THE WALL STREET JOURNAL: Eye of the Storm In Katrina’s Wake, U.S. Oil Crossroads

Storm-Prone Gulf Holds Key
To Refining, Distribution;
Big Oil Keeps Supply Tight
Pipeline’s Race With the Clock

By CHIP CUMMINS in Hattiesburg, Miss., and RUSSELL GOLD in Austin, Texas
June 10, 2006; Page A1

Surging oil prices have stirred fears in Western capitals over threats to global energy security in hotspots from Iraq to Nigeria. But one of the energy world’s biggest weaknesses lies in America’s own backyard — the storm-prone Gulf of Mexico.

As the hurricane season starts this month, a little-understood episode from last summer — the shutdown of a massive gasoline conduit run by Colonial Pipeline Co. — underscores how vulnerable the U.S. energy network remains. After Hurricane Katrina blew ashore one morning late last August, red alarms lit up Carroll White’s computer console in the company’s control room, outside Atlanta. The storm knocked out electricity to seven pumping stations along Colonial’s pipeline, shutting down a major source of gasoline and jet-fuel supplies for more than a dozen states.
 
“We’re in big trouble,” Mr. White, a pipeline controller and former naval nuclear-reactor operator, remembers thinking. “Nobody’s gonna have gasoline.”

In the days that followed, hundreds of engineers and electrical workers mobilized across the piney woods of southern Mississippi for the repair job of their careers: restoring power to America’s biggest fuel pipeline before filling stations ran dry across the Eastern U.S.

An unprecedented scramble by industry and government officials averted a full-blown energy crisis in the wake of Katrina. But the Colonial pipeline’s shut-down brought the U.S. much closer to large-scale gasoline shortages than the public realizes, according to interviews with industry executives and government officials.

Hurricanes have walloped the vast Gulf Coast energy system for two years in a row, helping drive up oil prices globally. Yet the industry is still vulnerable to a big storm today. Oil infrastructure is concentrated in the region. The industry keeps little extra inventory of products like gasoline, and the electrical grid which powers the region’s refineries and pipelines is as fragile as ever.

Meteorologists are girding for another fierce hurricane season starting this month, though this year isn’t expected to be as violent as last summer. Energy companies are still recovering from that record-breaking season. As of early June, about 15% of oil production in the Gulf was still shut down.

Out for 55 Hours

The Colonial pipeline itself — which carries fuel from Gulf of Mexico refineries north to New York — escaped major damage. But the conduit was shut down for 55 hours, while most customers keep just three to five days of spare supply. Some depots ran dry and others came perilously close to empty. To get the line pumping again, Colonial had to race against the clock to restore electricity after the Gulf Coast’s power grid collapsed. They competed with federal authorities to get their hands on emergency generators and got Washington to cajole utility executives in rural Mississippi, ultimately restoring the gasoline flow in the nick of time.

“The entire system was very close to running out of fuel,” says Bill Scott, Colonial’s chief operations officer, in an interview.

The federal government has taken some steps to improve readiness. The departments of Energy and Homeland Security asked oil companies to stock up on emergency generators, because the region’s crazy-quilt of power systems remains susceptible to high winds. Officials say they have clarified the system for allocating emergency supplies and improved lines of communication. Gulf safety regulators are proposing infrastructure upgrades, such as stronger fasteners to secure drilling derricks to offshore platforms. Damage to such facilities hammered oil output last summer.

Many changes won’t be made this year, though. Simply finding enough space in shipyards to perform the work on the offshore platforms “is a Herculean effort,” says Chris Oynes, the Gulf region director at the U.S. Minerals Management Service. “It is going to take…two to three years to get all those re-outfitted,” he says.
 
The crude that is pumped from offshore platforms flows through pipelines to refineries onshore, where it is refined into products like gasoline. The fuel is then shipped by pipelines like Colonial to markets.

At the heart of the problem is the concentration of a large chunk of the country’s energy infrastructure in the Gulf and its coastline. The region is home to almost 30% of U.S. oil production and more than 40% of America’s capacity to refine crude.

The pipeline system feeding much of the East Coast with gasoline and other refined fuels is especially concentrated in a few routes that start in the Gulf. The network took shape during World War II, when overland fuel pipelines were built to avoid German submarine attacks on sea tankers. In recent years, urbanization and safety concerns have made getting permits for new lines difficult even as gasoline use keeps rising.

That has left the world’s largest oil-consuming country with a network of pipes with little spare capacity and scant room for error. In late July 2003, a pipeline ruptured in Arizona, severing one of the two conduits for gasoline that fuel the four million people in the Phoenix area. By August, two-thirds of gasoline stations in Maricopa county, which includes most of metro Phoenix, didn’t have anything to sell, according to Congressional testimony after the crisis.

Meanwhile, oil companies have cut costs by slimming the fuel inventories they store along pipeline routes. The Department of Energy estimates the amount of gasoline and other fuels held by oil companies, relative to daily demand, fell 21% from 1990 to 2005. A report by the Arizona attorney general in April on post-Katrina gasoline spikes blamed the industry’s shift to lower inventories for exacerbating price volatility. “Consumers pay a high price for the oil companies’ profit-maximization strategies,” the report concluded.

After the storms, Senate Democrats proposed building an emergency reserve of gasoline and other refined products, to complement the country’s strategic reserves of crude oil. The Bush administration studied the proposal, but in March, Energy Secretary Samuel Bodman said his agency put the idea aside after finding it impractical for the time being.

Oil companies are loath to invest the billions of dollars and years of effort needed to build extra storage tanks and pipelines simply to give more cushioning to the system. Executives say the effort would face stiff opposition from citizens worried about environmental and safety issues.

“All of that is quite costly, and we’re talking about providing a response to a situation that comes up quite infrequently,” says Bill Bush, a spokesman for the American Petroleum Institute, the oil lobby in Washington.

Fragile System

The upshot: The country’s gasoline-supply lines remain fragile. Nothing underscores this weakness more than Colonial’s brush last summer with Hurricane Katrina.

The Colonial network is owned by a consortium including some of the country’s biggest oil companies. The 5,500-mile network stretches from Houston to New York Harbor and pumps 2.4 million barrels of gasoline, diesel, heating oil and jet fuel each day. By far the biggest fuel pipeline in America, it is the source of 30% of the refined petroleum products sold east of the Mississippi, according to the company.

When Katrina trashed southern Mississippi on Monday morning, Aug. 29, it knocked out electricity to seven pumping stations along some 200 miles of the Colonial pipeline. The pumps lay idle and crucial data such as pipeline pressure couldn’t be sent back to the control room. At noon eastern standard time, executives ordered the line shut down — the first unplanned halt since it started operation in 1963.

On Tuesday morning, Greg Daigle, Colonial’s operations manager in Mississippi, weaved his truck slowly between a tangle of felled trees, telephone poles and power lines. It took a backhoe and a chainsaw to get through the front gates of a station nestled in pine forest near the town of Collins, Miss.

“We literally had to cut our way in,” he says. Although a door on a warehouse had buckled, almost everything else looked intact. But there was no electricity.

Mr. White, the pipeline controller, and others at Colonial’s headquarters got to work. First they needed to figure out whether they could ramp up the pumping force at unharmed pumping stations upstream of the seven downed facilities. That way, they could blast fuel past the dead stations. It would be an unprecedented and risky trick. “I’d never done any more than [bypass] two,” says Jayson Nall, another control room operator. “And that’s something we’d always wanted to avoid.”

To restore gasoline flow to more than a trickle, the team realized they had to find some giant emergency generators. Bobby Tucker, Colonial’s power manager, started working the phones. By 3 a.m. Tuesday, he had located six trailer-size, 100,000-pound generators in an equipment yard in Baton Rouge, La. But a few hours later, he got a phone call with bad news: Workers from the Federal Emergency Management Agency, along with a police escort, had confiscated the generators at dawn for emergency needs, including a nearby hospital.

Colonial executives briefed officials at the Department of Energy in Washington and asked to be put on a priority list for supplies so that wouldn’t happen again. By day’s end, Colonial had scrounged 19 other generators from as far away as Washington state. Executives sent all of them rumbling on trucks toward a staging area in Tuscaloosa, Ala.

One driver coming in from New York was stopped at every weigh station along the way for exceeding highway weight limits. Energy and Transportation Department officials dashed off waivers to get the trucks through.

Official Concern

By Wednesday afternoon, the pipeline had been out for more than two days. Colonial executives and Washington officials grew worried. Mr. Scott, the pipeline’s operations officer, knew some of his customers kept just three days of supply on hand. The long Labor Day weekend — when gasoline demand typically jumps as vacationers hit the road — was just a few days away.

Another key conduit, Kinder Morgan Inc.’s Plantation Pipeline stretching from Louisiana to the nation’s capital had also lost power. The two lines provide about 90% of North Carolina’s gasoline. Gov. Mike Easley pleaded with drivers to conserve fuel; instead, panic buying broke out. Linda Campbell, who owns a Shell station in Elizabeth City, N.C., ran out of gas Thursday afternoon. “It was a mess,” she said.

BP PLC terminals along the Colonial line started rationing fuel to customers, and in a few cases terminals ran out completely. Washington officials grew worried about supplies to Dulles International Airport. Alex de Alvarez, a deputy director at the Energy Department, briefed Secretary Bodman: “It looks like we’ll be out of gas on Labor Day if we don’t do something fast,” he told the energy czar.

In the wake of Katrina, the White House worked with the International Energy Agency in Paris to orchestrate a global release of emergency oil and petroleum-product supplies to calm markets. It lifted U.S. regulations to make it easier to sell different gasoline blends and allow foreign tankers to deliver fuel up and down the coast. European refiners sent shiploads of gasoline westward to the U.S.

But the hobbled Colonial pipeline became the biggest immediate worry for an administration task force monitoring the energy-recovery effort. Alerted to the Mississippi power outages, Washington officials started phoning big utilities in the area. Jim Cochran, then the transmission manager for a Mississippi subsidiary of Southern Co., remembers getting a call from headquarters. Vice President Dick Cheney’s office had phoned to ask how long it will take to restore power to Plantation, the other big pipeline suffering power outages.

“We don’t get calls from him on a regular basis,” Mr. Cochran says. “But when we got a handle on the gasoline situation, we realized this could be a national security issue.”

By late Wednesday, utilities had restored three of Colonial’s downed pumping stations. Colonial restarted pumping around 7 p.m. eastern time at reduced capacity. The next day, Colonial was up to 40% capacity. It was a start — but not enough to prevent shortages.

“The timing on Colonial was measured maybe not in hours, but half days,” said Keith Hennessey, deputy assistant to the president for economic affairs and a point man in the crisis effort.

On Thursday, President Bush, speaking from the Oval Office, asked Americans to conserve fuel. “Don’t buy gas if you don’t need it,” he said.

Sleeping on an Air Mattress

Jim Compton, general manager of South Mississippi Electric Power Association, a small utility in Hattiesburg, Miss., had spent the night sleeping on an air mattress in his office. The utility had just restored power to a local hospital. After getting a plea from Washington to help rescue Colonial, he redeployed three teams of exhausted road-clearing crews and power-line repairmen. Working through the night with chainsaws, bucket trucks and flashlights, they restarted the transmission grid feeding two more Colonial stations around 2 a.m. Friday.

Later Friday, Colonial was pumping at 66% capacity. But utility executives warned the grid was still delicate, and executives worried about losing power again.

The next day, the Saturday before Labor Day, engineers were finishing work on the last two disabled Colonial stations. The task — hooking up big emergency generators at each station — had never been done by the crews.

At one of the stations, near the town of Columbia, Mr. Daigle, the Mississippi operations manager, watched as the switches were flipped. The power came on, and the engineers cheered. “This was the first time we had done anything like this, and people were ecstatic that it worked,” he says.

The Gulf is now gearing up for this summer’s storms. Last week, Colonial Pipeline bought and tested 12 giant generators to use in emergencies. South Mississippi Electric has joined a powerful radio-phone network to improve emergency communications.

But Mr. Compton, the utility’s general manager, says his ability to protect the American energy lifeline is limited. “There’s nothing we can build that will stand up to a Katrina,” he says.

Write to Chip Cummins at [email protected] and Russell Gold at [email protected]

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