Oil's hurricane recovery: Slow going

As oil industry picks up the pieces after Hurricanes Ike and Gustav, refineries still remain closed but gas prices start to fall.

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By David Goldman, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- Gas prices fell for the first time in nine days after two powerful hurricanes entered the Gulf of Mexico and smashed through the heart of the nation's oil infrastructure, but questions lingered about when production would be restored.

Of the 32 Gulf coast refineries - 26 of which were in Ike's path - 12 remained completely shut down Thursday morning, and 9 were operating with reduced capacity, according to the U.S. Department of Energy. The decline in refinery operations has resulted in about 5 million barrels per day in reduced gasoline output.

"There are some restarts of refineries, but the process is very slow," said Cathy Landry, a spokeswoman for the American Petroleum Institute.

A lack of power has stalled the refinery restart process in many instances, as 15% of Texas electric customers are experiencing outages. That affects both the ability of refineries to restore power to operations and offshore facilities from pumping oil through pipelines to the refineries.

More than 40% of U.S. refining capacity is located on the Gulf Coast, namely Texas and Louisiana - the two states hit by the double punch of Gustav and Ike. After Hurricanes Katrina and Rita offered a similar back-to-back thrashing in 2005, 30% of Gulf Coast refineries were shut down or operating with reductions for as long as two weeks, as floods and power outages prevented operations from restarting.

But Ike and Gustav's damage to refineries was not as bad as initially feared, an Energy Department official told pool reporters Tuesday. Most of the undamaged shut-down refineries should be restored as early as the beginning of next week, the official said.

"We do have some refineries that took a pretty good bit of damage. There are at least a couple that will take a long time to come back up,'' said Kevin Kolevar, Assistant U.S. Secretary of Energy. "But generally speaking, the situation is much more positive than we had initially feared."

ExxonMobil (XOM, Fortune 500), for instance, said late Wednesday that its Baytown refinery facility is making progress in restarting its operations. The nation's largest refinery, which produces more than half a million barrels of gasoline a day, has begun providing gasoline shipments to distribution terminals, the oil company said.

With most Gulf production shuttered and tankers with oil imports not yet allowed to the ports, the Department of Energy said product supply could be constrained. As a result, shipments of imported oil have increased to make up for the drop in domestic supply.

Effect on gas prices

Gas prices fell on Thursday for the first time in nine days, according to a nationwide survey of credit card swipes at gasoline stations. Gas prices had risen about 18 cents in Ike's wake - 3.1% since the storm entered the Gulf on Saturday.

In 2005, Katrina and Rita brought many Americans their first glimpse at $3 a gallon for regular gas. The destruction from Hurricane Katrina alone led gasoline prices to jump 46 cents, or 17%, in just one week to a national average of $3.11, according to the U.S. Energy Information Administration.

A similar surge now would have sent gas prices to nearly $4.40 a gallon, well past the previous record of $4.11 a gallon set in July and erasing all the declines seen over the couple months.

Part of the reason Katrina and Rita led to such a spike in gas prices was that there weren't enough functional facilities to make up for the lost output. Although capacity at many U.S. oil refineries has been expanded, there hasn't been a new refinery built in the United States in three decades.

But the 2005 storms hit when demand for gasoline was much higher. U.S. gas demand has slumped in 2008, sending oil prices sinking more than $50 in two months.

As a result, refineries are operating at 6.8% less capacity than they were last year, according to the U.S. Energy Information Administration. Some experts say that gas prices haven't risen as much as in 2005 because other refiners have been able to make up for lost capacity in the Gulf.

In fact, gas futures on New York Mercantile Exchange have fallen from nearly $2.80 a gallon on Friday, the day before the storm, to $2.44 Wednesday. Traders bet that if oil can maintain its downward trend, gas prices should move lower once refineries are restored to full capacity.

"As the refineries start pumping out gasoline, things should start to normalize a bit," said Beth Evans, an analyst with energy research group Platts. "As crude prices fall, it becomes cheaper to make gasoline."

Offshore rigs

As the remnants of Hurricane Ike cleared, oil companies sent crews back to their offshore rigs to perform in-depth safety checks.

Nearly 96% of crude oil production in the Gulf of Mexico remains shut down, down from 100% Tuesday morning, according to a report on the damage left in the wake of Hurricane Ike by the U.S. Department of the Interior's Minerals Management Service. The Gulf is responsible for 25% of the domestic U.S. oil production, producing 1.3 million barrels per day, according to the U.S. Department of Energy.

Additionally, 82.3% of natural gas production in the Gulf of Mexico remains shutdown. That's down 94.8% of gas production that was shut down as of early Tuesday morning.

But the damage was light, and production should be back up and running in a matter of days, according to industry experts.

MMS reported that just 28 of the 3,800 offshore oil and gas production platforms have been destroyed by Ike, only 4 of which had the capacity to produce more than 1,000 barrels of oil per day. Landry said that number may jump as high as 40 when MMS issues next report.

Still, by contrast, in 2005, Hurricanes Katrina and Rita destroyed 113 offshore oil and natural gas platforms.

"Some rigs went adrift and there has been some damage, but it's a small fraction of what Katrina and Rita left," said Landry.

Since 2005, the industry began making changes to the structures. The Interior Department in April 2008 imposed more stringent design and assessment criteria for both new and existing structures located within particular Gulf of Mexico areas.

For example, drilling rigs moored to sea floor in the Gulf had been attached with eight lines, and are now required to be moored with 12 to 16 lines. New rigs are built higher out of the water than ones that were built previously, and old rigs were strengthened, according to the American Petroleum Institute.

"We were better prepared this time around and really saw improvements in damage assessment," Landry said. "That makes it much faster to get things back in operation." To top of page

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