Thursday, March 24, 2005

Tightening the Screws
The unfortunate explosion yesterday at BP's Texas City refinery is already sending ripples through the market. In addition to the tragic loss of life, the damage will impede gasoline production at one of the country's largest oil refineries. With oil markets already extremely tight and hanging on every news story, the immediate reaction will send prices higher, whether it should or not.

In the immediate aftermath, it's hard to ferret out exactly what happened. Reporters and first responders often don't know the difference between a crude still and a cat cracker, and companies tend to be slow in specifying details. In this case, the most detailed report I could find this morning suggests the explosion occurred in the refinery's 30,000 barrel per day catalytic isomerization unit, which upgrades light gasoline components to higher octane. This unit is less essential to running other parts of the plant than the catalytic reformers or catalytic crackers.

So what is the impact of this event, which will probably slow overall run rates and production from the whole refinery? Generally speaking, this should actually depress crude oil prices slightly, because less refinery capacity is available to turn crude into products. However, with overall refinery utilization running at about 90%, it's possible that other refiners could boost production a bit to make up the shortfall from BP. On balance, the impact on crude is probably neutral, though a nervous market will likely see it as an excuse to go higher.

Product inventories are a crucial factor in assessing the impact on gasoline prices, as discussed in my posting of March 10. Although total US gasoline stocks are 7 million barrels lower than a month ago, they remain at the high end of their seasonally-adjusted range. That means there's a reasonable buffer to allow refiners and traders to respond without creating a serious supply crunch. If repairs can't be effected quickly, the shortfall will have to be covered from imports. In that case, retail gasoline prices will eventually go up a by a little more than they would have anyway.

Whenever an incident like this occurs, it reminds us that refineries--no matter how well run--are dangerous places that subject flammable liquids and gases to extremes of temperature and pressure. The human toll of accidents like this is part of the cost of keeping our cars, trucks, buses and boats running. We should pause periodically and reflect on that.

Addendum - 1:00 PM EST
I just watched a live press conference on this event from Texas City. Normally, you'd expect the plant manager to be acting as the main company spokesman. In this case Lord Browne, BP's CEO, was on hand, saying all the right things and fielding questions. This is impressive crisis management, assuming he must have jumped on a plane in London right after hearing the news.

Lord Browne also confirmed that the explosion occurred in the Isomerization unit, which was being restarted following annual maintenance. Startup and shutdown are always the diciest times in refinery operations, and despite extra precautions and extra manpower--presumably the reason the casualties were so high on a unit that would normally have had an operating staff of maybe a half-dozen--accidents do happen. It will be interesting to see what the inquiry turns up.

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