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September 2005 Headlines

On Monday, 29 August, Hurricane Katrina made landfall at 6:10 AM just east of New Orleans, Louisiana, and continued to track slightly east by northeast into Mississippi. Prior to coming ashore, it was a Category 5 Hurricane, downgraded to a Category 4 storm upon reaching land. In preparation, most oil and natural gas production facilities in the Gulf of Mexico, as well as refineries (10-12 in total) in Louisiana and Mississippi, were either shut down or reduced operations starting on 27 August. The refinery shutdowns are said to impact 12-15% of total US refining capacity. These outages included the closure of a section of the Colonial Pipeline (Houston, TX to Greensboro, NC) and Kinder Morgan Energy Partners' Plantation Pipeline, both major gasoline and crude oil conduits servicing the Midwest and East Coast. In addition, the Louisiana Offshore Oil Port (LOOP) stopped offloading crude oil, for a loss of some 1.0 million barrels per day or approximately 10% of US crude imports. The shutdown of crude oil and natural gas production facilities in the US Gulf of Mexico is affecting 88-92% of the total volume located here.

Due to the vast devastation caused by the storm, the timing of recovery cannot be fully evaluated yet. It is influencing a lot of prompt pricing on a number of chemical products, but out month pricing is currently somewhat insulated. Information is slow in being confirmed, as well as what courses of action are being taken. The big unknown is how long the petroleum, refining and chemical infrastructure will be out. This depends upon the timing of the return of workers and employees that were evacuated, the recovery of crude oil supplies, the loss and subsequent return of electrical power, flood and damage assessments and repairs, and the opening of the ports and Mississippi River to traffic. The President of the United States has eased some gasoline specifications and is releasing oil from the Federal Petroleum Reserves. However, until gasoline refineries can return to production, volumes will be impacted. Projections vary from facility to facility, with estimates at 1-2 weeks and longer.

As far as the impact on methanol, there has been a strong run on all gasoline octane sources, including MTBE and aromatics. Some BTX (benzene, toluene and xylene) prices rose over $1.00 USD/gallon in the US Gulf, as refiners search for methods to satisfy gasoline and octane volume requirements. Wholesale US gasoline prices rose nearly $0.40 USD/gallon a day after the hurricane.

The large chemical storage depot of International Matex Tank Terminal (IMTT) at St. Rose, Louisiana was temporarily shut down, with only a skeleton crew remaining onsite. The IMTT storage facility is a major methanol storage and staging location for supplies to the local and Midwest region. As we go to press, the information is that IMTT did not suffer any major damage or flooding. All of the loading and unloading facilities appear to have been spared, but that power and the opening of the Mississippi to boat and barge traffic was still an issue. The Mississippi River was given clearance and reopened, but this was only to within a short distance below St. Rose. It is expected that St. Rose should return shortly, but that the movement of parcels in and out of the location will be delayed, especially upriver barge movement. There will be backlogs that will need to be addressed. Ocean-going vessels that were scheduled to discharge at St. Rose will either be delayed or seek alternative discharges in Houston. Transportation costs will suffer, as some vessels will likely be unable to fully discharge in Houston and will be used as floating offshore storage for the near-term. As September progresses, a clearer picture of the situation, as a whole, should emerge.

Less than a month after Hurricane Katrina, a second major natural disaster hit the Gulf of Mexico region and US Gulf States. Both of these major hurricanes have significantly impacted the production and transport of natural gas, LNG, and crude oil in the US Gulf, as well as US refining and chemical production located in the coastal Texas, Louisiana, and Mississippi region. Last month, we reported on the impact of Hurricane Katrina, which made landfall on 29 August just east of New Orleans, Louisiana. Numerous oil and natural gas production platforms, as well as a few remaining refinery locations, are still out due to the effects of this storm.

This month, Hurricane Rita made landfall in the Port Arthur, Texas and Lake Charles, Louisiana region early on Saturday, 24 September. The initial zone of impact was projected to be the Galveston - Texas City, Texas area of the US Gulf, aiming straight for Houston, Texas. As the storm neared shore, it angled toward the Northeast. With memories of Hurricane Katrina still fresh, a significant number of refining and chemical production facilities were taken offline as a precautionary measure and a large portion of the population in the Galveston-Houston, Texas region evacuated. It was estimated that potentially 50% of the population of the region moved inland, a head count of some +/- 2.5-3.0 million people. Due to the counter-clockwise spin of the storm, most of the wind and rain impact was felt in the eye of the storm and east/northeast, this being the Port Arthur/Port Neches/Lake Charles region at the boundary line between Texas and Louisiana at Sabine Pass. Winds in excess of 130 miles-per-hour, with rainfall in excess of 20 inches, impacted this zone. At the same time, reports from 100 miles inland in Houston and the northern zone of the city told of winds of 50-70 miles per hour with minimal rainfall.

The impact to the methanol and derivatives sector remains, with disruptions and delays to methanol shipments and supplies entering the Houston Shipchannel and the loss of derivative demand (MTBE, MMA, acetic acid) due the shutdown of enduse production capacity in the Houston, Texas City, Beaumont, Port Arthur and Lake Charles regions. The Lyondell (formerly Millennium Chemical) joint venture LaPorte Methanol facility (600,000 tonne/year) in LaPorte, Texas was closed as a precautionary measure. Lost methanol demand is conservatively estimated at several hundred thousand tonnes (+/- 66 million gallons). Most of the Houston-area facilities have returned to production by now, but the Port Arthur and Lake Charles facilities are still feeling the impact. While physical damage to specific facilities plant components is a factor, the most impact is being felt by the presence of significant water, the loss of power, and the reduced availability of manpower due to the evacuation and housing losses. As we go to press, regional power supplier Entergy Corporation is indicating that they have restored partial power to four of the seven oil refineries in this zone. It is estimated that the recovery of power to Shell Oil Motiva, Total and Valero's refineries in Port Arthur, Texas will take longer. The Huntsman Chemical complex at Port Neches, Texas is still down, with startup projected 2-3 weeks out.

As of 27 September, a number of Gulf Coast ports remain closed, with others operating under restrictions. The Houston Ship Channel is open to tug and barge traffic, but is restricting it to vessels drafting less than 35 feet. Specific sections of the Gulf Intracoastal Waterway (GICW) are also open to all tug and barge traffic. The US Department of Homeland Security reports that railroad companies are still assessing damage and are trying to open key access points and terminals. Daily updates can be found at the American Association of Port Authorities' web site.

For September, the US Gulf Houston Ship Channel Natural Gas Index rose 31.5% from last month, being fixed at $9.72 USD/MMbtu. As of the close of business on 9 September, the daily US Gulf Henry Hub prompt cash natural gas price was fixed at $11.03 USD/MMBtu. Prices have been slowly adjusting downward, as production capacity has been returning in the US Gulf. The forward months are still showing a premium with November, December 2005, and January 2006 posting a Nymex gas price of $11.853, $12.318 and $12.618 USD/MMBtu, respectively. Natural gas stock levels did reverse their strong building trend, but gas stocks were still added during the first week of September when gas production was out in the Gulf.

In the wake of Hurricane Katrina, the US Gulf Houston Ship Channel Natural Gas Index jumped to $9.72 USD/Mmbtu in September, up 31.5% from August. At this level, the domestic US methanol producers' cash cost is $1.10-1.15 USD/gallon, a premium of $0.20-0.25 USD/gallon over the September posted non-discounted barge US Gulf methanol price. The US Department of Minerals Management and Services (MMS) estimates that 8 Bcf (billions of cubic feet) of natural gas production was still shut in at the end of September, with cumulative losses totaling 181 BCF since 26 August. The Henry Hub price was suspended as of 23 September owing to the closure of the hub. Natural gas last traded at $14.50 USD/MMBtu at this location. As of the close of business on 29 September, forward November, December 2005 and January 2006 were posting a Nymex gas price of $14.196, $14.686 and $14.991 USD/MMBtu, respectively.

The extremely high natural gas pricing in the Gulf is now affecting methanol production economics at the remaining North American units. The short-term impact has been formal closure announcements of some of the remaining methanol capacity. The Celanese Bishop, Texas facility (450,000 tonne/year) formally closed at the end of August. This plant was already planning to shut down, with a new supply agreement from Trinidad in place as of July 1, 2005. On 30 August, Methanex Corporation formally disclosed plans to close its Kitimat, BC units in early January 2006, as high natural gas prices have made them "no longer economically viable." The company has indicated that it may try to close the facilities earlier. Similarly, Celanese Corporation has indicated that they will likely close their Edmonton, Alberta Canada methanol production facility (800,000 tonne/year) during late 2006.

Due to high natural gas prices in North America, Methanex Corporation labeled its Kitimat, BC methanol and ammonia units as "no longer economically viable" and initially targeted shutting down the facilities in January 2006, after existing ammonia supply commitments have been honored. At the time, Methanex expressed that it would try to shut down the units earlier, if possible. This now appears to be the case, as the company announced on 29 September that they struck an agreement with Mitsui & Co., Ltd. on the ammonia contracts, and, because of this, will now be able to shut down the units on 1 November 2005. When Methanex first announced the closures, it was stated that they were discussing the future of certain assets at Kitimat with a third party, which was later revealed to be Canadian natural gas producer EnCana Corporation. According to the agreement announced on 20 September, Methanex will provide EnCana with terminalling services at Kitimat, with EnCana to import diluting fluids through the site for their Alberta oilsands projects. The pact also gives EnCana the option of purchasing the Kitimat site, excluding the methanol and ammonia units, within five years. Methanex is targeting terminal services to begin in early 2006.

In addition to closing its Kitimat site early, Methanex formally revealed that it will shut down the Waitara, New Zealand methanol facility (500,000 tonnes/year) on 30 September, citing poor plant economics. In its announcement, the company stated that the site will remain a "flexible asset, with future operations dependent on securing economically priced natural gas."

Methanor Vof announced on 22 September that they would be taking one of their methanol production trains (Unit #2: 450,000 tonne/year) out of operation permanently at the start of the fourth Quarter due to economic hardship linked to rapidly escalating feedstock costs. Their remaining methanol production train (Unit #1: 500,000 tonne/year) will be dropped to minimum operating rates, as the unit is required for hydrogen and on-site support for other operations at the Delfzijl, Netherlands location. The #1 unit is to run through Q1/Q2 2006, after which it could also shut down. Methanor indicated that it has begun talks with other methanol sources, seeking more affordable supply. Also, they would seek a new level of €250 Euro per tonne in order to supply customers out of the remaining unit, otherwise they could claim economic hardship and void contracts.

Iran's National Petrochemical Company (NPC) issued a progress report on the Zagros Petrochemical "4th Methanol" unit in Assaluyeh, with the 1.65 million tonne/year project now 97% complete and pre-commissioning work underway. Start-up is targeted for the end of Q1 2006/start of Q2. Zagros also has a second ("6th Methanol") 1.65 million tonne/year methanol project, as well as an 800,000 tonne/year DME unit, going forward at this location for a later date.

Huntsman Petrochemical Corporation shut down its Port Neches, Texas PO/MTBE facilities (MTBE capacity: 260 million gallons; PO: 525 million pounds) on 21 August for what was to be 48 days of unscheduled maintenance and repairs. As a result, the company declared force majeure on production. At mid-September, the repairs were said to have proceeded faster than expected, with the units targeting a restart around 21st September, with full production anticipated by the end of the month. However, with the arrival of Hurricane Rita in the Gulf Coast on 24 September, these plans were scuttled and the plant was rapidly closed back down. Huntsman was forced to shut down Port Neches, along with several other facilities in Texas and Louisiana, as well as its Woodlands, Texas offices, on 22 September. While the units did not suffer any sizeable damage, the return to production is being hampered by significant power outages, infrastructure restrictions and employees' ability to return to the area.

The effects of Katrina and Rita are extending beyond the Gulf region, with many US consumers seeing higher prices and experiencing supply issues at the gasoline pump. Because of the "extreme and unusual fuel supply circumstance," the US Environmental Protection Agency (EPA) has granted several emergency fuel waivers to help ease supply constraints, and has been monitoring the situation closely with the Department of Energy (DOE), in case further action is needed. On 31 August, the EPA issued a nationwide fuel waiver through 15 September, setting aside the summer fuel requirement and allowing early introduction of winter blends to combat shortages. The Richmond, Virginia region was granted a limited waiver from RFG requirements for 2-9 September, with the waiver then extended until 20 October. An RFG waiver has also been granted for the St. Louis, Missouri area until 7 October. The EPA issued an RFG waiver to the Houston/Galveston area on 21 September, and then extended the waiver the next day to include Dallas/Fort Worth, allowing conventional gasoline to be sold through 30 September. This has since been extended to 20 October. As the situation continues to evolve and more complete assessments are possible, further action may be forthcoming.

Eastman Chemical announced that it would increase its global list and off-list acetic acid prices by $0.05 cents per pound, effective 1 October. BP Chemicals has announced an increase of $0.05 USD per pound in North America. Celanese Chemicals also announced Q4 contract price increases for acetic acid, with North America to go up $0.05 cents/pound, and Central America, South America and Asia to increase $110 USD/MT. The company will boost Q4 VAM prices by $0.08 cents/pound in North America, $175 USD/MT in South and Central America, and $135 USD/MT in Asia. All increases are effective 1 October.