Perry taps DOE reserve for struggling refineries

Source: Hannah Northey and Nathanial Gronewold, E&E News reporters • Posted: Friday, September 1, 2017

Energy Secretary Rick Perry authorized an emergency drawdown today of the nation’s petroleum reserves along the Gulf Coast to offset fuel shortages and ease pressure on refineries bearing the brunt of Hurricane Harvey.

Harvey has forced refinery closures outside of the Houston Ship Channel area, including in East Texas and Louisiana. The Colonial Pipeline Co., whose pipeline carries petroleum from the Gulf Coast to the Northeast, said late last night that it would suspend services on the line. This morning, pipeline operators modified the statement. Texas lines are still down, but the major pipelines running east of Lake Charles, La., would continue shipping fuel.

The Department of Energy said Perry had authorized two agreements today with the Phillips 66 Lake Charles Refinery in Westlake, La., the first allowing the release of 200,000 barrels of sweet crude oil and 300,000 barrels of sour to be drawn from the West Hackberry site, about an hour south of Westlake. A second agreement was later announced, essentially doubling the amount of sweet and sour crude being siphoned to the same refinery.

The crude will be carried by pipeline to the refinery, DOE said, and the federal officials will continue to review “incoming requests” for crude from the Strategic Petroleum Reserve.

The Texas and Louisiana coasts are home to about 45 percent of the nation’s refining capacity, which has been battered by Harvey’s winds and floodwaters, with companies reporting leaks as gas prices climb across the nation (Greenwire, Aug. 30). Yesterday, Motiva Enterprises LLC announced the closure of the nation’s largest refinery in Port Arthur, Texas.

Buyers on the East Coast are panicking and scrambling to find new supplies, said Joe Brusuelas, chief economist at RSM U.S., based in New York. Almost half of the Gulf Coast’s PADD 3 petroleum refining region is down. And up to 25 percent of total U.S. liquid fuels refining capacity is offline, according RSM data.

A surge of gasoline imports to the Northeast from Europe and elsewhere is imminent, as is a spike in gasoline prices.

“Typical Colonial Pipeline volumes are equivalent to Europe’s gasoline exports, so these volumes will be difficult to replace and will require supplies from distant regions if the outage is prolonged,” said Wood Mackenzie analyst Alan Gelder in a note.

Past administrations have conducted similar “exchanges” for companies in recent years when massive hurricanes like Katrina, Gustav and Ike battered the coastline. Under such agreements, companies must repay the government with oil of similar quality within a specific time frame.

Kevin Book, managing partner of ClearView Energy Partners LLC, said the most likely answer for the refiner’s request was the hurricane’s blocking of oceangoing vessels coming into the Gulf Coast.

“The storm delayed and disrupted seaborne imports of crude into the Gulf of Mexico, but the pipes from the SPR work just fine,” Book said in an email.

DOE in recent days has received at least one industry request to release oil from the nation’s four sprawling caverns below the Texas and Louisiana coasts where 700 million barrels of oil is stockpiled for emergencies like Harvey, as well as wars and other disasters.

Calls have also come from Capitol Hill, including a request from Democratic Sen. Ed Markey of Massachusetts yesterday for President Trump to immediately tap the SPR to ease pressure on refineries, thwart market speculation and protect consumers at the pump.

“Since Hurricane Harvey made landfall, prices for U.S. gasoline futures surged earlier this week by more than eight percent to a level not seen since July 2015,” Markey wrote.

Analysts at Wood Mackenzie estimate that Harvey cut U.S. refining output by some 4.5 million barrels per day during its rampage. And RSM analysts say up to 4.2 million barrels per day of refining capacity is still down. But they suspect companies are still not reporting the full scope of lost capacity.

DOE earlier this week confirmed it had received a request “to release oil” from the SPR, a facility the Trump administration wants to partially drain and sell. That request, however, was rejected due to the massive flooding and difficult conditions tied to Harvey (Greenwire, Aug. 28).

Demand for the SPR’s stockpiled oil and its ability to deliver during a crisis could throw a wrench in calls to drain and dismantle the operations to lower the nation’s deficit.

Trump, with the backing of conservative groups that have questioned the need for the SPR, proposed in his fiscal 2018 budget request to cut the reserve in half to reduce the federal deficit by $16.6 billion over the next decade.