FBI: Colonial Pipeline Hacked By ‘Apolitical’ Group DarkSide

Some of Colonial’s regional pipelines are again operational, being brought back online in a “stepwise fashion.”

On Monday afternoon — three days after Colonial Pipeline shut down operations on its 5,500 mile pipeline network due to a cyber attack — the FBI in a statement confirmed that the attacker was a group of so-called professional hackers called Darkside. 

Darkside on Friday had hacked the Colonial network, downloaded 100 gigs of data and demanded payment of ransom to hand back control, according to a report from Reuters.

Colonial shut down its entire system rather than run the risk of cyber-terrorists causing havoc with the system. According to Reuters the cloud storage system to which the hackers uploaded the stolen data was taken offline — presumably preventing Darkside from accessing it.

Colonial is reportedly working with Fire Eye to root out the hackers, who according to their website are not terrorists, just “apolitical” opportunists. “Our goal is to make money and not creating problems for society,” DarkSide wrote on its site.

Colonial pipeline says it “continues to dedicate vast resources to restoring pipeline operations quickly and safely,” and that getting back to normal is “a process that requires the diligent remediation of our systems, and this takes time.”

Some of Colonial’s regional pipelines are operational, being brought back online in a “stepwise fashion.” This gives hope to customers that the outtage on the 5,500 mile network will be temporary and deliveries of 2.5 million barrels per day of jet fuel and other petroleum products can return to normal. 

The market doesn’t seem terribly concerned. Front-month gasoline contracts for delivery in New York harbor had spiked from $2.10 per gallon last week to $2.17 over the weekend, but fell Monday to $2.12. Gulf Coast gasoline is about 7 cents cheaper. Average nationwide gasoline prices are up 6 cents in the past week, at $2.97. That’s up more than a buck from this time a year ago. 

So what happens if operations are not immediately returned to normal? It could mean potential disruptions for a region that refines just 800,000 barrels per day, but has 5.3 million bpd of current demand. Jason Gabelman at Cowen notes this morning that inventories of oil in storage will help manage disuptions in the near term, with East Coast refineries pushing their own inventories into the market first while additional fuel is trucked in. 

Helping in this effort, the Biden administration has temporarily waived federal rules restricting the number of hours fuel truck drivers can work each day. But trucking is small scale, and deliveries by ship are initially limited to supplies already on the water. So Cowen expects inventories in the East Coast region to fall below 5-year lows in a week from now. Meanwhile, as fuel backs up, inventories in the Midwest, Rocky Mountain and Gulf Coast regions are expected to soon hit 5-year highs. Balancing the system, oil can escape the U.S. via export tanker from Texas, while new emergency shipments to New York from European refineries will start arriving in a couple weeks. 

Oil markets analyst Louise Dickson writes today that European refiners and traders can try to play market “though the arbitrage opportunity will likely be met by cargoes already at sea, as the two-week journey over the Atlantic at this point is still a gamble if the pipeline is swiftly restored.”

Refineries in the region owned by Phillips 66

PSX
, Delta Airlines

DAL
and PBF Energy

PBF
, could significantly benefit. Manav Gupta at Credit Suisse

CS
notes that PBF has benefitted from downtime at the Colonial pipeline in the past. Refiners that send their products north through Colonial will miss sales. Marathon Petroleum

MPC
could see the biggest negative hit, of $130 million if the line is down for a month. Valero would lose $90 million a month. According to Reuters, Valero has chartered a 330,000 barrel tanker to haul shipments from the Mississippi River around to the North East. 

The Biden administration’s move to relax rules limiting the number of hours fuel truck drivers can work per day will help on the margin. But in the long-term it would be helpful to national energy security if the U.S. Congress were to overhaul the Jones Act — which limits the shipping trade between U.S. ports to only ships built in the U.S. and manned by U.S. sailors. An act that was originally intended to support homebuilt shipping prevents empty foreign-flagged tankers from picking up a cargo of jet fuel in Houston and sailing it up to New York harbor. Colin Grabow of the Cato Institute, a perennial Jones Act hater, says that outages like the Colonial Pipeline would be far less harmful if the system had more potential redundancies and optionalities built in — which the Jones Act now prevents. 

Meanwhile, in Michigan, the pipeline outage has broad new urgency to the fight between Gov. Gretchen Whitmer and the Enbridge

ENB
pipeline company, which operates a 540,000 bpd line under the Straits of Mackinac, which connect Lakes Michigan and Lake Huron. A spill there could pollute the world’s biggest system of fresh water lakes. In November she ordered cancelation of the pipeline’s easement, and operations shut down by May 12. Enbridge has appealed, says it won’t shut down without a court order, and that doing so would devastate their customers in Michigan, Ontario, Quebec, Ohio and Pennslyvania. Whitmer has called it a “ticking time bomb.”

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