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The Wall Street Journal: Oil Industry Embarks on Recovery: Tuesday 6 Sept 2005

By THADDEUS HERRICK in Houston, RUSSELL GOLD in Austin, Texas, and STEVE LEVINE in Grand Isle, La.
September 6, 2005; Page A2

Though still seriously hobbled by Hurricane Katrina, the vast and crucial Gulf Coast energy infrastructure showed signs of recovery yesterday, as some refineries worked to restart and the price of oil in overseas trading fell to near pre-storm levels.

But the world remained vulnerable to a potential energy crisis. Yesterday, AAA, formerly the American Automobile Association, reported that the average U.S. price for regular unleaded gasoline reached about $3.06 a gallon -- up from $2.307 a month before -- which matched gasoline's March 1981 record in inflation-adjusted terms. Analysts warned that prices could push still higher before emergency imports from overseas reach U.S. markets.

The region ravaged by Katrina is home to about a quarter of America's oil and natural-gas production, pumping platforms far out to sea, refinery complexes that turn crude into gasoline, and pipelines linking them all. The storm temporarily closed down about two million barrels a day of oil-refining capacity, resulting in the loss of one million barrels a day of gasoline output representing 10% of U.S. capacity.

While capacity representing 5% of U.S. demand appears likely to restart in coming days and weeks, four refineries that represent the other 5% will be offline for at least a month. One of them is Exxon Mobil Corp.'s 185,000 barrel-a-day plant in Chalmette, La., co-owned by Petróleos de Venezuela, which the company acknowledged yesterday will likely be out of service for "months."

To compensate for the lost production, Exxon Mobil officials said the company is diverting about a million barrels of gasoline production from its overseas refineries in Europe and Asia to ship to the U.S. But analysts expect sustained pressure on gasoline prices until the additional imports arrive.

"We may see another week or two of increases," said Doug MacIntyre, an analyst with the U.S. Energy Information Administration.

The disruption is emerging as a political storm for the oil industry as well, as prices at the pump soar at a time of banner profits for producers and refiners. Refiners, which were already enjoying strong results amid rising prices and continued demand, are expected to see even more extraordinary profit margins. With gasoline prices rising while crude-oil prices stay steady, Credit Suisse First Boston raised its estimate for third-quarter U.S. Gulf refining margins -- the gross profit margin earned from refining oil into gasoline and other products -- by 67%, to $15 a barrel from $9 barrel.

The governors of five U.S. states issued a letter requesting that President Bush prevent oil companies from profiting at the public's expense. Congress, too, is pressing the matter with hearings on gasoline supplies and other Gulf-related energy measures this week.

"There are going to be questions about what major oil companies are doing with all of the resources they're accumulating," said Sen. Pete Domenici, a New Mexico Republican who is chairman of the Senate Energy Committee. "They can't escape that."

Though some service stations around the U.S. were without fuel over the Labor Day weekend, many Americans hit the road as usual, as worst-case scenarios of shortages failed to emerge. At a highway rest stop in Kennebunk, Maine, Chris Cheseborough, a 24-year-old from Boston traveling with three friends, said he considered canceling Labor Day travel plans but decided a summer weekend at Maine's Sebago Lake "is still worth it," even if gas costs $3.25 a gallon. He said the rest-stop price was lower than most places he had seen -- including a high of $3.60 a gallon.

The extent of the gasoline-price shock will depend in part on whether Americans conserve fuel amid the outages. The blow to the Gulf of Mexico has led to long lines at filling stations and outright shortages in some places. Analysts said there was some evidence of motorists topping off their tanks between last Tuesday and yesterday. But they said they doubted panic by consumers would persist as it did during the oil shocks of the 1970s and early 1980s.

Tom Kloza, chief oil analyst at the Oil Price Information Service, said he expects a sharper post-Labor Day drop in demand than in previous years, when gasoline usage averaged about nine million barrels a day. Instead, Mr. Kloza predicted that high prices will push gasoline demand down to between 8.5 million and 8.8 million barrels a day this fall, "at least on a temporary basis."

But Mr. Kloza said that if gasoline prices fall back to between $2.50 and $2.99, that "might provoke a continuation of the behavior that got us into this mess," with demand returning to as high as 9.5 million barrels a day next year.

Hurricane Katrina's strong winds appear to have caused considerably more damage than did last year's Hurricane Ivan. Ivan destroyed seven fixed platforms in the Gulf and damaged another 24. The U.S. Coast Guard yesterday said that 26 platforms were missing after Katrina and about another 20 sustained damage.

A number of offshore platforms -- which either pump oil and gas or serve as pipeline hubs to move the fuel to shore -- remain idled because crews have been unable to assess damage to pipelines. One of the hobbled deep-water platforms, Royal Dutch Shell PLC's Ram Powell, is capable of sucking 60,000 barrels of oil and 200 million cubic feet of natural gas a day, but hasn't been able to restart because of pipeline problems.

After Ivan, damage to the pipelines turned out to be the hardest problem to fix. The sea bed off Louisiana has large ledges of mud and silt, and hurricanes can trigger underwater mudslides that can snap pipelines. Katrina's pipeline damage appears to be substantial, but it is too early for definitive reports.

The best indication of the damage is the U.S. government's Minerals Management Service daily tally of how much oil and gas production has been brought back into service. Yesterday, the MMS said 70% of the Gulf of Mexico's oil output -- a little more than one million barrels a day -- and 54% of its gas -- about 5.2 billion cubic feet a day -- were still closed off because of Katrina. Since the beginning of the hurricane season, about 2.9% of annual Gulf output has been lost.

The impact of the refinery outages may be muted by the International Energy Agency, which Friday agreed to release two million barrels a day of crude oil, gasoline and other fuels to the world market from member nations' strategic stockpiles over 30 days. That is equal to about 2.4% of daily world consumption. In response, gasoline futures fell nearly 23 cents in New York trading on Friday to settle at $2.18 a gallon.

Yesterday, London Brent crude closed down $1.22 at $64.84, close to levels seen before Katrina disrupted U.S. Gulf oil production and refining operations. In the U.S., where markets were closed yesterday for Labor Day, crude finished at $67.57 on Friday, down $1.90.

In Grand Isle, Police Chief Euris DuBois, who has sat in on planning meetings with oil-company officials, said deep-water oil platforms and underwater pipelines linked to them are severely damaged. "It's just a mess," Mr. DuBois said.

The pipeline damage is exacerbated by the apparent flattening of important intermediary towns in the oil system, such as the coastal town of Empire. Thus oil companies will probably build a temporary pipeline loop to the west from the platforms while the lines and towns in the east are repaired, said Brad Pregeant, a supervisor at the Grand Isle Shipyard, which is playing a large role in assessing and repairing damage to the oil facilities.

Oil companies were flying helicopters to the platforms to assess the damage Sunday, but waterways were empty of traffic. Yet there were signs of defiance. "Fourchon will be back," read one sign, referring to the local port.

Brent Savoie, who runs a local boating service for the oil industry, said his men were preparing a barge with oil-spill equipment for use in Venice, at the state's far southern reaches. He said the men were largely on their own, however, since there were no phones to call out. "It felt like a primitive Flintstone age," he said.

--William M. Bulkeley and Susan Warren contributed to this article.

Write to Thaddeus Herrick at, Russell Gold at and Steve LeVine at

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