Gas Prices Hinge on Rita's Whims

Hurricanes underscore need for more refineries

Published in CSP Daily News

HOUSTON -- Production losses from the shutdown of Gulf Coast refineries in expectation of Hurricane Rita's arrival, as well as damage from the storm itself, could ripple through the nation's gasoline market for weeks, said the Wall Street Journal.

With four refineries knocked out of operation by last month's Hurricane Katrina, the new shutdowns add up to about a quarter of U.S. fuel-making capacity going offline. But Rita and Katrina could be a boon for one would-be refiner in Arizona and a turning point in U.S. energy policy, the Journal said.

Under a best-case scenario, the United States could lose about two million barrels a day of refinery output until the middle of next week, after which it could return relatively quickly if damage is minimal, Roger Diwan, an analyst at consultancy PFC Energy, told the newspaper. That would force retail prices up 30 cents to 40 cents a gallon, before falling again, perhaps even to below pre-Rita levels, he said.

But the bad scenario is that three or four refineries get badly hit, said Diwan late last week. That would mean $3.50-a-gallon gasoline for some time.

Red Cavaney, president of the American Petroleum Institute (API), said port facilities accounting for 10% to 15% of U.S. oil imports could be affected by the storm. The Louisiana Offshore Oil Port, with its capacity to unload about one million barrels of imported oil a day from tankers, was closed. The federal Minerals Management Service said about 92% of oil production and 66% of natural-gas production in the offshore Gulf had been shut off, in preparation for the storm and from Katrina.

Samuel Bodman, secretary of the Department of Energy, said last week that if Hurricane Rita interrupted oil supplies, the federal government is prepared to use more oil from the Strategic Petroleum Reserve (SPR).

Still, Katrina showed spare crude oil will not help consumers fill up their cars if damaged refinery capacity limits the nation's ability to process it, said the report. Cavaney expressed optimism that Texas refineries, even if they sustained a direct hit from Rita, might still come back quickly. We took the brunt of the most severe hurricane dead on, he told the paper, noting that while three of the four refineries in the New Orleans area are still shut down because of electricity outages in their areas, not damage to refinery equipment.

About 5% of the nation's refinery capacity remains offline from Katrina, which tore through a major refining region. Because of the network of pipelines that carry refined products like gasoline and jet fuel from the Gulf Coast area to the rest of the nation, the disruptions rippled through the South and up the East Coast. The disruptions failed to turn into widespread shortages. Both Katrina and Rita come at a time when commercial inventories of gasoline are low, said the report, increasing the likelihood of big fluctuations in the prices consumers pay at the pump.

Meanwhile, Phoenix-based Arizona Clean Fuels LLC has been trying since 1989 to build a refinery in its home state. But no refinery has been built in the United States since 1976 due to regulatory barriers, relatively low profit margins, scant investor interest and a not-in-my-backyard mentality by communities. As a result, 47% of American refining capacity is located around the Gulf of Mexico. The hurricanes have exposed that concentration as a vulnerability of the nation's energy supply system. Policymakers and investors now are warming to the notion of a new refinery in Arizona, the report said.

[Katrina] was a tragic event, but there may be some opportunities here for us, Glenn McGinnis, the company's CEO, told the newspaper. Let's just say we're making progress.

Congress recently passed and President Bush has signed an energy bill that did not focus on refineries. Now, politicians are scrambling to craft legislation that would ease the path for projects like that of Arizona Clean Fuels. One of McGinnis's senators, Jon Kyl (R-Ariz.), is among those working on tax proposals that would allow investors a faster writeoff for investments in new or expanded refineries. And Representative John Shadegg (R-Ariz.) introduced a bill to streamline the refinery permitting process and give refiners risk insurance similar to that offered to nuclear-power plants.

There is no margin for error in our energy supply, Shadegg said in a statement announcing the bill, which has 35 cosponsors. America needs more alternative energy sources. But in the short term, we must add refining capacity or we will continue to face extreme price fluctuations.

But McGinnis still faces hurdles, said the report, such as finding investors and satisfying environmental concerns. In the three weeks since Katrina, he said he has talked to investment bankers and oil company executives in the United States and abroad. There has been interest in his project, but no commitments; Arizona Clean Fuels needs $2.5 billion. So far, according to McGinnis, a group of local investors has raised about $30 million.

The economics of this business is all about payout, said McGinnis, who said investors, knowing it will take five years or more to build the plant, may have other options for a quicker return on their money.

Investors may also know that Arizona Clean Fuels needs several federal permits to start operations. One is an environmental impact statement assessing how the refinery will affect nearby federal properties, including an Air Force base. For the pipeline that will bring in crude oil from Mexico, it will need permission from the Defense Department to cross a Marine air station and a special Presidential permit from the State Department, which sanctions structures that cross international borders.

State officials have been upbeat, the report said, especially after one of the two pipelines that bring in gasoline and other oil products from refineries in Texas and California broke in August 2003, propelling gasoline prices to near $5 a gallon. A poll taken after showed 90% of Arizonans felt their state needs an oil refinery.

The Shadegg bill would help McGinnis overcome environmental objections. The legislation would streamline the permitting process for refiners by loaning them experts from the U.S. Department of Energy, which would also get the power to impose deadlines on other federal agencies, and on the time spent on appeals, the Journal said.

The message of the hurricanes seems to be getting through. As reported in CSP Daily News, U.S. Representative John D. Dingell (D-Mich.) has sent a letter to Secretary of Energy Samuel W. Bodman concerning the possible expansion of U.S. refining capacity through the construction of new refineries. Dingell cited Hurricane Katrina-related and other supply disruptions, high gasoline prices and growing demand as reasons to explore the idea.