Oil refineries, rigs preparing for hurricane

/ Source: The Associated Press

Drivers, homeowners, airlines and businesses will end up paying higher fuel bills if Hurricane Rita magnifies the damage last month’s Hurricane Katrina inflicted on the oil-refining industry.

More refineries and oil and natural gas rigs along the Gulf Coast blinked off Thursday as Rita bore down on the heart of the nation’s energy infrastructure.

About 5 percent of the nation’s oil-refining capacity is still out from Hurricane Katrina’s sweep through Louisiana and Mississippi. In the Houston area, representing another 13 percent, every major refinery was closed or in the process of shutting down by Thursday because of Rita, expected to hit shore Saturday.

“It’s potentially a bigger threat than Katrina because there is more refining capacity in the Houston area,” said Bob Slaughter, president of the National Petroleum & Refining Association. “This is a double whammy for the industry — it’s an amazing thing to contemplate.”

Larry Goldstein, president of the Petroleum Industry Research Foundation, estimated that precautionary shutdowns would cut refining capacity by more than 3 million barrels of oil a day — about one-seventh of the U.S. total — for a week. Any damage to the plants would compound the loss, he said.

To make up the shortfall from Katrina, the United States has imported more gasoline and other refined products from Europe. But the imports are costly, and further cuts in capacity due to Rita are likely to drive up prices, experts said.

Tom Kloza, an analyst with the Oil Price Information Service of Wall, N.J., said pump prices along the Gulf Coast may soon jump above $3 a gallon because wholesale gasoline prices in the region have climbed by about 75 cents in the past week to $2.50 a gallon before taxes and dealer markup. Motorists in the East and Midwest would see smaller increases, he said.

Ken Stern, managing director of FTI Consulting, which advises refineries on business strategy, predicted $4 a gallon at the pump for gasoline within two weeks.

“In an environment where capacity is constrained and demand continues pretty much unabated, that’s a formula for significantly higher prices,” Stern said.

After an early jump, oil prices eased at midday Thursday on news that Rita had weakened slightly, to a Category 4 storm. But futures for natural gas, a key fuel for heating homes and producing electricity, continued climbing past $13 per 1,000 cubic feet, nearly twice the level of a year ago.

Inside Texas refineries, crews were conducting what company officials termed orderly shutdowns of the massive machinery that turns crude oil into gasoline, jet fuel, heating oil and all the other petroleum products that consumers and businesses use every day.

After watching the storm’s path through the Gulf of Mexico on Wednesday, Exxon Mobil Corp. decided Thursday morning to shutter the largest refinery in the country, at Baytown, Texas, and another in Beaumont, Texas.

That brought to at least 11 the number of Texas refineries hunkered down for the storm, including the nation’s third largest, a BP PLC plant in Texas City, Texas.

Valero Energy Corp. began closing three refineries and cut production at two others late Wednesday. Royal Dutch Shell PLC, Marathon Oil Corp., ConocoPhillips and Motiva Enterprises Inc., a joint venture between Royal Dutch Shell and Saudi Refining Inc., also shuttered refineries that stretched from Houston to the Louisiana border.

In Louisiana, ConocoPhillips closed its Lake Charles refinery.

Unlike New Orleans, Houston is above sea level, but not by much, and many of the refineries are close to water. A Houston engineering firm, Dodson & Associates Inc., concluded in a 2001 study for Harris County that a direct hit by a Category 5 hurricane would flood five big oil refineries, 36 chemical plants, the Houston port, the Johnson Space Center and an area twice the size of New Orleans.

Even as a Category 4 hurricane, Rita could cause a huge storm surge — 20 to 25 feet instead of 30 to 34 feet, said Chris Johnson, a water engineer who worked on the study. Could the government or refineries have done more to protect themselves?

“We can build a 50-foot concrete wall around a refinery, it just costs a whole lot of money,” Johnson said. “That kind of storm is extremely rare. At some point, somebody said, ’This is a risk I can live with.”

Some experts said the Houston refineries would withstand the storm but that other parts of the energy supply chain were more vulnerable, including electricity needed to run the plants.

“It’s not so much that the refineries themselves will be damaged, because we’re talking about large plants built of concrete and steel,” said Stern, the refinery consultant. “Pipelines and power lines have exposure to the elements.”

Fuel supplies were pinched after Katrina because two pipelines that carry gasoline, diesel and jet fuel from the Gulf Coast to the East Coast were closed. Those pipelines are open now, but the Explorer Pipeline Co. on Wednesday evacuated workers and shut down a line that carries fuel from Port Arthur, Texas, to Hammond, Ind.

Explorer President Tim Felt said the company would send out crews with diesel generators and chain saws to inspect and restart the pipeline after Rita passes.

The Texas Eastern Products Pipeline Co. link between refineries in Texas City and New York also closed, as did a Centennial Pipeline LLC line between Beaumont and Creal Springs, Ill., and a Seaway Crude Pipeline Co. line that takes Gulf crude oil to Cushing, Okla.

In the Gulf of Mexico, evacuations continued from drilling rigs and oil and gas platforms. The U.S. Minerals Management Service said Thursday that nearly three-fourths of the manned platforms had been cleared and oil production was only at about 8 percent of normal — a loss of 1.38 million barrels of oil a day.

Since Katrina evacuations began Aug. 26, the storms have cut 28.5 million barrels of oil production, or 5.2 percent of the Gulf’s annual production, the agency said.

Energy Secretary Samuel Bodman said in a CNBC interview that the government will release more of its emergency oil supply as needed.