Congress warned of limits to gasoline price relief

Sept. 7, 2005
US gasoline markets already were tight when Hurricane Katrina devastated the Gulf Coast, and recovery from the storm's damage will only moderately relieve the resulting price spike, government and industry leaders told two congressional committees.

By Nick Snow
Washington Correspondent

WASHINGTON, DC, Sept. 7 -- US gasoline markets already were tight when Hurricane Katrina devastated the Gulf Coast, and recovery from the storm's damage will only moderately relieve the resulting price spike, government and industry leaders told two congressional committees.

"We have an oil distribution system in this country that is based on 1970s production and 1970s demand. It needs to be brought up to date," House Energy and Commerce Committee Chairman Joe Barton (R-Tex.) said Sept. 7 as he opened his committee's hearing on the hurricane's impact on the Gulf Coast.

Other committee members called the storm's domestic oil products disruption a wake-up call. But the country's top government energy forecaster maintained that markets already were tight before Katrina made landfall.

"With the current tight global petroleum market, gasoline and distillate prices have risen sharply. How far and how long they remain elevated will depend on the severity of [the hurricane's] damage to petroleum facilities," Guy F. Caruso, the US Energy Information Administration's leader, told the Senate Energy and Natural Resources Committee Sept. 6.

Oil and product prices were breaking records before the storm, he pointed out. In its weekly nationwide gasoline price survey on Aug. 29, EIA reported that unleaded regular retail prices averaged $2.61/gal nationwide, 73¢ more than a year earlier, Caruso said in his written statement.

As he testified, EIA released its latest weekly report, with an average nationwide unleaded regular average retail price of nearly $3.07/gal, 46¢ more than on Aug. 29 and $1.22 higher year-to-year. Diesel fuel's nationwide average retail price was nearly $2.90/gal, up 31¢ for the week and $1.03 year-to-year.

Katrina arrived during the natural gas shoulder season between heavy demand for summer cooling and for winter heating, Caruso told the House hearing on Sept. 7. "Gas in storage remains above normal. However, disruptions of injections due to lost Gulf of Mexico production will have an impact," he said. EIA expects gas prices to average $11-13/MMbtu during the fourth quarter.

Before Hurricane Katrina, spare crude oil production, refining, and transportation capacities that existed for more than a decade before 2003 fell more quickly than EIA and other analysts expected, Caruso continued.

"Little spare capacity, both upstream and downstream, not only supports higher prices but they also add to price volatility, since any upset to supply-demand balances regionally cannot be resolved quickly. Restoring spare capacity will not be easy or rapid because an increase in capacity takes time and investment, and growing demand will require capacity increases just to maintain current cushions, which suggests that high prices and potential volatility will be with us for some time," Caruso said.

Refining effects
National Petrochemical & Refiners Association Pres. Bob Slaughter said the storm closed refineries processing 2 million b/d, or 12% of the nation's 17 million b/d of total refining capacity. But its total impact reached 3.4 million b/d, or 20% of total processing capacity, as refineries in Texas, Tennessee, Alabama, and Louisiana reduced runs, and Midwestern plants as far from the Gulf Coast as Catlettsburg, W.Va., and Robinson, Ill., lost feedstock due to the closure of the Capline crude oil pipeline.

"Recent reports indicate that many of these refineries are either up and running or anticipate start-up as early as this week. But, unfortunately, there are some refineries representing a significant amount of capacity that will remain shut for an undetermined period," Slaughter told the Senate committee.

Crude and product pipelines closed by the storm are operating again, he continued. "Serious problems remain, however, due to the significant loss of product and crude volumes which would have been shipped on these lines last week," said Slaughter. "In addition, it remains unclear when many, if not most, of the refineries impacted directly by Hurricane Katrina in the Gulf can return to service.

Problems with wind and water damage, electricity supply, and other infrastructure remain to be addressed despite the best efforts of facility owners and operators. Thus, although some of the affected refineries may restart and return to capacity or near-capacity levels this week, there are indications that several facilities may be out of service for a longer period."

Refiners are committed to operating these facilities as soon as possible, "but employee safety and overall safe start-up and operation concerns are paramount. Significant flooding and damage still affects some facilities. However, some refiners with operating facilities have indicated that they will be able to ramp up production from currently reduced levels at refineries near the affected areas, which should have a positive impact on product supplies," the NPRA official said.

Upstream responses
As Gulf of Mexico oil and gas producers evacuated offshore platforms and tried to secure drillships before Katrina, the US Minerals Management Service implemented its regional Continuity of Operations Plan (COOP) and moved key personnel to Houston. Those employees will move back in coming weeks to help restore lost production, according to Rebecca W. Watson, the Interior Department's assistant secretary for land and minerals management.

"Our focus now is to ensure that the offshore oil and gas operations are brought online safely and as soon as possible. Progress is being made," she told the Senate committee. When Katrina roared through the Gulf on Aug. 29, 615 offshore platforms and 90 drilling rigs had been evacuated.

As of Sept. 7, MMS reported 163 platforms and 16 rigs remained evacuated. Shut-in oil production totaled 860,568 b/d, or 57.37% of total gulf Outer Continental Shelf capacity, while the 4.035 bcfd of shut-in gas production represented 40.36% of capacity.

Producers and the MMS also used lessons learned from Hurricane Ivan last year to prepare for Katrina, Watson said. Specific changes included tightening bolts and strengthening clamps that secure drilling systems on floating production platforms, new evacuation reporting requirements, contracts for six new engineering and technical studies of operational and design flaws revealed by Ivan, and consultation with the American Petroleum Institute and other industry groups on hurricane preparedness.

"A full assessment following hurricane Katrina will require several more days and will require an integrated view of production and drilling facilities, ports, electricity, availability of repair equipment, availability of workers, and potentially other factors," Watson said. "Crews began to reboard platforms by [Aug. 31]. As to be expected, many production and exploration facilities sustained significant damage, but early reports indicate that many facilities could come back on line in days and weeks rather than months. Many of the deepwater high output facilities appear to have survived with minimal damage."

Katrina's impacts went beyond Ivan's, however, as many onshore production support facilities were damaged. "These facilities provide vital support for the offshore oil and natural gas industry. However, many do not have electricity, are inundated with water, and sustained damage from hurricane winds. These support facilities are important jumping off points for industry workers and MMS inspectors to conduct pipeline and structure repairs, and their availability will be a key factor in getting production online and onshore," Watson said.

Downstream capacity
Several Democrats on the House Energy and Commerce Committee charged Sept. 7 that integrated oil companies and independent refiners have not aggressively invested in increased capacity. "Why not more refineries? The answer is profit margin. Fewer refineries means more profits," said Tom Allen of Maine.

"The industry doesn't want to build more refineries because it makes more money the way things are," said Lois Capps of California. "If we don't do something about our insatiable appetite for motor fuels, shoveling more tax breaks to the industry won't do any good at all. The nation had high gasoline prices before Katrina, and it will have them after its impacts dissipate."

Slaughter noted in his Senate statement that there currently are 148 refineries owned by 55 companies in 33 states with roughly 17 million b/d of capacity, down from a 1981 level of 325 refineries with 18.6 million b/d of capacity. The result, he said, is that US refining capacity has dropped 10% while gasoline demand has climbed 20%.

"No new refinery has been built in the United States since 1976, and it will be difficult to change this situation. This is due to economic, public policy, and political considerations, including siting costs, environmental requirements, a history of low refining industry profitability and, significantly, 'not in my backyard' (NIMBY) public attitudes," the NPRA official said.

While many existing refineries have increased their capacity, some proposed capacity expansions can become controversial at state and local levels, "even when necessary to produce cleaner fuels pursuant to regulatory requirements," Slaughter said. "We hope that policy makers will recognize the importance of domestic refining capacity expansion to the successful implementation of the nation's environmental policies, especially clean fuels programs."

He said the Bush administration's New Source Review reform program would provide one tool to help add and update capacity. "NPRA wants to recognize a provision in the recently enacted energy
legislation that will help encourage additional refining investment," said Slaughter. "The provision allows 50% expensing of the costs associated with expanding a refinery's output by more than 5%. The refiner must have a signed contract for the work by Jan. 1, 2008, and the equipment must be put in service by Jan. 1, 2012."

Asked at the Sept. 7 hearing in the House why investors aren't attracted to refining despite recently robust profits, David K. Garman, US energy undersecretary for energy, science, and environment, replied, "I would imagine that people would not want to put large amounts of capital at risk with so much uncertainty."

Department of Energy officials have watched, "with some amazement, as a potential refinery project in Arizona has attempted to be built for more than a decade and investors have come and gone," he said. "Clearly, something needs to be done, and we'll be happy to work with the committee on this."

Garman said, "History has shown us that anyone trying to put a new energy facility of any kind—electricity, LNG, or refining—faces a lot of local opposition. Investors tread lightly in that realm as a result. If the first new US oil refinery in 30 years gets built, it will send a strong message to investors."