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Gulf Coast Refineries Shut; Gas Prices Edge Higher

Reuters
Sunday, 31 Aug 2008 | 9:50 AM ET

Hurricane Gustav's threat to the Gulf Coast halted about 15 percent of U.S. refining capacity Sunday, though for now prices at the pump have not risen dramatically.

AP

However, analysts and others say a prolonged disruption in refining operations could cause price spikes of 20 cents per gallon or more, not unlike the surges after hurricanes Katrina and Rita devastated the region's energy infrastructure three years ago.

Exxon Mobil Corp., Royal Dutch Shell PLC and Valero Energy Corp., North America's largest refiner, were among the companies that said they had shut down Gulf Coast refineries, primarily in south Louisiana.

Altogether, about 2.4 million barrels of refining capacity have been halted, roughly 15 percent of the nation's total, according to figures from Platts, the energy information arm of McGraw-Hill Cos. The U.S. Gulf Coast is home to nearly half the nation's refining capacity.

"Fifteen percent looks small, but the impact is larger than meets the eye," said Eswaran Ramasamy, director of Platts' U.S. market reporting. "Louisiana refineries supply a chunk of the southern states' product needs — gasoline, diesel, whatever."

For now, prices were climbing only slightly.

A gallon of regular gasoline jumped one-half cent overnight to a national average of $3.687, auto club AAA reported Sunday. The price rose slightly more than a penny Saturday. A month ago the average price was $3.898, AAA said.

The Energy Department said Sunday gasoline stocks were normal along the Gulf Coast for this time of year. Shell reported strong demand for gasoline at its stations along the Gulf Coast, though it said supplies remained strong.

New Orleans Braces for Gustav
Hurricane Gustav, is threatening not just oil production in the Gulf, but also forcing the evacuations of thousands from New Orleans. NBC's Jay Gray gives us an update from the French Quarter. CNBC's Martin Soong & Sri Jegarajah also provide analysis of the impact of Gustav on the oil markets.

Where prices go in the coming days and weeks depends largely on Gustav's path and intensity. Churning toward the Gulf Coast with frightening strength and size, the storm was forecast to hit the Louisiana coast sometime Monday.

The two biggest challenges for refiners after monster storms Katrina and Rita passed three years ago were power disruptions and flooding — both of which prompted refiners to examine their practices and make adjustments.

Some refineries have raised critical equipment so it won't flood, and they've also beefed up plans to get backup power as quickly as possible.

Kenneth Medlock, an energy expert and adjunct economics professor at Rice University, said a big concern is Gustav lingering after it makes landfall and dumping massive amounts of rain on the region.

"That could keep a lot of those refineries shut down for awhile because you have to deal with flooding and power outages," Medlock said. "If that capacity remains shut down for an extended amount of time, you could see prices really start to rise. Four-dollar (gasoline) is not out of the question."

The industry also will be keeping close watch on the Louisiana Offshore Oil Port, which is in the storm's direct path and has shut down operations too. The facility handles about 12 percent of the nation's crude imports and is tied by pipeline to about half the nation's refining capacity, much of it along the Mississippi River from the New Orleans area north to Baton Rouge.

Any prolonged closure of LOOP, as it's called, could severely disrupt crude imports and their shipment to refineries. LOOP is located about 18 miles south of Grand Isle, La.

Oil and natural-gas production in the Gulf was largely nonexistent Sunday. Oil companies, drilling contractors and others spent the past several days evacuating thousands of offshore workers from a region that accounts for about 25 percent of domestic oil production and 15 percent of natural gas output.

As of midday Sunday, about 96 percent of the Gulf's oil production and 82 percent of its natural gas output had been shut down, according to the U.S. Minerals Management Service, which oversees offshore activity.

In some cases, oil companies can resume significant production in a couple of days after a storm passes — as long as equipment isn't heavily damaged. Hurricanes Katrina and Rita knocked out the region's offshore energy infrastructure for several weeks.

On Friday, light, sweet crude for October delivery fell 13 cents to settle at $115.46 a barrel on the New York Mercantile Exchange, after earlier rising as high as $118.76. While U.S. markets are generally closed through Tuesday morning for the Labor Day holiday, Nymex began early electronic energy trading Sunday afternoon, and will date the trades Sept. 2.

In recent trading, light sweet crude for October delivery rose $1.62 to $117.08, having earlier reached $118.60.

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