs at Shell-branded stations in the area," the company said, adding that retail staff "are working diligently to resupply Shell stations as quickly as possible. We are making every effort to navigate current road conditions and deliver gasoline in a safe and efficient manner."

A federal waiver was granted to sell conventional gasoline -- or gasoline that hasn't gone through the reformulation process to reduce pollutants -- in the Houston-Galveston area until Sept. 26 to ease supply constraints.


  Marketers have also sought a waiver for Dallas-Fort Worth. The Environmental Protection Agency, in a letter to Texas Governor Rick Perry, said it "has determined an 'extreme and unusual fuel supply circumstance' exists" due to Rita.

Marketers hoped the Dallas waiver would be approved Sept. 22, so far with no luck. "I spent all day yesterday trying to get waivers for reformulated gasoline in Houston and Dallas," says Scott Fisher, spokesman for the Texas Petroleum Marketers & Convenience Store Assn. There are "1.3-million people on the move trying to get out of the way of this thing," he notes.

Evans, Karey, and Saville are writers for Platts Oilgram News, which like BusinessWeek Online, is a publication of The McGraw-Hill Companies

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