The Wall Street Journal: Hurricane Raises Potential For a Global Energy Crisis: Monday 5 Sept 2005

Nearly a week after Hurricane Katrina cut through a main artery of the U.S. energy industry, a large amount of crucial infrastructure remains offline, leaving the world's largest economy and the rest of the globe on the brink of a potential energy crisis.

The Gulf of Mexico coastal region ravaged by Katrina is home to one-fourth of America's oil production, multibillion-dollar floating platforms that were situated far out at 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 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 cut off 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.

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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 returning slowly, and it isn't clear whether it will takes weeks or months to return to anything near normal output levels.

The federal government's decision to release crude oil from the Strategic Petroleum Reserve is helping some crude-choked refineries resume normal operations. But ultimately restoring sufficient gasoline production appears to rely most heavily on repairing the refineries, not adding more crude oil to the market.

An economy-walloping energy shock in the U.S., which consumes a quarter of the world's oil and whose demand for foreign goods is underpinning world-wide growth, would be felt around the globe.

Economic forecasters surveyed by Macroeconomic Advisers LLC, a St. Louis forecasting firm, estimate that the effects of Hurricane Katrina will reduce the growth rate of gross domestic product, on average, between 0.5 and 0.7 percentage point in the third and fourth quarters of this year. (See related article.) Before the hurricane, the forecasters surveyed by the firm were anticipating that the U.S. economy, which the government estimates grew at a 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.

Price Pressure

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 at full capacity 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 gasoline prices skyrocket at the pump 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, or 57 cents a liter, 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 on Friday, 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 at full capacity. Russia, the world's No. 2 producer, is producing all it can. Even Saudi Arabia, the top exporter, and its fellow members of the Organization of Petroleum Exporting Countries can do little to alleviate the emerging crisis. OPEC 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, Czech news agency CTK said drivers lined up at filling stations around the country after prices jumped by the equivalent of 14 cents per liter overnight, Reuters reported.

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, the Associated Press reported. It 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 nation, 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, a California Democrat, 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, Mississippi, 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 Michael Barrett, a Chevron spokesman, although the terminal is open to accept tankers carrying gasoline and other products.

Mr. Barrett wouldn't provide an estimate of how long it would take to restart. But officials with the Mexican national oil company, Petroleos Mexicanos, or Pemex, which is 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 Co.; a joint venture of Exxon Mobil Corp. and Petroleos de Venezuela SA, the Venezuelan 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, Louisiana, plant, but spokeswoman Mary Rose Brown said, "We're still in the middle of a relief effort for our own employees." Ms. Brown said 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, Louisiana, refinery should be running at full capacity by today.

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.

'State of Near Paralysis'

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 more than 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 fell 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 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 on 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 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 90 million cubic meters 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 123 million cubic meters 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. Several offshore natural-gas pipelines had standing orders for customers on several pipeline branches not to pump any gas into the system.

Write to Russell Gold at russell.gold@wsj.com and Thaddeus Herrick at thaddeus.herrick@wsj.com