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The Observer: All washed up: Oliver Morgan looks at the economic consequences of Katrina's fury leaving the US offshore oil industry in ruins: “There is a lot of damage. Shell's Mars platform, for example, had one leg badly damaged in the storm. 'It's trashed,' says one analyst.”: Sunday September 4, 2005


With a death toll in the thousands, widespread flooding, rampant looting, a million people evacuated from their homes and the declaration of a public health emergency, Hurricane Katrina has already been called America's worst natural disaster - will it also be an economic one?

The storm tore through the heart of the American offshore oil industry in the eastern gulf of Mexico. By Wednesday, according to the US government's Minerals Management Service (MMS), 91.45 per cent of US Gulf of Mexico oil production had been 'shut in' - or cut off. This amounts to some 18 per cent of US output. In addition, 83.46 per cent of its gas production was interrupted. As the week progressed production crept back - but very slowly.


President Bush ordered US oil refiners to be provided with crude oil from the 700 million barrel strategic oil reserve - a sure sign of an emergency - while suspending environmental regulations on the production of fuel.


The hurricane serves as a reminder that oil is to be found in difficult places. If it is not political instability in the Middle East or tax risk in Russia, it is Katrina, tearing around the Florida panhandle and into the lowlands around New Orleans. Oil prices, already at record nominal highs, breached $70 for the first time before falling off in response to Bush's moves. Average gasoline prices in America headed towards $3 a gallon. Some see this as a prelude to problems for some time to come. Goldman Sachs, for example, warned that growth in the third and fourth quarters could fall by at least half a per cent.


Paul Horsnell, analyst at Barclays Capital, says: 'We are looking at a system that was already getting more and more stretched. We were worried about further small interruptions and potential geopolitical risk. But this is not a small thing; this is very big. The president has asked Americans to preserve gasoline. It has a Seventies feeling to it.'


Adam Sieminski at Deutsche bank says: 'This is having a tremendous impact, and will continue to do so until some of the damage can be repaired.'


There is a lot of damage. Shell's Mars platform, for example, had one leg badly damaged in the storm. 'It's trashed,' says one analyst. Another was driven off its mooring into a bridge. Chevron's Pascagoula refinery, the ninth-largest in the US, was flooded and could take weeks if not months to restart.


According to MMS, by Wednesday 79 rigs and 482 manned platforms in the gulf had been evacuated. At that point 1.37 million barrels of oil and 8.34 billion cubic feet of gas per day were shut in. The cumulative totals since Katrina struck were 6 million barrels and 34 billion cubic feet.By Thursday, the figures were down - but only to 64 and 423, while the cumulative oil shut-in rose to 7.4m barrels.


But the problem is only partly about crude oil. As David Fyfe, of the Paris-based International Energy Agency says, the price is underpinned by strong demand, but also by structural weaknesses in the supply side.


One of these has to do with crude: 'The first is the thin margins of operating capacity in Opec. It means that while Opec has been increasing output, it has not been investing as quickly in infrastructure to increase capacity.' In other words, despite Saudi Arabia increasing production from 9.1 million barrels a day in January to 9.5 million in June, there are concerns about its sustainability.


But more pertinently he says: 'Refining capacity, particularly in the US, has been very tight for some time. US refiners have been operating pretty close to capacity.' It is the shutdown in refining and distribution infrastructure caused by Katrina that is causing most concern because it generates price spikes in gasoline, jet fuel and other products that coincide with peak driving and travelling periods. Bad news for motorists, holidaymakers, industry - and airlines, which have been trying to pass through oil price rises to customers via fuel surcharges.


Thus, Bush's release of the strategic oil reserve is of limited use. Unlike European countries, the US stockpiles only crude, which is why the 26 member states of the IEA are feeding 2 million barrels a day into the market.


According to US Department of Energy estimates, some 3 million barrels of refining capacity has come offline thanks either to refineries being shut down or reducing their run rates after Katrina. Nine have been shut down in the region and starting them up again will depend on the extent of damage and the speed with which workers - many of whom have been evacuated - can be brought back.


Sanford Bernstein estimates that refineries could be out for two months. SB analyst Neil McMahon says : 'We will only know how serious this is when we know how quickly they can fix the infrastructure.' He points out that the onshore 'gathering' systems that take oil and gas from pipelines on the gulf coast are damaged. One is currently submerged. On top of this, the key Plantation and Colonial pipelines running from Texas along the gulf and up to the east coast were shut down, while Capline, serving the midwest, was off, affecting refineries in Ohio and Indiana.


Analysts point back a year to Hurricane Ivan, which ripped through the region last September. Fyfe says: 'A benchmark is Ivan, which was supposed to be a once in a hundred years storm. The full impact came over a period of nine to 10 months, over which period some 100 million barrels of oil output was lost.'


McMahon says: 'The problem with Ivan was that there was damage to undersea pipelines from mud slides, and it is too early to tell whether this has happened.' He says the impact of Katrina is likely to be more widespread - hitting everything from rigs, through gathering installations, to refineries and pipelines, but possibly not as long-lived as Ivan. He adds: 'In terms of raw price increase, Ivan had a more marked effect, the price went from the mid $40s to a peak of $58, but it came back down quickly because the background was not as tight as it is today. But here the prices before were higher, so we could see a sustained period of oil around $60 to $70 for a longer time, rather than it coming back down.'


Horsnell believes the impact of Katrina will be far greater: 'This is going to make Ivan look very minor. There has been a greater impact on onshore resources and on general logistics. You could see a production gap totalling some 25 million barrels of gasoline over four weeks, and that is a lot. So gasoline prices will remain high.'


With Alan Greenspan - who met Bush to discuss Katrina's havoc last week - warning about the US housing market, a continued oil shock could cool already wobbly expected demand in the US.


McMahon agrees there is the danger of an economic knock-on. 'If the price is sustained at high levels you could see a limited impact on the economy. Not a recession, but a slowdown.' Sieminski adds: 'Don't forget, we have just had this major storm, and the hurricane season in the Gulf of Mexico has not even started yet. That happens at the end of September.' We have been warned.,6903,1562184,00.html 


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