In addition to destroying thousands and devastating hundreds of thousands of lives, Hurricane Katrina delivered a body blow to the national and global energy system by striking at the heart of the U.S. oil and gas industry, the site of half the nation's oil refineries, and the reverberations are being felt throughout the world. -- At present, however, experts are issuing reassuring evaluations of the situation. -- AFP reported Friday that the International Energy Agency in Paris predicted that "Katrina was likely to curtail world oil production until the end of the year by 55 million barrels, about the same as Hurricane Ivan in 2004," but that the damage would be repaired in 3-6 months. -- OECD member countries will meet to assess the response to the Katrina oil shock on Sept. 15. -- AFX reported Sunday that "in an ironic twist, some analysts predict the [gasoline] market might see a brief mini-glut as refiners, unscathed by Katrina, push their units as hard as they can and tankers stream into U.S. ports brimming with gasoline." -- On Sunday Jad Mouawad of the New York Times evaluated the damage to the U.S. energy industry in the context of its recent history. -- Because of Katrina, "four major refineries, owned by Chevron, Exxon Mobil, ConocoPhillips, and Murphy Oil, are either flooded or without power, and are likely to be out of commission for several weeks, perhaps months. Together, these refine 880,000 barrels a day, or 5 percent of domestic capacity. . . . The loss is equal to 1 percent of the world's refining capacity," Mouawad reports. -- With no spare refining capacity, "most Americans now pay more than $3 a gallon for gasoline -- matching inflation-adjusted highs reached after the Iranian revolution in the late 1970's and early 1980's," the Times reports. -- Such a crisis has been long anticipated. -- "Since the 1980's, the number of refiners in the United States has been cut in half. From a peak of 324 in 1981, the industry has shrunk to 149 as the smaller, less efficient, and less profitable operators once protected by price controls closed, leaving mostly larger companies in place. Refining capacity has fallen about 10 percent, to 17 million barrels a day, while oil consumption rose by 33 percent over the same 24-year period, to 20.8 million barrels a day. Meanwhile, refiners have been increasing their skill in turning crude into useful products; efficiency improved by 27 percent between 1981 and 2004. Still, the difference must be made up by direct imports of refined products, with gasoline imports now at 1 million barrels a day." -- The lack of spare capacity has led refiners to push too hard for production, leading to fatal accidents like the explosion in March at BP's Texas City refinery, the third-largest in the U.S., which killed 15 and injured 170 people. -- (All three of these pieces continue the strange disconnect between Peak Oil (the moment at which global oil production peaks and begins to decline) and other reporting on the oil industry in the mainstream media. -- Only eight days before Hurricane Katrina struck, the New York Times Magazine published a long article endorsing Matt Simmons's belief that Saudi oil capacity is peaking, and the possibility that there will soon be much less oil to refine has certainly been a factor in the failure of the industry to build additional refining capacity during the past thirty years. -- But as in most other mainstream media articles on the oil industry, Peak Oil goes unmentioned in these pieces.) ...
KATRINA OIL SHOCK 'SEVERE' BUT DAMAGE REPAIRABLE
By Hugh Dent
September 9, 2005
Hurricane Katrina delivered a "severe" shock to Gulf of Mexico oil supplies, wrecking pipelines and damaging scores of platforms, but 90% of production can be back on stream within a few months, the International Energy Agency said on Friday.
Katrina was likely to curtail world oil production until the end of the year by 55 million barrels, about the same as Hurricane Ivan in 2004, the IEA estimated in a report.
"Hurricane Katrina has had a severe impact on U.S. Gulf of Mexico supply and will likely affect production for several months to come," it warned.
However, overall data "shows world supply two million barrels a day above August 2004. OPEC crude stands 0.75 million barrels per day higher, OPEC other liquids supply is up 0.5 million barrels per day and non-OPEC supply is 0.75 million barrels up."
By September 7, the hurricane had cost 57% of oil production in the Gulf of Mexico, and 40% of natural gas production, the report said, adding that 20% of manned platforms and 12% of rigs remained evacuated.
There was much pipeline damage, about 37 platforms in shallow water had been destroyed and four platforms in deep water, including the Mars platform owned by Shell, had suffered extensive damage.
The IEA said, however, that "90% of production could be back on stream in less than the three to six months which these specific facilities are likely to require for replacement/repair".
"Many of the effects are expected to be temporary and readily repairable," it said.
Hurricane damage was likely to cut supply of oil products by 38-million barrels in September, the IEA said, stressing that market forces were compensating quickly for bottlenecks throughout the supply chain.
Organization for Economic Cooperation and Development (OECD) member countries were to meet on September 15 to review the post-hurricane supply situation and decide on emergency supply action, the agency said.
The IEA, created to help industrialized countries deal with energy crises, said its stockpile-release mechanisms had worked after the hurricane in giving markets extra "liquidity" to switch oil, refined products, and transportation capacity in response to demand pressures.
The underlying tone of the report indicated that, excluding the immediate effects of Hurricane Katrina, some of the heat might be going out of the oil market.
This was partly because of an easing of demand pressures in China and Asia where governments were finding that energy subsidies were unsustainable, and there were signs that consumers were changing habits: in Italy, for example, commuters were switching from cars to public transportation.
In some areas of China, energy rationing had been introduced, the report said.
Noting that the hurricane had driven gasoline prices in Europe up by about one third and in Asia by more than 13%, the report said: "It is critical that a response be swift, but also flexible. The initial response is to make available to the market two million barrels per day for 30 days with the emphasis on product supply (particularly gasoline) outside the United States.
"But given that our assessment could be overly optimistic or pessimistic, member countries will meet on September 15 to assess the response."
Markets had reacted "swiftly" to draw spare products from around the world and to switch spare shipping capacity to carry clean oil-product cargoes. Market information had been assisted by an "immense" and rapid collection of data by the U.S. Energy Information Administration.
It was up to the market to continue deciding where crude oil and products were most needed in view of the refining situation and "similarly, the market can also be relied upon as an efficient delivery mechanism," said the IEA, an offshoot of the OECD.
On the underlying demand-supply equation, the IEA said that it had revised down its estimate of the growth of global demand by about 240,000 barrels per day to 1.35 million barrels owing to "a weakening demand picture in many areas." The change was only partly attributable to Katrina.
"OECD demand was much weaker than expected in July. Chinese apparent demand has remained weak in comparison to 2004 and 'other Asia' continues to struggle with the impact of high prices." Demand in Japan was "weaker than expected in July."
The agency held its estimate that demand in 2006 would grow by 1.77 million barrels per day.
It reduced its estimate for global demand this year by 250,000 barrels per day to 83.48 million barrels and next year by 260,000 barrels per day to 85.25 million barrels.
On these figures, demand this year would grow by 1.6% from growth of 2.9% in 2004, and would increase by 1.8% in 2006.
OIL FUTURES LOSE 5 PCT FOR THE WEEK; IEA CUTS DEMAND VIEW
September 11, 2005
SAN FRANCISCO -- Crude futures lost 5 pct for the week to close at their lowest level since mid-August, pressured by a lower oil-demand forecasts as traders eyed the newest storm in the Atlantic and the recovery progress in the hurricane-devastated Gulf of Mexico.
Crude for October delivery closed at 64.08 usd a barrel on the New York Mercantile Exchange, down 41 cents for the session and down 3.49 usd for the week.
In other energy trading, October unleaded gasoline dropped 7.58 cents, or 3.7 pct, to close at 1.9597 usd a gallon. It was down 10.3 pct for the week. October heating oil also ended at 1.8965 usd a gallon, down 3.31 cents for the day and down 9.3 pct from last Friday's close. Both contracts ended at two-week lows.
Katrina's impact on oil demand will be largely temporary, according to a report from the International Energy Agency on Friday.
'Regional oil-product demand will be seriously affected in the near term, but this will be offset by fuel needs for rescue/recovery and rebuilding efforts,' the report said.
Still, it has reduced its Gulf of Mexico supply forecasts by 140,000 barrels a day in 2005 and by 55,000 barrels a day in 2006.
The IEA also reduced its worldwide 2005 demand growth forecast by 250,000 barrels a day to 1.35 mln -- pegging global consumption at an average of 83.48 mln barrels per day.
'Since at least the spring, the International Energy Agency has been forced to acknowledge on a monthly basis that its demand projections were too high,' said Tim Evans, a senior analyst at IFR Markets.
For 2006, the Paris-based agency lowered demand growth by 260,000 barrels a day to 1.77 mln and said global consumption will likely average 85.25 mln barrels.
The IEA blamed the impact of Hurricane Katrina as well as lower Chinese and Indian demand for the weaker consumption estimates.
The agency lowered its Chinese demand growth forecast by 100,000 barrels a day to 220,000. 'Chinese apparent demand continues to be relatively weak, especially when compared to robust economic growth,' the IEA said.
OPHELIA A THREAT?
Oil traders also eyed the latest storm in the Atlantic: Tropical Storm Ophelia.
Traders are 'getting nervous about this new hurricane,' said Phil Flynn, a senior analyst at Alaron Trading. 'Conflicting reports on where this storm will actually track will keep nerves alive and have few wanting to be short over the weekend.'
He added that 'many thought Katrina wouldn't end up being much of a storm and many were horribly wrong.'
Ophelia had a brief stint as a hurricane late Thursday, but may regain hurricane strength Friday evening or Saturday, according to the National Weather Service Friday afternoon.
'Interests from Northern Florida through the Carolinas should closely monitor the progress of Ophelia during the next few days,' the NWS said.
Ophelia 'looks like it will spin around to hit the Georgia-South Carolina border area next week, but natural-gas traders aren't quite ready to count on that, when the outlook could change plenty by Sunday or Monday when trading resumes,' said IFR's Evans.
Meanwhile, operations at oil and natural-gas facilities hit by Hurricane Katrina improved slightly Friday.
As of Friday, about 59.9 pct of daily oil production in the region remained offline, according to the U.S. Minerals Management Service -- that's an improvement from Thursday's 60.1 pct. And around 38.3 pct of daily natural-gas output was still shut in vs. Thursday's 40.2 pct.
A total of 16.2 mln barrels of oil, or 3 pct of yearly output in the region, and 80.4 bln cubic feet of natural-gas, or 2.2 pct of yearly production, has been shut in since August 26, the MMS said.
Katrina significantly reduced U.S. inventories for the week ended Sept 2. Supplies of crude fell 6.4 mln barrels, motor gasoline inventories dropped 4.3 mln barrels and distillate stocks lost 800,000 barrels, the Energy Department reported Thursday.
Royal Dutch Shell said on Friday that 60 pct of total production from the Gulf of Mexico would be restored to pre-hurricane levels in the fourth quarter of 2005. Gulf of Mexico production is at 160,000 barrels a day, a bit more than a third of the first-half average of 450,000 barrels a day, Shell said.
Shell also said its Mars oil and natural-gas production platform may be out for the rest of the year, Dow Jones Newswires reported.
The facility, co-owned by BP PLC, is the most significant known to have been badly damaged in the storm. Mars produces the Gulf Coast's benchmark grade of sour crude, the type most used and imported by U.S. refiners, and pumps out high volumes of natural gas.
Still, in an ironic twist, some analysts predict the market might see a brief mini-glut as refiners, unscathed by Katrina, push their units as hard as they can and tankers stream into U.S. ports brimming with gasoline.
NATURAL-GAS PRICES EASE
Natural-gas futures eased Friday, a day after the Energy Department reported a smaller-than-usual increase in stocks in storage. For the week, it lost 3.7 pct.
On Thursday, the government said natural gas in storage rose 36 bln cubic feet for the week ended Sept 2. Most experts had been expecting the smaller-than-usual increase in supplies due to Katrina. The usual increase for the period is closer to 80 bln.
October natural gas was last at 11.263 mln British thermal units, down 8.4 cents for the session. It was down 42.8 cents from the week-ago close.
Even so, many analysts believe the energy commodity will touch the 15 usd level in the coming months because of reduced output from Katrina-related damage to facilities in the Gulf.
In equities, energy-related shares climbed, with the Philadelphia Oil Service Index reflecting strength in shares of oilfield-services providers.
Meanwhile, gold futures logged a seven-session win to close 1 pct higher for the week.
As for the Reuters/Jefferies CRB Index, the broad measure of commodity-futures markets stood at 323.3 points, down 0.4 pct, on the New York Board of Trade.
STORM STRETCHES REFINERS PAST A PERILOUS POINT
By Jad Mouawad
New York Times
September 11, 2005
[PHOTO CAPTION: Chevron's Pascagoula, Miss., refinery was flooded on Tuesday, Aug. 30, after the hurricane. The refineries are unsure how long repairs will take.]
For the nation's oil refiners, Hurricane Katrina was a disaster long in the making.
Analysts and industry executives had for years feared the consequences of a storm ramming into the country's largest energy hub -- a complex infrastructure that spans most of the coastline between Texas and Alabama, where nearly half of the nation's refineries are located.
Hurricane Katrina confirmed the worst predictions. Wreaking havoc along the coastal states, drowning New Orleans, and leaving many dead, the storm shut down nearly all the gulf's offshore oil and gas production for over a week. Racing to restore operations, the industry has brought about 60 percent of that back.
But even more crucially, it knocked off a dozen refineries at the peak of summer demand, sending oil prices higher and gasoline prices to inflation-adjusted records.
The events of the last two weeks have demonstrated how close to the edge the country's refining system had been operating, even before the storm. Because the last American refinery was built nearly 30 years ago -- with only a single new one now in the works -- the problem is unlikely to disappear quickly.
As a consequence, even though crude oil prices have fallen back to pre-Katrina levels, prices for gasoline, heating oil, diesel, and jet fuel are expected to remain higher than they were before the storm for a much longer period of time.
"There is now a greater realization that we don't have much extra capacity," said Edward H. Murphy, a refining specialist at the American Petroleum Institute, a trade and lobbying group. "It doesn't take a Katrina, but even a smaller event can create a dislocation in the market. Disasters like this can give you a billboard on the need to address this. We need more capacity."
The rapid run-up in oil prices over the last two years has translated into a boon for refiners after many years of meager returns. This year, the refining margin -- the difference between the cost of buying crude oil and selling refined end products -- has exceeded $20 a barrel, far above the long-term average of $6. That has meant record profits for oil companies and refiners and above-average stock performance on Wall Street.
With profits soaring, the nation's refiners are now being blamed by many drivers and politicians for contributing to the run-up in prices. Indeed, to critics of the industry, the higher profits are evidence of a policy to intentionally limit refining capacity to improve the bottom line.
"Oil companies have jacked up gasoline prices through a simple mechanism: reducing inventories and refining capacity," said Jamie Court, president of the Foundation for Taxpayer and Consumer Rights, an advocacy group, whose views are widely shared by industry opponents.
"They are supposed to compete and bring the lowest price to consumers," Mr. Court said. "But the truth is that a small number of oil companies cheat by working together by artificially reducing supplies."
But that argument misses the point, said Bob Slaughter, the president of the National Petrochemical and Refiners Association.
"What's happened can be explained by the higher cost of crude oil, the difficulties in building new refineries, and the disaster that cut right through the heart of the industry," Mr. Slaughter said.
Currently, four major refineries, owned by Chevron, Exxon Mobil, ConocoPhillips, and Murphy Oil, are either flooded or without power, and are likely to be out of commission for several weeks, perhaps months. Together, these refine 880,000 barrels a day, or 5 percent of domestic capacity. "It's very significant," said Colm McDermott, an oil analyst at John S. Herold Inc. The loss is equal to 1 percent of the world's refining capacity. "It's a global market and that's certainly enough to have an impact on a global level."
As many as 15 other refineries, also affected by the storm, are resuming production, but some are still operating at limited capacity.
"There's going to be a lot of pressure on these people to get things up and running and deal with the maintenance issues as they come up," said James W. Jones, a vice president at Turner, Mason & Company, a refining consultancy in Dallas.
Many parts of the industry are recovering rapidly. The most damage offshore was sustained by Royal Dutch Shell, which said Friday that its production, usually about 450,000 barrels a day, would be down by 40 percent through the end of the year.
But even as oil and gas production returns in the gulf, the time that it will take refineries to get back to full speed will be a key factor in determining how long product prices will remain elevated.
Under normal conditions, because of the close proximity of volatile materials, high pressure, and fire, restarting a refinery is a dangerous process that can take anywhere between three to seven days.
In the refinery, oil is heated to around 1,110 degrees Fahrenheit, turned into vapor and then collected at various temperatures, creating products that are further refined to remove impurities, allowing for the production of gasoline, heating oil, diesel fuel, and kerosene.
For the four damaged refineries -- three are in the vicinity of New Orleans, and the fourth is in Pascagoula, Miss. -- restarting will involve a much longer process. First, power must be restored. Once that happens, generators, pumps, and other electrical equipment flooded by brackish water will need to be dried out. Removing salt sediments will add to the ordeal. Then the operators must check that none of their main systems have suffered any structural damage before firing them back up.
So far, none of the refineries have provided an estimate of how long all that will take. In its latest report, Chevron, whose 325,000 barrels-a-day refinery is the largest of the four, said "it will be days before a full estimate of damage is known or when operations can be safely brought back online."
Most Americans now pay more than $3 a gallon for gasoline -- matching inflation-adjusted highs reached after the Iranian revolution in the late 1970's and early 1980's and the equivalent, on a per-barrel basis, to $126. Oil prices, which touched a high of $70.85 a barrel last week, now trade around $64 a barrel, still about $20 short of the record set in 1981.
"If we lose three or four refiners for two or three months, that shortfall is going to be very difficult to make up," said William E. Greehey, the chief executive of Valero, the nation's largest independent refiner. "I don't know how anyone can blame it on us when we've just had the worst natural disaster in the United States' history."
The refining outages prompted an international response from industrialized nations to send emergency stocks of oil and gasoline to the United States to plug the shortfall.
But that is only a temporary solution to a crisis that has been waiting to erupt for years.
Since the 1980's, the number of refiners in the United States has been cut in half. From a peak of 324 in 1981, the industry has shrunk to 149 as the smaller, less efficient, and less profitable operators once protected by price controls closed, leaving mostly larger companies in place.
Refining capacity has fallen about 10 percent, to 17 million barrels a day, while oil consumption rose by 33 percent over the same 24-year period, to 20.8 million barrels a day.
Meanwhile, refiners have been increasing their skill in turning crude into useful products; efficiency improved by 27 percent between 1981 and 2004. Still, the difference must be made up by direct imports of refined products, with gasoline imports now at 1 million barrels a day.
As their numbers dwindled, most remaining refiners expanded their plants and added equipment to process more oil. Many refiners now typically run at 95 percent of capacity, a level that is dangerously high and that has led to a growing number of accidents in recent years.
In March, for example, a blast at BP's Texas City refinery, the country's third-largest, killed 15 and injured 170 people. The company was blamed by investigators with the Chemical Safety and Hazard Investigation Board for "systemic lapses."
Following the agency's recommendation, BP appointed an independent panel last month to review the "safety culture" of its American refining operations.
Only one project to build a new refinery is currently under way. For the last six years, Glenn McGinnis said he has been struggling to line up the permits, funding, and oil supplies to build a refinery from scratch in a remote patch in Southwest Arizona.
"The fundamental reason why there has not been a new refinery built for years is really two reasons -- economics and uncertainty," Mr. McGinnis said.
Traditionally, the profit margin for refineries has averaged about 6 percent, a rate of return too low to encourage much new investment. Added to that is the lengthy process involved in securing the permits from state and federal agencies. "If you take permits, and engineering, and building," Mr. McGinnis said, "you're talking about a 10-year horizon from the time you decide to build to the day the refinery is completed."
Another issue that has slowed expansion, refiners said, was the cost of complying with environmental regulations set in the 1990's under the Clean Air Act. The American Petroleum Institute estimates that refiners have spent $47 billion over the last decade to meet carbon-emission standards and low-sulfur regulations, with more investments needed through 2007. That, refiners say, is money not spent to raise capacity.
It has been cheaper to add refining capacity through acquisitions rather than new projects. Valero recently bought Premcor for $10,000 a barrel of capacity, a price many analysts deemed high. But that is well below the $16,000 a barrel that Arizona Clean Fuels, Mr. McGinnis' project, expects to invest.
Elsewhere in the world, some oil producers are planning to build new refineries. Saudi Arabia is one of them. "We cannot keep producing oil with no refineries," Ali Al-Naimi, the Saudi oil minister, told the industry newsletter Petroleum Argus a few months ago. "There is a limit."
While helpful, such moves abroad would mostly serve to shift the country's increasing reliance on foreign oil producers to a greater dependence on refiners abroad.
"We are going to be importing more products," Mr. Murphy of the American Petroleum Institute said. "That is a certainty if we don't expand our capacity. But the problem there is that you've changed one form of dependency for another."
--Barnaby J. Feder contributed reporting for this article.