Gulf of Mexico oil operations remain in disarray
- Published Friday, September 2, 2005, in the New York Times
Gulf Oil Operations Remain in Disarray
By Jad Mouawad and Vikas Bajaj
The Gulf of Mexico, the nation's largest energy center, was still
reeling yesterday, four days after Hurricane Katrina, crippling
gasoline supplies in some pockets of the country. In the face of the
turmoil, the government stepped up its release of strategic oil stocks
The Bush administration said it approved a loan of six million barrels
from the emergency reserve to Exxon Mobil, and another one million
barrels to Placid Refining. A third company, Valero, will receive 1.5
million barrels. The new supply is, however, far less than what is
needed to make up for the expected loss of production from the gulf --
a region that accounts for over a quarter of domestic oil supplies.
Much of the gulf area's production and refining remained shut
yesterday, but the first signs emerged that at least some parts of the
region's intricate energy infrastructure were slowly coming back. Two
important pipelines that supply oil products to the East Coast began
limited operations again, supported by emergency power supplies. And
a huge oil-importing terminal in Louisiana provided reassurance that
it would resume receiving oil tankers soon.
Still, nine major Louisiana refineries remained without power,
according to the Energy Department. At least four others were running
at reduced capacity. In all, at least 1.8 million barrels a day of
refining capacity is still down, or about 10 percent of the nation's
Retail gasoline prices have surged in recent days to over $3 a gallon
in many parts of the country. Prices increased as much as 50 cents a
gallon overnight, with Illinois, Michigan, Texas and Pennsylvania
reporting some of the biggest increases.
The nationwide average for premium fuel was $2.95 yesterday, up from
$2.88 on Wednesday and $2.42 a month ago.
Two days before the Labor Day weekend, when millions of people
typically hit the roads for the last big summer holiday, President
Bush asked Americans to curb their gasoline consumption. "Americans
should be prudent in their use of energy during the course of the next
few weeks," Mr. Bush said yesterday. "Don't buy gas if you don't need
[BATN: Presumably after a few weeks are over it's OK to go back to
knocking it back like drunken sailors.]
But while tapping the reserve and bringing in additional imports will
provide a quick injection of oil into the system, they will do little
to get refineries hit by the storm up and running again. What is
certain already is that Hurricane Katrina produced what economists had
feared most, a dislocation of oil and gas supplies on a global scale
and the prospect of even higher energy prices.
"We have lost a lot of supplies at a time when we were very
vulnerable," said Roger Diwan, a managing director at PFC Energy, an
oil consulting firm in Washington. "How high prices go will depend on
how quickly refiners can get back on."
PFC Energy estimated that 820,000 barrels a day of refining capacity
was badly flooded and would remain without power for weeks.
The prospect of a sustained drop in refining operations pushed the
price of oil products on the New York Mercantile Exchange up again
yesterday. Gasoline futures for October delivery closed at $2.409 a
gallon, up 15.37 cents. The September contract expired at $2.61 a
gallon on Wednesday. Crude oil futures closed at $69.47 a barrel, up
Gasoline stocks have fallen for nine consecutive weeks and are at
their lowest since November 2003. Last week, they dropped by 500,000,
to 194 million barrels -- enough to supply the country's total
gasoline consumption of 9.4 million barrels a day for about 20 days.
"The United States is facing a major gasoline crisis and is starting
from a nearly empty tank," Barclays Capital said in a note.
The White House has already approved more loans from the strategic oil
reserves than the 5.4 million barrels it released after Hurricane
Ivan, which hit the gulf last September. The administration also
relaxed shipping rules to allow foreign ships to transport oil and
gasoline between American ports to make up for shortages in some
sections of the country.
"By utilizing the resources from the Strategic Petroleum Reserve, we
will help minimize any potential supply disruptions as a result of the
hurricane," Samuel W. Bodman, the energy secretary, said in a
But the real problem, said Frank A. Verrastro, the head of the energy
program at the Center for Strategic and International Studies in
Washington, "is the refining capacity, not crude."
The first hurdle to overcome is the lack of electrical power.
The Louisiana Offshore Oil Port, an import terminal with a capacity of
1.2 million barrels of crude oil a day, said it had suffered only
minimal damage but had not been able to take deliveries from oil
tankers because it was waiting for power to be restored to its onshore
storage operation in Galliano, about 74 miles south of New Orleans.
"I really feel confident that we will be going as soon as we have
energy," said Tommy Martinez, executive director of the agency that
regulates the terminal. Port Fourchon, which serves offshore rigs,
platforms and the offshore oil terminal, is still struggling to get
back to full capacity.
Ships that use the port, which is about 100 miles south of New
Orleans, still cannot sail through the clogged waterways that connect
it to the Mississippi River and other shipping channels, said Ted
M. Falgout, the port's executive director. Bridges along those
waterways are not operating because they do not have power.
The pipelines that transport oil or refined products to the Northeast,
the Midwest and the Southeast reported some limited improvements.
Valero, the nation's largest independent refiner, said it had restored
power to its refinery in St. Charles, La., and that a quarter of its
employees had managed to return to work. Initial reports from the
company suggested that it would take as long as two weeks to restart
the flooded refinery.
Chevron said that that its refinery in Pascagoula, Miss., which has a
capacity of 325,000 barrels a day, had escaped "catastrophic damage"
thanks to a dike that has held up. But the plant remain shut.
The delays at refineries and pipelines rippled through the system.
One gasoline wholesaler, Petroleum Traders, reported it was being cut
off by BP and Marathon, which have contracts that allow them to supply
their own distributors first during supply shocks. Exxon Mobil and
Chevron also warned of gasoline disruptions.
To make up for the domestic shortfall, oil companies began taking
measures to increase their imports of gasoline and diesel fuel from
Europe. Bloomberg News reported that as many as 10 tankers were
booked by companies, including BP, Chevron and ConocoPhillips, to ship
about 130 million gallons of gasoline.
But even if imports grow, much depends on how quickly oil production
can be restored in the gulf.
The Gulf of Mexico accounts for about 1.5 percent of global oil
production but with little spare production capacity anywhere around
the world, its impact is being felt far beyond the region's storm-hit
More than 90 percent of the gulf's daily oil output was still closed.
Natural gas production was down by 79 percent, a slight improvement
over Wednesday, the Interior Department reported. That did not ease
the pressure on the markets, with natural gas futures on the New York
Mercantile Exchange rising 2.5 percent, to $11.757 a thousand cubic
Since Aug. 26, more than 7.4 million barrels of oil, or 1.3 percent of
the gulf's yearly production, has not been produced as a consequence
of the storm.
Another uncertainty looms over the gulf's energy infrastructure.
When Hurricane Ivan hit the gulf last September, it created underwater
mud slides that uprooted crucial underwater pipelines, delaying the
return of full production for six months. In all, that storm cut oil
production by 43.8 million barrels.
So far, there is no indication of the impact of Hurricane Katrina on
the gulf's 33,000 miles of underwater pipelines, a seabed grid that
links thousands of offshore platforms to refiners and storage tanks on
"For all the talk of political uncertainty in Nigeria or Russia or
Venezuela last year, the biggest single loss of production was from
Ivan," Mr. Verrastro at the study center in Washington said. "Our
definition of risk might be changing. The weather is becoming one of
the biggest factors."
With hundreds of thousands of people homeless, oil companies were
facing more basic problems, even such previously simple tasks as
contacting employees. Chevron is advertising a toll-free number for
"On the top of our agenda is finding where our employees are," said
Mickey Driver, a Chevron spokesman in Houston. "It's a major concern