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September 4, 2005 11:21 a.m. EDT
HURRICANE KATRINA
The Outlook for Oil
U.S. Production Is Coming Back Slowly,
But Worries of an Energy Crisis Persist
By RUSSELL GOLD in Dallas and THADDEUS HERRICK in Atlanta
Staff Reporters of THE WALL STREET JOURNAL
September 4, 2005 11:21 a.m.
Nearly a week after Hurricane Katrina cut through a main artery of the U.S. energy industry, a large amount of crucial infrastructure remains off line, leaving the world's largest economy and the rest of the globe on the brink of a potential energy crisis.
The Gulf of Mexico region ravaged by Katrina is home to one-fourth of America's oil production, multi-billion dollar floating platforms far out to sea, refinery complexes that turn crude into gasoline, and a thicket of pipelines that connect them all. A focused picture of the damage to the region's infrastructure remains elusive amid the post-storm chaos, but in broad-brush strokes, it is becoming clear the industry faces a two-pronged problem.
Its ability to turn crude oil into gasoline is under extraordinary pressure. The storm shut in about two million barrels a day of crude-oil refining capacity, resulting in the loss of one million barrels a day of gasoline production -- or 10% of U.S. demand. Four refineries that together represent about 5% of U.S. oil-refining capacity will be out of commission for at least a month, while another 5% of refinery capacity knocked out by Katrina appears likely to restart in coming days and weeks.
At the same time, offshore facilities that pump crude oil and natural gas from prolific underground reservoirs and carry the fuel ashore suffered widespread damage. Production is coming back on line slowly, and it isn't clear whether it will takes weeks or months to return to anything near normal output levels.
An economy-walloping energy shock in the U.S., which consumes a quarter of the world's oil whose demand for foreign goods is underpinning world-wide growth, would be felt around the globe.
Economic forecasters surveyed by Macroeconomic Advisers, a St. Louis, Mo., forecasting firm, estimate that the effects of Hurricane Katrina will reduce the growth rate of the gross domestic product, on average, between 0.5 and 0.7 percentage points in the third and fourth quarters of this year. (See related article1.) Before the hurricane, the forecasters surveyed by the firm were anticipating that the U.S. economy, which the government estimates grew at an 3.3% annual rate in the second quarter, would expand 4.3% in the third quarter and 3.6% in the fourth.
"Higher prices for energy have already eroded real income, and will, temporarily at least, reduce aggregate demand," the firm wrote.
Whether the looming energy crisis spreads and persists long enough to hammer the economy depends on a variety of factors, among them whether Europe and other countries can supply adequate imports. But with the world facing a refinery capacity crunch, and U.S. refiners running their plants flat out to meet soaring demand for gasoline and diesel, even the slightest sustained outage will likely put considerable pressure on prices.
The blow to Gulf of Mexico crude-oil output also puts a big strain on the entire global market, leaving the world vulnerable to outright shortages of crude should another shock of Katrina's scale hit an oil-producing nation.
On Friday, consumers -- who have seen prices gasoline prices skyrocket at the pump in the U.S. since the hurricane -- got some good news. The International Energy Agency agreed to release two million barrels a day of crude oil, gasoline and other fuels on to the world market from their strategic stockpiles over the ensuing 30 days. That is equal to about 2.4% of the world's daily fuel consumption.
In response, gasoline futures fell nearly 23 cents in trading on the New York Mercantile Exchange to settle at $2.18 a gallon, after the IEA news. Crude oil, the raw material from which fuels are refined, also fell in Nymex trading, settling at $67.57 a barrel, down $1.90.
But the IEA's bold move is a reminder that the world has now started running on its reserve fuel tanks -- oil and refined products stockpiled over the past two decades for use only in true emergencies. Western oil companies are already pumping flat-out. Russia, the world's No. 2 producer, is producing all it can. Even Saudi Arabia, the top exporter, and its fellow members of OPEC can do little to alleviate the emerging crisis. The Organization of Petroleum Exporting Countries has spare capacity of some 1.5 million barrels a day -- which is just about equivalent to the production lost last week in the Gulf of Mexico because of Hurricane Katrina.
The huge blow to the Gulf of Mexico has led to long lines at filling stations in much of the U.S., and outright shortages in some places. Panic buying of gasoline was reported as far away as the Czech Republic. On Saturday, the Czech news agency CTK said drivers lined up at filling stations around the country after prices jumped by the equivalent of 14 U.S. cents per liter overnight, according to Reuters.
The extent of the price shock will depend in part on whether Americans conserve fuel amid the supply outages. Traffic over the Labor Day holiday weekend was noticeably lighter from Georgia to Colorado, according to the Associated Press, which also said 10% of West Virginia stations ran out of at least one grade of gas.
People were discouraged from driving by uncertain availability of gasoline and by the spiking cost of fuel. Gasoline was well above $3 a gallon at many stations across the country; in mid-August, the average national retail price was about $2.50. Americans also appeared to be heeding the calls of leaders, President Bush among them, who are encouraging conservation for the next few weeks.
But in the driving-addicted U.S., the gasoline crunch is rapidly becoming a political controversy. Mr. Bush and others are warning against price gouging, state attorneys general are mounting investigations and Sen. Barbara Boxer of California is urging the Federal Trade Commission to monitor the oil industry for price manipulation.
For the industry, the immediate concern is the vast effort to get the Gulf energy system back on its feet.
A Chevron Corp. official said Chevron's largest U.S. refinery, located on an inland channel in Pascagoula, Miss., would be shut for a considerable amount of time and unavailable to turn crude into much-needed gasoline to ease the fuel crunch. Crews would only begin assessing the extensive damage in Pascagoula later this week.
"We don't know when we will be expecting crude shipments," said spokesman Michael Barrett, although the terminal is open to accept tankers carrying gasoline and other products.
While Mr. Barrett wouldn't provide an estimate of how long it would take to restart, officials with the Mexican national oil company, a large supplier of crude to the refinery, said they were told by Chevron to cease shipments for at least a month. Chevron declined to comment on discussions with individual suppliers.
Three additional refineries -- all located southeast of New Orleans -- still don't have electricity and are believed to have sustained major damage from flooding, according to the federal Energy Department, and could also take at least a month to restart. These refineries are owned and operated by ConocoPhillips, a joint venture of Exxon Mobil Corp. and the Venezuela state oil company and Murphy Oil Corp. Together with Chevron's Pascagoula refinery, the four hobbled industrial complexes represent about 5% of U.S. refining capacity, a significant blow to the country's ability to produce enough gasoline and heating fuel.
Valero Energy Corp., America's largest refiner, was working to restart its St. Charles, La., plant, but spokeswoman Mary Rose Brown said, "We're still in the middle of a relief effort for our own employees." Ms. Brown the company has heard from 260 of 570 plant workers and that 150 employees have reported to work. She said the company may be forced to bring in workers from its other refineries.
Other refineries, however, appear to be on the mend. Marathon Oil Corp. said over the weekend that its Garyville, La., refinery should be running at full capacity by Monday.
Offshore, assessment and repair of gulf platforms after a slow start has begun in earnest. The U.S. Coast Guard reports that 21 platforms are believed to have sunk. And on another 20, the pumps, generators and control rooms are either missing or damaged.
The key -- and so far unanswered -- question is how many of these battered platforms are giant deep-water floaters responsible for about half of gulf production. At least one giant deep-water platform, Royal Dutch Shell PLC's Mars platform, sustained significant damage. By itself, this facility produces about 10% of the daily oil and gas output from the gulf.
Many platforms that survived with just dents and dings remain idled because the status of pipelines needed to move the fuel to shore was uncertain. On Saturday, nearly 68% of combined oil and gas operations in the gulf remained offline, according to the federal Minerals Management Service.
There are growing signs the industry itself realizes it could take over a month to return to anything even resembling normal operations. On the spot markets for Louisiana crude, trading volumes were unusually thin for barrels to be delivered next month -- a sign of the fundamental uncertainty permeating the region.
The markets are in "a state of near paralysis," says Tim Mingee, a Houston-based editor of the daily Americas Crude report, published by Argus Media Ltd. "Producers don't know what volumes they will be able to sell and on the refining side, they don't know what they will be able to buy," he says. Daily trading volume of a common variety of Louisiana crude dropped by 73% last week from the period immediately before Katrina's landfall.
Still, energy observers were upset by the lack of information. "It's too early to draw any accurate conclusions because of a frustrating lack of information," says Rodney Mitchell, president of the Mitchell Group Inc., a Houston investment management firm focused on energy.
There was some positive news from the storm-battered Gulf energy complex: Exxon said its large Baton Rouge refinery is increasing its production level and should be able to ramp up further as oil supplies increase.
The Louisiana Offshore Oil Port, a key import terminal that receives one million barrels of crude a day from overseas tankers, received its first vessel of Friday, according to the U.S. Coast Guard. But the facility still isn't functioning normally as one onshore terminal is without power. Two key pipelines that deliver gasoline and other refined products from the Gulf Coast to the Southeast and eastern U.S. were back to near-normal operating conditions.
By helicopter and boat, repairs crews are returning to the several thousand offshore platforms to find many operable, some missing and others badly in need of repairs. Resumption of anything even close to normal operations in the Gulf, source of more than one-quarter of U.S. oil and natural gas production, has been moving at a snail's pace.
Six days after Katrina's landfall, the industry had restarted 243,000 barrels a day of oil and 3 billion cubic feet of daily gas production shut down before the storm. By comparison, six days after Hurricane Ivan last year, the industry had restarted 831,000 barrels a day of oil and 4.1 billion cubic feet of gas.
A large reason for the slow-moving recovery is that the companies along the Louisiana coast that provide transportation and equipment for damage assessment and repair are themselves overwhelmed, say people in contact with these operators. Many employees are homeless and scattered all over the region. Some roads and waterways are still impassable.
This has generated a surprising lack of details on the status of offshore producing platforms -- and more vitally underwater pipelines. Last year, when Ivan, a less powerful storm, touched the eastern edge of the energy producing region, its waves triggered underwater mudslides that wreaked havoc on pipelines. Similar damage is believed to have occurred this time, also. Several offshore natural gas pipelines had standing orders for customers on several pipeline branches not to pump any gas into the system.
--Bhushan Bahree in New York, David Luhnow in Mexico City and David Wessel in Washington.
Write to Russell Gold at russell.gold@wsj.com8 and Thaddeus Herrick at thaddeus.herrick@wsj.com9
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