When Katrina shut down eight major refining operations on the Gulf Coast, initial reports estimated that many of the refineries would be operational again within two weeks. Let's take a brief look at where we are, two weeks after the disaster.
Two weeks after Katrina shut down nearly 2 million barrels per day (bpd) of refining capacity along the Gulf Coast, a picture is finally emerging of the damage caused to the refining infrastructure. What follows is a refinery-by-refinery look at the status of efforts to date.
According to the latest updates from the companies affected, four refineries, with a combined capacity of 880,000 bpd, will remain out of service for an undetermined length of time. These refineries are:
- ConocoPhillips (NYSE: COP ) in Belle Chase, La.
- Chalmette Refining in Chalmette, La.
- Chevron (NYSE: CVX ) in Pascagoula, Miss.
- Murphy Oil (NYSE: MUR ) in Meraux, La.
These four refineries all experienced various levels of flooding, and they will require extensive cleanup and equipment evaluation before operations can resume. It's still too early for the companies to estimate when any of the facilities will return to full production.
However, two refineries, with a total capacity of 505,000 bpd, are making great strides in restoring operations. Marathon's (NYSE: MRO ) Garyville, La., refinery resumed full production at the end of last week. Valero's (NYSE: VLO ) St. Charles, La., refinery announced that it would resume full production by the end of this week.
Two other refineries, with a total production of 460,000 bpd to 497,000 bpd, are also in the process of resuming operations. Motiva's Convent, La., refinery is up and running again and should be at full capacity by the end of this week. Its Norco, La., refinery is scheduled to resume operations this week. If all goes smoothly, I speculate that the Norco refinery will be at full production by the end of next week, because the start-up of a refinery, in my experience, normally requires about seven days to complete.
So where will the supply and demand balance rest once the Motiva facilities are at full production? On the supply side, before Katrina, total U.S. refining capacity was about 18 million bpd. Therefore, the 880,000 bpd that remain shut down represent approximately 5% of total U.S. refining capacity.
This is a significant supply disruption. On the demand side, a strong U.S. economy will likely prevent any material decrease in consumer demand. In France, gasoline costs more than $7 a gallon, and people haven't stopped driving, so I doubt that the current price of $3 a gallon in the U.S. will do much to curtail American demand. Simply put, we will continue to live with a supply shortage for some time, and gas prices of $3 a gallon will likely persist for the foreseeable future.
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Robert Aronen owns shares of none of the companies mentioned. Chalmette Refining is a joint venture between ExxonMobil (NYSE: XOM ) and Venezuela's Citgo Petroleum. Motiva is a joint venture between Royal Dutch Shell (NYSE: RD ) and Saudi Arabia's government-controlled Saudi Aramco.