Heart of U.S. Oil and Gas Industries Shut Down as Storm Approached

Fire destroys homes on Galveston Island as Ike approached yesterday. About 23 percent of the nation's oil refining capacity lies along the Texas coast.
Fire destroys homes on Galveston Island as Ike approached yesterday. About 23 percent of the nation's oil refining capacity lies along the Texas coast. (By David J. Phillip -- Associated Press)
By Steven Mufson
Washington Post Staff Writer
Saturday, September 13, 2008

The arrival of Hurricane Ike in southern Texas shut down the heart of the nation's oil and gas industry, as companies evacuated production platforms and closed down refineries along the Gulf Coast.

In anticipation of what was expected to be a Category 3 storm, nearly 98 percent of the oil and 94 percent of the natural gas production in the Gulf had been shut down as of yesterday afternoon, according to the Interior Department's Minerals Management Service.

It is the second time in two weeks that the region has been exposed to a crippling storm. Strategists usually focus on the U.S. reliance on imports of foreign oil, but lately the greater fear has been for the nation's own supplies and their vulnerability to Mother Nature.

"Ike couldn't have come at a worse time," said Daniel Ahm, an energy economist at Lehman Brothers. "Gustav had already ripped through with surprisingly little damage, but it is reminiscent of what happened with Rita and Katrina." The first of those 2005 storms caused relatively little damage, he said, but the second caused more, in part because it "was inflicted on already weakened infrastructure."

For most of the past two weeks, more than 90 percent of the Gulf's production has been sealed off, knocking out about a quarter of the country's total oil production. As of yesterday afternoon, personnel had been evacuated from 596 production platforms, or 83 percent of the manned platforms in the Gulf of Mexico. Personnel from 101 rigs, or 84 percent of those in the Gulf, also had been evacuated.

The concentration of refining along the Gulf coast is as big a concern as the suspension of oil and gas production. About 40 percent of the nation's oil refining capacity lies along the coast, with about 23 percent of it along Texas. The refinery shutdowns could create near-term problems for the prices of refined petroleum products -- gasoline and diesel fuel -- even as prices for crude oil remained weak.

At one point yesterday afternoon, crude oil slipped below $100 a barrel for the first time since April. It later settled at $101.18.

Exxon Mobil said it was closing its 590,500 barrel-a-day Baytown, Tex., refinery, the largest in the United States. The oil giant said it was also shutting down its Beaumont facility. By 5 p.m. yesterday, gross production of about 36,000 barrels per day of liquids and 270 million cubic feet per day of gas had been shut off.

Valero Energy, the nation's largest refiner, said that it had shut down three of its Texas refineries with a total capacity of 700,000 barrels a day. Others in the area were running at reduced levels. At its Port Arthur facility, which is a couple of miles inland along the Sabine Pass, Valero is worried about the danger of storm surge. The company is concerned about storm surge as well as high winds at its Texas City plant, which is well inland but on the ship channel off Galveston Bay. At its Houston plant, the company said it was mostly worried about high winds.

Shell also evacuated personnel and shut down its offshore systems.

Refinery outages could put a squeeze on gasoline, diesel and other refined petroleum products. While crude oil prices have been sinking steadily, gasoline prices have popped up on concerns of shortages.

Ahm said that crude oil prices were likely to remain stable or continue declining because there appeared to be excess world oil production and Saudi Arabia indicated that it might not abide by the Organization of the Petroleum Exporting Countries' call for members to stick to their quotas.

Even if the Gulf Coast refineries escape damage from this weekend's storm, flooding of ship channels or damage to power lines could hinder the refineries' ability to restart, as was the case in Louisiana two weeks ago. As of yesterday, there were still more than 80,000 people without electricity in Louisiana as a result of Hurricane Gustav, and the Conoco Phillips refinery in Belle Chasse, La. remained shut down.

The concern about gasoline supplies once again raised the question of whether the U.S. government should maintain an emergency gasoline and diesel stockpile. The Strategic Petroleum Reserve has more than 700 million barrels of crude oil, but no refined products.

Normally, wells in the Gulf of Mexico produce 1.3 million barrels of oil per day, or about a quarter of the nation's output, according to the Minerals Management Service. Estimated natural gas production is 7 .4 billion cubic feet a day.

If the facilities escape damage, some could restart in three to five days, industry officials say.

Staff writer Nancy Trejos contributed to this report.

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