Flooding on the Mississippi River and the upcoming start to Atlantic hurricane season have drawn U.S. refineries into
the spotlight, raising the risks for operational disruptions at a time when retail prices for gasoline and diesel stand near record levels.
The gasoline market showed its concern earlier this week that flooding along the Mississippi River may prompt refinery closures and delays of petroleum
transports in the region, with gasoline futures prices scoring a Monday-to-Tuesday climb of more than 9%.
But, in a sign of the volatility to come, gasoline futures as of Thursday had given all of those gains back, as traders tried to gauge the risks for
the nation’s refinery production, just weeks ahead of the traditional start of the summer driving season at Memorial Day weekend.
There are 11 refineries in Louisiana, representing 2.5 million barrels per day or 13% of total U.S. refining capacity, that are “vulnerable to shutdown
later this month, should the flooding reach them,” according to Brian Milne, Telvent DTN’s refined-fuels editor.
Torrential rains in recent weeks have caused the Mississippi River to reach water levels not seen since the 1920s and 1930s, with the flood crest
expected to reach New Orleans in less than two weeks.
And the flooding threat comes at a particularly bad time for the petroleum industry.
Total U.S. motor gasoline stocks of 205.8 million barrels, as of the week ended May 6, stand at their lowest since June 2009, according to data from
the Energy Information Administration.
And the average retail price for regular gasoline climbed to $3.984 a gallon Thursday, from $3.962 a day earlier — representing a 38% jump from a year
ago, according to AAA’s Daily Fuel Gauge Report. It’s just a few cents shy from the $4.114 record seen on July 2008.
Diesel-fuel prices have also climbed 33% from a year ago to average $4.141, AAA data showed — around 73 cents short of the July 2008 record price.
“Refined products are very concentrated in the Gulf Coast, and it’s the cost of doing business in an area that has geographic benefits to its
location,” said Neal Ryan, a managing partner at Ryan Oil & Gas Partners LLC.
“While post [Hurricanes] Katrina and Rita, everyone is much more ready to react and protect, there are just a number of unknowns that can never be
removed in a catastrophic event,” he said.
Watching and Waiting
For now, concerns over potential flooding disruptions to major refineries have eased, even though the threat remains.
Refineries that comprise around 13% of total U.S. capacity are near the Mississippi River, and “presumably at some risk for reduced or suspended
operations due to flooding,” said Daniel Morrison, managing director and senior exploration and production analyst at Global Hunter Securities.
Unlike Katrina, which left an indelible mark on the oil and natural-gas industry in 2005, “restarting these facilities in the wake of the flood, if
necessary, should take days, rather than the weeks we saw after Katrina,” he said.
So, “resulting supply shortages, if any, and associated high prices for all refined products should be a relatively short-lived event,” Morrison said.
Besides, Katrina and Rita may have helped the industry better prepare for certain disasters.
After the hurricanes, Valero Energy Corp., North American’s largest independent refiner and marketer, for example, implemented changes at its plants to
make them more resistant to flooding, including moving electrical equipment higher, said Bill Day, a company spokesman.
“We have learned important lessons in the aftermath of huge storms like Katrina an Rita,” he said. “We applied those lessons and the same kind of
preparations at our Memphis refinery.”
Overall, the Mississippi River flooding is not quite to the level of “hurricane proportions,” but offers a potential, similar “act of God” impact, said
Matt Parry, chief economist at energy consultancy KBC. “At the moment the markets are so jittery, a refinery operator having a sneezing fit would be
enough to send prices skyrocketing.”
Acts of Nature
As news of flooding develops, however, the energy industry will also have to contend with start of the latest Atlantic hurricane season, which
officially begins on June 1.
“Both threats are bad, but hurricanes are worse,” said Milne.
John O’Donnell, chief knowledge officer for Online Trading Academy, said “flooding conditions in the locations downstream in Louisiana, where many oil
and gasoline refineries are located, can cause large disruptions of supply.”
“Transportation of energy [inputs] and outputs, via the river in flooding season and Gulf of Mexico during hurricane season, can also create serious
challenges for producers and consumers of energy,” he said.
But finding out just how bad this year’s Atlantic hurricane season will require a much longer wait. Typically, the biggest Atlantic storms come in late
August through September.
“An ill-placed hurricane could ... impact these refineries in Louisiana, located in the south in the Lake Charles/Baton Rouge area,” Milne said.
A hurricane can also impact refineries in Texas at Port Arthur and Houston, he said, so a hurricane can be far more destructive.
In a report issued in early April, forecasters at the Colorado State University said they expect “well above-average” activity for the 2011 Atlantic
hurricane season, with nine hurricanes.
If a big hurricane makes landfall near Houston or southeastern Louisiana, it could interrupt enough capacity to impact prices, said James Williams, an
energy economist at WTRG Economics.
Hurricanes are “just the normal summer risk,” he said. The problem is that “they are something we just can’t forecast with any accuracy.”
Coping With the Issues
For refiners, it’s all a part of the growing challenges facing the industry.
The risk/reward of the refining industry generally “remains an economically challenging but essential business,” said Global Hunter Securities’
Refinery capacity has held up well despite the fact that it’s been more than 30 years since a new, major refinery was built in the United States.
Operable capacity was at 17.6 million barrels per calendar day as of Jan. 1, 2010, according to EIA data, up from 15.6 million barrels per day on Jan.
1, 1990. Over the same period, the number of operable refineries fell to 148 from 205.
“Modern refineries gain in efficiencies every year and seem to more than make up for any losses,” Charles Perry, president of energy-consulting firm
Instead of building new refineries, refinery operators are opting to expand and modernize existing refineries so they become more efficient and less
costly to run, he said.
Having fewer refineries can add to risk too.
“Greater concentration of refining capabilities can lead to supply issues if anything weather-wise occurs to decrease efficiency,” said Alan Knuckman,
editor of the Resource Trader Alert.
But, for now, the refining industry is likely balanced enough to cope.
Refineries are returning from spring maintenance and are at about 82% of capacity, with utilization rates well above 90% considered sustainable, said
“There is a lot of cushion to handle problems,” he said.