Hurricane Harvey poses a unique danger to Gulf Coast refineries because the quickly developing storm has left them with less time than usual to prepare for its anticipated landfall, analysts say.



Harvey, now barreling toward the nation's refining hub, would be the first hurricane since 2008 to make landfall in Texas, where one-third of U.S. refining capacity lies in its potential but unpredictable track. Harvey threatens to dump 12 to 20 inches of rain on facilities in the area between Corpus Christi, Texas, and Lake Charles, Louisiana, and will likely affect the Houston metro area. The rainfall and storm surge threaten catastrophic flooding.

Harvey's potential path into Texas coast

Source: EIA/Bespoke. Flames—natural gas processing plants. Brown squares with barrels of oil—petroleum refineries. Major storms often form somewhere off the coast of West Africa, giving refiners weeks of advance notice, said Alan Gelder, vice president for refining, chemicals and oil markets at energy research firm Wood Mackenzie. But this storm caught many off guard when it rapidly intensified and took a turn north in the Gulf of Mexico. A hurricane warning was first issued for the Houston area on early Thursday, and the storm could make landfall by Friday. With such short notice, refiners are now "scrambling" to assess Harvey's track, the intensity of wind and rainfall and a host of other factors, Gelder said. "I think they're in a time crunch because this storm didn't exist yesterday," he told CNBC. "They're making decisions with poor information, or lots of uncertainty." Ideally refiners would have a few days to begin powering down their refineries, should that become necessary, Gelder explained. They can do that on short notice, but the faster a refinery shuts down the vessels that heat crude oil at high temperatures, the greater the chance of damage to the equipment, he said.

Tom Kloza, global head of energy analysis at Oil Price Information Service, said refiners likely have the time they need to prepare for the storm. "I don't think they're ill-prepared," he said. "If you're a Corpus Christi refiner right now, you're having team meetings to discuss precautionary shutdowns." Two Corpus Christi refineries are already shutting down operations, Reuters reported. Flint Hills Resources is closing its nearly 300,000-barrels-a-day facility, while Citgo Petroleum is winding down its 157,000-barrels-a-day plant. Energy infrastructure company Kinder Morgan told CNBC it is prepared to activate response plans. Phillips 66 said its operations have not been affected. Plastics, chemicals and refining company LyondellBasell has begun preparations for heavy rain at its Houston refinery and activated severe weather plans for four of its manufacturing facilities in the region. Marathon Petroleum declined to comment. Other refiners in the area did not return requests for comment.

U.S. crude oil prices tumbled 2 percent on Thursday, while gasoline futures surged nearly 3 percent. That is a clear sign that traders are engaging in so-called crack spread buying, said John Kilduff, founding partner at energy hedge fund Again Capital. Anticipating refinery outages on the U.S. Gulf Coast, traders were buying refined products such as gasoline and selling crude oil, the primary feedstock at refineries, he told CNBC. Right now Harvey is a Category 1 hurricane, with 85 mph winds. But it could strengthen to a Category 3 hurricane with winds of at least 111 mph, which could send the price of gasoline up 27 cents in parts of the country, Kloza said. "It's a temporary event, but you could have a temporary price shock for portions of the United States that are fed by the Gulf Coast," he said. Andy Lipow, president of Lipow Oil Associates, is currently anticipating a roughly 10 cent impact on gasoline prices east of the Rockies. If Harvey makes landfall as a Category 3 hurricane, it will take refineries caught in its path two to three weeks to return to normal operations, according to Lipow. "That is because in Category 3 there is more likely to be lots of evacuations, widespread power outages, wind damage, flooding and difficulty getting workers back to the facilities," he told CNBC in an email.

While refineries in the area are hardened to withstand 12 to 14 feet of flooding, just 2 feet of flooding could shut facilities for 18 to 36 months, Bob Mitchell, president of the Bay Area Houston Economic Partnership, told CNBC's "Power Lunch" on Thursday. This scenario is unlikely because the 20 inches of rain is expected to fall over a period of days, giving rainfall time to drain, said Lipow. Mitchell noted that the region produces 60 percent of the country's jet aviation fuel, 80 percent of its military-grade fuel and 40 percent of the specialty chemical feedstocks used to make products like plastic bottles and drug capsule coatings. Asked whether Harvey's impact could lead to a slowdown in American manufacturing, he said, "It's not a slowdown. It's a shutdown. I can assure you of that if we get hit."

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