Crippled Citgo Refinery Sparks Fears Thursday August 23, 4:11 PM EDT

By Richard Valdmanis

NEW YORK (Reuters) - Citgo said Thursday it expects its fire-damaged refinery in Lemont, Illinois, to remain crippled for up to six months, sparking worries that the U.S. Midwest's already thin supplies may start drying up.

"Unless someone can redirect gasoline and diesel into the area I think there's going to be a tightening of supply, and even shortages," said Bill Fleischli, director of the Illinois Petroleum Marketers Association (IPMA).

The Citgo refinery, which produces 160,000 barrels of gasoline and distillates per day, was shut Aug. 14 due to a fire in the crude distillation unit. Three days later the plant's distillation tower suffered a structural failure.

"As of today, for supply planning purposes, we are assuming that the crude unit will return to service in 20 to 24 weeks," said Adolph Lechtenberger, Citgo senior vice president of refining and petrochemicals. Citgo has estimated the cost of the damage at $25 million.

As a way of easing the region's supply shock the company said it would study ways of operating the refinery's gasoline- and diesel-producing units by bringing in feedstocks from outside the refinery.

"If we are able to deliver sufficient feedstocks and blending components, we may be able to begin producing gasoline and diesel fuel at the refinery prior to bringing the crude unit back on line," Lechtenberger said.

Midwest petroleum supplies are already languishing at low levels, with gasoline stocks more than five million barrels below last year, and distillate stocks more than four million barrels below, according to data from the American Petroleum Institute (API).

Meanwhile, Midwest pump prices have pushed well-above the national average of $1.44 a gallon, with drivers in Chicago paying $1.69 a gallon, according to the American Automobile Association's (AAA) daily survey of 60,000 service stations.

The Midwest has been treading a razor's edge for supply since last winter when Premcor closed the doors at its 80,000 barrel per day Blue Island, Illinois, refinery due to the cost of necessary upgrades.

The Illinois Environmental Protection Agency (EPA) said on Thursday it has not yet received an application from Citgo to rebuild the damaged distillation tower at its Lemont refinery, but will likely give it top priority when it arrives.

"We have a maximum of 120 days to process such an application, but we could definitely do it faster than that," said Illinois EPA official Dennis McMurray. "We will definitely expedite our part of the process," McMurray added.

McMurray said a 60-day public hearing period on the rebuild permit could be required if a member of the public asks for one, but noted that: "Obviously that can't happen until we receive the application."

Citgo is the U.S. refining and marketing subsidiary of Petroleos de Venezuela SA (PDVSA).

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Prices pushed up another dime today to $1.79/gallon in the Twin Cities.

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