U.S. To Tap Petroleum Reserves

Energy Secretary Samuel W. Bodman said Wednesday the Bush administration will release oil from petroleum reserves to help refiners affected by Hurricane Katrina. An announcement was expected later in the day.

The move is designed to give refineries in the Gulf Coast area a temporary supply of crude oil to take the place of interrupted shipments from tankers or offshore oil platforms affected by the storm.

The government's emergency petroleum stockpile — nearly 700 million barrels of oil stored in underground salt caverns along the Texas and Louisiana Gulf Coast — was established to cushion oil markets during energy disruptions.

The production and distribution of oil and gas remained severely disrupted by the shutdown of a key oil import terminal off the coast of Louisiana and by the Gulf region's widespread loss of electricity, which is needed to power pipelines and refineries.

"So far, we have received, to my knowledge, three requests from operating companies with respect to the strategic petroleum reserve" Bodman said on CBS News' The Early Show. "It is my expectation that we'll be seeing a positive response to that. This is a decision that I made yesterday."

The potential damage to oil platforms, refineries and pipelines along the Gulf Coast drove energy prices to new highs Tuesday, with crude futures briefly topping $70 a barrel and wholesale gasoline costs surging to levels that could lead to $3 a gallon at the pump in some markets.

The buying frenzy reflected uncertainty and fear about the full extent of the damage Hurricane Katrina inflicted on key energy infrastructure.

Meanwhile, wholesale gasoline suppliers have begun limiting the amount of fuel they sell to retailers in certain markets in order to make sure they do not take delivery of more fuel than they actually need.

Tom Kloza, director of the Oil Price Information Service, said gas prices are going to soar.

"It's going to be a super-spike, there's no question about that, and I think this time it's not just going to be a problem of with how much you pay for gasoline but there's going to be some inconvenience in where you find the gasoline," Kloza told CBS radio affiliate WTOP.

He also said filling station lines, like those in 1979, could be seen again. October gasoline futures were almost 75 cents a gallon higher Wednesday than on Friday, before the storm hit.

A JP Morgan report released Tuesday says Katrina has already forced a production halt in about 630,000 barrels of crude a day from the Gulf of Mexico, some 12 percent of daily output. Analysts say that figure is likely to rise significantly in the coming days, once assessments are made.

Analysts are concerned that the slower production could constrain the supply of home heating fuels for winter and they note the hurricane season isn't over yet.
And analysts believe that the operations of natural gas processors and chemical manufacturers, who depend heavily on the natural gas as a feedstock, could be disrupted for days, if not weeks.

Companies are scrambling to assess damage to their platforms, pipelines and refineries — a task easier said than done in some cases because, in addition to flooding, the Gulf Coast has been plagued by power outages. More than 2.1 million customers have reported power outages in Louisiana, Mississippi, Alabama and Florida.

Most energy companies still have not been able to visit their facilities and are relying on aerial surveillance for preliminary examinations.

The drilling rig seen washed up on Dauphin Island off the Alabama coast has been identified as the Ocean Warwick, reports CBS News Correspondent Anthony Mason, owned by Houston-based Diamond Offshore Drilling. The storm carried it 65 miles from its original location. A company spokesman said the Ocean Warwick suffered "significant damage to its legs and upper structure" and will take "at least a year to repair." All workers were evacuated from the rig, which only was involved in drilling, not production, before the storm.

At least seven Gulf refineries remain out of service, and will be for days if not weeks. Also, several pipelines that carry gasoline, heating oil and jet fuel to other markets are stymied by disruptions to the power grid.

Some analysts on Tuesday said the impact of the release of petroleum reserves would be minimal for now, because the problem is not supply, but rather refining capacity.

"The release of crude out of the Strategic Petroleum Reserve is not as critical as making sure that there is enough refined product supply and that there are refineries to process the crude," said analyst Victor Shum from Texas-based consultants Purvin & Gertz.

Katrina, which struck the Gulf Coast as a Category 4 storm, forced the evacuation of more than 700 offshore platforms and rigs. It slammed into a major oil production hub at a time when producers worldwide were already struggling to cope. The latest storm of the Atlantic hurricane season now threatens to constrain the supply of home heating fuels for the North American winter, a season of traditionally high demand.

Organization of Petroleum Exporting Countries secretary general Adnan Shihab-Eldin reiterated Tuesday that the group will supply extra barrels of crude oil to refiners if they want them. Previous OPEC pledges have done little to ease market fears over supply.

The U.S. Minerals Management Service said Monday that 92 percent of the region's oil output was out of service, with more than 3 million barrels of production lost since Friday. The agency said 83 percent of natural gas output was shut down, resulting in a loss of 15.5 billion cubic feet of lost production since Friday.

The Gulf of Mexico normally produces 2 million barrels of crude oil a day and about 10 billion cubic feet a day of natural gas.