Oil Industry Waits to Assess Storm's Impact

By Steven Mufson
Washington Post Staff Writer

Relief that Hurricane Gustav's high winds were less severe than expected drove crude oil prices down 4 percent in electronic trading yesterday to $111.23 a barrel, the lowest level since mid-April, as traders assumed that the oil and gas industry's offshore platforms in the Gulf of Mexico would weather the storm.

But the hurricane highlighted the fact that threats to U.S. energy security need not come from abroad. With a quarter of the nation's crude oil production coming from the Gulf's waters, the United States has drilled offshore to sustain domestic output but made itself more vulnerable to the vagaries of the weather.

Moreover, the industry was still assessing Gustav's impact, especially on the nation's oil refineries; a dozen refineries with more than 12 percent of the nation's capacity were still shut down and 10 others were operating at reduced levels, the Energy Department said. If flooding or prolonged power outages affect some refineries, then gasoline prices could increase in the coming days or weeks.

Service stations throughout the evacuation area were closed, and many had run out of fuel after motorists scrambled to fill up their tanks as the storm approached.

"With the downgrading of Gustav to a Category 2 Hurricane this morning, concerns over witnessing a repeat of the devastating impacts inflicted by Katrina and Rita in 2005 have begin to subside," said Frank Verrastro, an energy fellow at the Center for Strategic and International Studies. But, he added, "as the storm moves onshore, high winds, storm surges, rain and flooding could still affect refinery operations."

To guard against damage and spills offshore, the industry has shut down more than 1.2 million barrels a day of oil production in the Gulf of Mexico, nearly as much as what the United States imports from Saudi Arabia, and 12 percent of the country's natural gas production. In addition, the Louisiana Offshore Oil Port, the biggest U.S. oil import terminal, has been closed since Saturday.

That disruption prompted Louisiana Gov. Bobby Jindal (R) to appeal yesterday to President Bush to release oil supplies from the Strategic Petroleum Reserve, which was created in the wake of the 1973 Arab oil embargo and which holds more than 700 million barrels of crude in underground salt caverns in Louisiana.

"A disruption is a disruption," said Kenneth Medlock, an energy fellow with Rice University's Baker Institute. "It doesn't matter if it's because of a war in the Middle East, a disruption in Africa or a hurricane in the Gulf."

But releases of crude oil from the reserve would not do much good if refineries remain closed.

In addition, the Bush administration has resisted calls by Democratic lawmakers to release supplies from the reserve to dampen prices. Bush has asserted that it should be used only to safeguard national security in an international crisis.

Verrastro said that it might be more important for the Environmental Protection Agency to issue a temporary waiver on fuel specifications and for the Transportation Department to waive restrictions on how long truck drivers can stay on the road so that deliveries of gasoline could be brought to the Gulf Coast from refineries elsewhere around the country.

Most oil experts were guardedly optimistic about how offshore production facilities would fare. During hurricanes Rita and Katrina, the offshore oil and gas installations that suffered the worst damage were the oldest, and many of those were not rebuilt. Newer platforms are able to withstand stronger storms.

However, in the earlier storms, underwater pipelines were also damaged, and that could delay the restart of offshore production even if platforms are in satisfactory condition.

Kevin Kolevar, assistant secretary of Energy, said that a category 3 hurricane was well within the design specifications for offshore drilling platforms and that production could resume quickly if there is no significant damage to platforms or undersea lines. "We don't see any indication of [significant damage] at this time, but we'll learn more tomorrow as companies start repopulating facilities," Kolevar said.

"The onslaught of Gustav reemphasizes the importance of the Gulf of Mexico energy complex and the importance of building resilience and flexibility into our energy security system," said Daniel Yergin, energy historian and chairman of Cambridge Energy Research Associates. "That means diversification."

But the United States has become increasingly dependent on the Gulf Coast. Forty percent of the nation's oil refineries are along the coast.

Some individual companies rely heavily on production in the Gulf. Shell Oil, the U.S. affiliate of Royal Dutch Shell Group, gets about 80 percent of its U.S. production from the Gulf of Mexico. So far this year, BP has been producing an average of 290,000 barrels a day in the Gulf, a company official said.

Oil companies were playing a game of wait and see yesterday. BP spokesman Darren Beaudo said the company hoped to fly over the eight offshore platforms it operates in the Gulf. "Tomorrow will give us more information," he said.

Although oil traders breathed a sigh of relief yesterday, Lehman Brothers' oil analysts warned last week, "even if this storm misses major infrastructure in the Gulf Coast, other storms pose risks this season."