Hurricane Katrina and Virginia

by Stuart V. Price
for Virginia Business
October 2005

A month after this country's worst natural disaster devastated the Gulf Coast, the recovery from Hurricane Katrina continues, and it includes rebuilding our nation's petroleum processing and distribution systems. Virginians learned of their dependence on this system when gasoline prices soared to more than $3 a gallon and some service stations ran out of fuel just as motorists were looking forward to getting out of town over Labor Day.

The situation raised a number of questions: How did Hurricane Katrina affect Virginia? What lessons can we learn? And what happens if another hurricane strikes the Gulf Coast?

Virginia state Sens. Walter Stosch (R-Henrico) and William Wampler Jr. (R-Bristol), who is chairman of the General Assembly's Coal and Energy Commission, formed a task force to tackle these and other issues.

The gasoline price spikes in Virginia were prompted by electrical outages that temporarily shut down pumping stations serving the commonwealth's two biggest gasoline suppliers, the Plantation and Colonial pipelines. Together, these pipelines normally carry more than 115 million gallons of gasoline and other fuels from Gulf state refineries to Virginia and beyond, but the power failures had temporarily reduced them to 25 percent capacity. Normal operations in the Gulf produce 1.5 million barrels of petroleum per day, but the storm temporarily cut daily output to 129,000 barrels.

In addition to crippling the pipelines, Katrina destroyed dozens of offshore production platforms and damaged others. Richmond-based energy company Dom-inion Resources was one of many companies forced to relocate most of its Gulf Coast operations.

The timing of the crisis over the Labor Day weekend caused some suppliers to limit deliveries to gas stations. That's why station owners in Virginia raised prices. Some even put up "Out of Gas" signs, a stark reminder of scenes from the OPEC oil embargo in the 1970s.

To compensate for lost gasoline production, President Bush opened the nation's Strategic Petroleum Reserve. ExxonMobil, Marathon Petroleum and BP are some of the companies that received crude oil loans. In addition, 26 nations linked with the International Energy Agency agreed to transport petroleum and gasoline reserves to the Gulf. Nonetheless, if damaged petroleum facilities are unable to ramp up their operations, having access to extra crude supplies might be a moot point.

The Gulf Coast is the heart of the petroleum refining business. While supply disruptions caused by the storm were significant, Hurricane Katrina will probably have its greatest long-term impact on energy-intensive oil refinery operations. The U.S. Senate's Energy and Natural Resources Committee reports that the storm completely shut down nine refineries, damaged seven others and destroyed corresponding electricity distribution assets. The storm, therefore, removed 10 percent of domestic gasoline systems from active production.

The industry has been making plans to expand refinery capacity, from 16.8 million barrels per day in 2003 to 22.3 million barrels per day in 2025. However, almost all of this new capacity is expected to occur on the Gulf Coast.

The time may have come to reconsider plans to concentrate our nation's refineries in the hurricane-vulnerable Gulf of Mexico. While energy companies have built a robust energy infrastructure there — largely because of nearby petroleum and natural gas reserves and ready access to central transportation routes such as the Mississippi River — they have also done so in response to difficulties they face in gaining permission to locate refineries elsewhere.

The sector's low profit margins are another reason energy companies have been reluctant to expand refineries. To encourage refinery investments, the federal Energy Policy Act of 2005 creates new tax benefits. The Senate Energy and Natural Resources Committee — champion of the Energy Policy Act — has encouraged interested parties to build refineries closer to high-consumption areas including the East Coast.

Katrina's impact on Virginia and other states will depend on re-establishing crude oil delivery, repairing damaged refineries in the Gulf, and restoring local electricity services. In the future, though, the nation's petroleum infrastructure may be best served by building new refineries elsewhere. Right now, a single in-state refinery stands in the city of Yorktown. Sen. Wampler's new task force should consider ways to bolster Virginia's refining capacity in addition to developing state energy policy to protect consumers in times of natural disaster.

Stuart V. Price, a principal with RSVP Communications in Alexandria, has written about energy, engineering, and environmental operations for 20 years.