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UPDATE 2-Colonial delays restart as fuel prices keep rising after Harvey

(Updates with Colonial restart delay,)

NEW YORK/HOUSTON, Sept 3 (Reuters) - Colonial Pipeline Co, the biggest U.S. fuel system, delayed reopening a segment of its system in Texas that was shut due to Hurricane Harvey, increasing worries about rising retail prices and the domestic distribution of gasoline and distillates.

The company, which had originally scheduled a Sunday restart for the segment going from Houston to Hebert, Texas, said it planned to reopen the distillates line on Monday. The line would be ready to move gasoline on Tuesday, it added.

Colonial's 5,500-mile system begins in Houston and ends in Linden, New Jersey, serving seven airports and other facilities. The pipeline hauls more than 3 million barrels per day (bpd) of refined products including gasoline, diesel and jet fuel from the Gulf Coast refining hub to the populous U.S. Northeast.

The firm also planned to allow shippers to pump transitionary-grade Gulf Coast CBOB gasoline, as refiners ran short of the summer grade product due to Hurricane Harvey.

U.S. gasoline prices continued to rise through the weekend amid fears of shortages, despite the restart of several key refineries on the U.S. Gulf Coast that had been crippled by Hurricane Harvey.

The storm took down a quarter of U.S. oil refining capacity, hit oil and gas platforms along the Gulf and lifted average gasoline prices by more than 20 cents since Aug. 23.

On Sunday, average retail prices rose again, to $2.621 a gallon, with weekly increases hitting 18 percent in Georgia and 19 percent in South Carolina, according to motorists advocacy group AAA.

Refiner Phillips 66 said on Sunday that it requested a Jones Act waiver to its Alliance refinery in Louisiana, but the petition was still pending.

The Jones Act mandates the use of U.S.-flagged vessels to transport goods between U.S. ports. The CBP has occasionally allowed exemptions for oil and gas operators to use often cheaper, tax-free, or more readily available foreign flagged vessels.

On Sunday, about 5.5 percent of the Gulf's oil production and 8.4 percent of the natural gas output remained shut, the federal Bureau of Safety and Environmental Enforcement said, while operators began inspecting facilities and resuming work.

The total lost production in the Gulf since platforms started shutting is about 2.97 million barrels of oil and 6.35 billion cubic feet of gas.

ExxonMobil Corp said on Saturday that it began restarting the country's second-largest oil facility, the 560,500 barrels per day (bpd) Baytown, Texas, unit, while Phillips 66 said it was working to resume operations at its 247,000 bpd Sweeny refinery and at its Beaumont oil and fuels terminal.

The restarts followed an announcement from Valero Energy Corp on Friday that it was increasing production at its Corpus Christi, Texas-area refineries.

The hurricane battered Texas before weakening to a tropical storm and inundated the region with torrential rains and flooding.

Not only refineries have started resuming operations. Pipelines and terminals have also been restarting over the weekend, assuaging worries over the ability of refineries to get the crude oil they need to operate.

Magellan Midstream Partners said it had resumed operations on Friday on its BridgeTex and Longhorn crude oil pipelines, which transport around 675,000 bpd of West Texas crude to East Houston.

Still, several Texas ports remained closed to large vessels, limiting discharge of imported crude and products.

(Reporting By Libby George and Devika Krishna Kumar in New York, and Catherine Ngai, Gary McWilliams and Marianna Parraga in Houston; Editing by Susan Fenton and Andrew Hay)