Assessing Rita

HURRICANE AFTERMATH

Hurricane Rita, which walloped the oil, gas, and chemical industries along the U.S. Gulf Coast a little more than a week ago, caused less damage than originally expected.

Still, this second blow, following close on the heels of Hurricane Katrina's devastating effects a month ago, again hurt gas and oil production, shut down petrochemical plants, and further tightened availability of energy and raw materials.

Four days after Rita's landfall along the border of Texas and Louisiana as a storm packing 120-mile-per-hour winds, oil production of 1.5 million barrels per day in the Gulf had not resumed, according to the Department of the Interior's Minerals Management Service. Daily gas production of 10 billion cu ft was just 20% of normal.

According to the petrochemical consultancy Chemical Market Associates Inc. (CMAI), the storm “resulted in the largest precautionary shutdown of petrochemical and refinery-related assets in the history of the U.S. industry.” CMAI's tally of assets off-line due to the storm showed significant reductions in North American operating rates. About 34% of propylene capacity was down, as was 56% of ethylene capacity, 55% of high-density polyethylene, 67% of linear low-density polyethylene, 68% of butadiene, 83% of polybutadiene, 49% of benzene, 44% of toluene, and 41% of chlorine.

Shortages created by plant damage, lack of utilities, flooding, and scarcity of manpower led to multiple declarations of force majeure. They came from Total, Basell, Innovene, and Sunoco for polypropylene; DuPont for ethylene copolymers made in Orange, Texas, and aniline, acrylonitrile, hydrogen cyanide, and acetonitrile made in Beaumont, Texas; Akzo Nobel for metal alkyls made in Deer Park, Texas; and PPG Industries for all products manufactured in Lake Charles, La., including caustic soda, chlorine, vinyl chloride, and various chlorinated solvents.

Windows were blown out of the administration building at PPG's Lake Charles plant, where the wind also destroyed sheds and damaged some roofs.

Other plants close to where Rita made landfall were also compromised. Lyondell Chemical says its ethylene glycol plant in Beaumont will be out of service for a month. ExxonMobil's refinery, chemical, and lubricant plant in Beaumont is still without water and electricity. Huntsman's ethylene plants in Port Arthur and Port Neches, Texas, also have no power or utilities, and they could be off-line for a month or more. Securities analyst Frank Mitsch of Fulcrum Global Partners estimates Rita will reduce Huntsman's third-quarter earnings by $20 million.

Like many other plants, Dow Chemical's operations in Texas and Louisiana, including those in Plaquemine and Hahnville, La., damaged in the last storm, so far appear to have suffered no significant structural damage from Hurricane Rita. But Dow points out, as do others, that this latest storm further complicates fuel, gas, and raw material supplies, as well as transportation logistics around the Gulf of Mexico, already significantly stretched because of Katrina.

A storm of Rita's magnitude must have an impact on industry earnings, and some firms have intimated as much. Air Products & Chemicals says the whammy from two major hurricanes within a month of each other will reduce earnings in its fiscal fourth quarter by 5 to 7 cents per share. Eastman Chemical and Cytec Industries have also warned shareholders to expect an impact on earnings since Katrina hit.