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ARC Sees Impact of Hurricane Katrina on US Oil & Gas Industry Will Be Lasting

Posted on: Friday, 2 September 2005, 15:00 CDT

As ARC Advisory Group has already seen from the significant price increases at the pump, Hurricane Katrina is going to have a significant and lasting impact on the US oil and gas industry. The Gulf Coast area is the hub of American refining and petrochemicals. Currently in the Gulf Area there are nine refineries shut down, with a total capacity of about 1.8 million barrels per day (BPD) of crude. This represents about 11 percent of total US refining capacity. Aside from refineries, midstream facilities (primarily pipelines) are also affected for both crude and finished products. Other refineries are reducing crude runs because of pipeline outages on both the crude or finished product side. These additional refineries include 4 or 5 fair sized Midwest refineries.

It will be difficult for US refiners to make up lost production, because they have been running at close to absolute maximum capacity rates for some time. Year-too-date capacity utilization rates for refineries has been over 93%, and the higher demand and summer production rates have resulted in refineries running more in the area of 97 to 98 percent.

The US imports considerable finished products, such as gasoline, as well as. Should US refining capacity face a prolonged reduction, increasing these imports of finished products is an option, but even this will be subject to possible limitations from the pipeline outages. Releasing the Strategic Reserve, which has already been put into motion, will aid refineries that would have to reduce throughput because of a crude shortage, but would not help those refineries that face product pipeline outages. So far, three refiners have requested access to the strategic reserve. It should also be noted that the EU has offered to release oil from the strategic reserves of member nations. Gulf of Mexico (GOM) Statistics in the Wake of Hurricane Katrina GOM Crude Production (1,000 b/d) 1,527 GOM Crude Production Shutdown (8/31/05) 1,451 GOM Crude Production Shutdown (% of US Crude Production) 27% Capacity of Gulf Refineries Shutdown (1,000 b/d) 1,800 Capacity of Gulf Refineries Shutdown (% of US Refinery Runs) 11.3% US Crude Inventories (1,000 b) 195,000 US Gasoline Inventories (1,000 b) 380,000 Number of Days Gasoline Supply from Existing Inventories 40.1 Number of Days Crude Supply from Existing Inventories 12.6 (C) 2005 ARC Advisory Group

Crude Production Impact

About 28 percent of the US crude production comes from the Gulf of Mexico basin (GOM), and almost 95% of that production was shutdown because of the hurricane. These facilities are being ramped up slowly, and many companies are still surveying the damage that has been done, but many of the early reports from offshore production platforms are better than expected. Some exploration rigs were damaged or broke free from their moorings during the storm, but no production rigs have been reported missing or repositioned. It will probably be at least a week before the real damage is assessed.

Even without the impact of Katrina, the US petroleum market is engaged in a trend that is seeing gasoline demand increasing about 5% over last year but a decreasing supply of crude from domestic sources. We face a similar net shortage in the natural gas market as well.

The Impact on Automation

ARC believes there will be a direct impact on the automation marketplace as a result of the hurricane. Rebuilding efforts will require a considerable investment in replacement products and related services. With oil hovering at US $70 per barrel even before the hurricane, automation suppliers are already refocusing their efforts on the oil & gas and refining industries. The impact on automation goes beyond hydrocarbons, however. All of the manufacturing businesses in the Gulf Coast region have been affected in some way by Katrina, and considerable effort will be required to rebuild infrastructure for these manufacturers in both the process and discrete industries.

Founded in 1986, ARC Advisory Group has grown to become the Thought Leader in Manufacturing and Supply Chain solutions. No matter how complex your business issues, our analysts have the expert industry knowledge and first-hand experience to help you find the best answer. We focus on simple yet critical goals: improving your return on assets, operational performance, total cost of ownership, project time-to-benefit, and shareholder value. Further information can be obtained from ARC, Three Allied Drive, Dedham, MA 02026, 781-471-1000, Fax 781-471-1100, E-mail info@arcweb.com, Web www.arcweb.com.

Source: Business Wire

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