Colonial Pipeline Outage Scenario

The What and Who

The Colonial Pipeline, which supplies fuel to markets throughout the East Coast, reported on Friday, May 7 that it experienced a network outage requiring it to shut down operations. Over the weekend, the company confirmed that the outage was the result of a cyberattack, which they said stemmed from a rogue group of hackers known as DarkSide. Colonial has reportedly engaged the cybersecurity company FireEye to respond to the threat.

What Is the Colonial Pipeline?

The Colonial Pipeline runs from Houston, TX up to Linden, NJ, supplying 2.5MM bbl/d of gasoline, diesel, heating oil, and jet fuel. The pipeline makes up ~ 45% of fuel supplies to the East Coast. The pipeline also operates numerous spur lines, which send fuel to Tennessee, southern Georgia, eastern North Carolina, and other areas further from the main pipeline.

How Does the Colonial Pipeline Operate

The Colonial Pipeline operates in five-day cycles, meaning markets are used to being restocked approx. every five days. Markets scheduled to receive fuel over the weekend will be the tightest, while other markets have been able to go longer without fuel. The longer the outage lasts, though, the more severe the shortage may be.

Once the network outage is resolved, refilling inventories will be the next challenge. Fuel moves at a rate of 3-5 mph through the pipeline, so it takes 10-14 days to ship fuel from Houston to New Jersey. Even after pipeline operations resume, it will take weeks to bring markets back to full operations.

What Happens During a Cyberattack 

When a cyberattack is detected, companies typically shut down both infected and non-infected systems to limit the spread of the damage. Once the threat is neutralized (by paying the ransom or eliminating the malware), it can still take time to bring systems back online.  IT teams must go through each system to look for damage or lingering malware.

The Colonial Pipeline Company was hit by a ransomware attack, which involves hackers shutting down major systems or locking down critical data. They then extort the owner to pay anywhere from hundreds of dollars to multi-millions of dollars to resume system operations.

It is believed the group DarkSide is behind the attack. That group reportedly uses a double extortion approach, locking down data and threatening to make it public if the ransom is not paid.

 How Long Could This Last

 Most recent update from Colonial - As of 12:30 EDT on May 10^th - Colonial has noted that a majority of the system will return to full operational service by end of the week (5/14).

 The length of the outage will be critical in determining how severe the impact is:

• Short Outage: If the pipeline is offline less than five days (ie, a resolution before 5/11), markets could bounce back relatively quickly. Suppliers would be able to reopen their allocations and allow normal purchases, since a pipeline shipment would be forthcoming.
• Intermediate Outage: If the pipeline is operational before next Monday, the impact will likely be short-term outages along the pipeline. Refiners may need to limit their output, and crude inventories might rise a bit.
• Long Outage: A prolonged outage, extending over ten days, could severely disrupt Gulf Coast refining operations, causing major builds in PADD 3 crude inventories and severe shortages of fuel along the East Coast. Barge shipments from other countries would begin flowing to NY Harbor, but transporting that fuel throughout the Gulf Coast would be a challenge. Given the on-going carrier shortage, the result would be further constrained markets and major logistics challenges.

Are There Other Ways to Supply the East Coast?

The Colonial Pipeline provides roughly half the fuel consumed along the East Coast. The rest comes from a variety of sources:

• Other pipelines may provide some help. The Plantation Pipeline runs a similar route, traversing from Gulf refiners up to Washington DC. However, it carries only a quarter as much fuel, supplying 720 kbpd. The Plantation is an existing pipeline, so its ability to scale up to fill the gap is limited. Besides the Colonial and Plantation, the only other pipeline supplying the East Coast is the Laurel Pipeline, which transports from the Chicago region to Pennsylvania.
• Barge deliveries are possible for different areas. Gulf Coast refiners may use barges to haul fuel to coastal markets such as Savannah and Charleston, though this method is slow and pricier than pipeline deliveries. European refiners can ship more fuel across the Atlantic to New York Harbor, though these deliveries take as long as two weeks. The situation would have to extend for weeks for European imports to catch up.
• Long-hauled fuel from surrounding regions will be the most important emergency measure for fuel. Whether it’s trucking fuel from Ohio and other unconstrained markets eastward, or hauling product from coastal markets inland, truck deliveries will be a critical logistics option to meet demand.

How Are Governments Responding

The Federal Motor Carrier Safety Administration has declared an emergency for states ranging from Texas to New York. The emergency waives hours of service requirements, allowing drivers to work longer to deliver fuel.

From a supply standpoint, the federal government is evaluating releasing supplies from the Northeast Gasoline Supply Reserve. The reserve of 1MM bbls of gasoline held in New York, Boston, and Maine would only be a temporary solution, but it might help mitigate higher prices in some northern markets.

How Will This Impact Fuel Prices

Fuel prices will see different impacts in different areas. Texas, which supplies the pipeline, may see prices fall as inventories rise. For markets along the Colonial Pipeline’s path, expect to see prices rise as local inventories are drawn down. Higher prices can stem both from higher supply costs and from higher freight rates, given driver shortages and logistics constraints.

NYMEX prices, which are based on NY Harbor rates and set the tone for national fuel prices, could be particularly impacted. The Colonial Pipeline transports fuel to New Jersey, so it’s an important supply source for NY consumers. As northeast prices rise, NYMEX Futures will also get a lift. That could affect consumers around the country since many fuel indexes are pegged to the NYMEX. Gasoline prices increased to $2.20 in early Monday morning trading, though since they have fallen lower (As of writing NYMEX Rbob $2.232/gal unchanged from Friday close).

Before the cyberattack occurred, the Colonial Pipeline had not been running at full capacity since fuel demand is lower. Diesel demand tends to be a bit lower in May, which will help prevent shortages. Gasoline demand, on the other hand, is ramping up ahead of summer driving season. Analysts had expected gasoline prices to peak ahead of Memorial Day, but now expect prices to peak much sooner.

Update as of late day May 11 2021

The Colonial Pipeline is making progress in the full restart of its operations, and is working with the US government to help alleviate fuel supply disruptions.

Some regional markets are experiencing supply constraints and/or not serviced by other fuel delivery systems are being prioritized. Colonial is collaborating with the DOE to evaluate market conditions to support this prioritization, Colonial said in its latest statement.

Colonial had previously said it hopes to have the pipeline substantially back online by the end of the week as it restarts one segment at a time. Some additional lateral lines are operating manually to deliver existing inventories to markets along the pipeline, it added.

Colonial said it delivered approximately 967,000 barrels (around 41MM gals) to various delivery points along its system. It had also taken delivery of an additional 2MM bbls (around 84MM gals) from refineries for deployment upon restart.

The US EPA noted late May 11 that it had expanded an emergency fuel waiver allowing 12 states and D.C. to sell off-spec gasoline through the end of the month to deal with the pipeline shutdown.

The expanded waiver runs through May 31 and covers: Alabama, Delaware, the District of Columbia, Georgia, parts of Florida, Louisiana, Maryland, Mississippi, North Carolina, Pennsylvania, South Carolina, Tennessee and Virginia.

The DOT separately late May 11 issued a new order allowing trucks to carry overweight loads of gasoline and other fuels on highways to move more supply along Colonial's route.