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Financial Times: Fears over long-term damage to oil output: Tuesday 30 August 2005


By Sheila McNulty in Houston and James Boxell and Javier Blas in,London

Published: August 30 2005


Hurricane Katrina yesterday unravelled parts of the delicately balanced US oil and gas market, as analysts estimated roughly 12 per cent of total US crude oil production and 10 per cent of US refining capacity had to be shut down. That, however, was only the beginning.


"The story for the market is the longer-term impact of rig, platform or pipeline damage," said Katherine Spector of the Global Energy Strategy team of JPMorgan Chase Bank. She noted that 2004's Hurricane Ivan, the last such damaging storm to hit the US, "proved that the vulnerability of offshore infrastructure is powerful mudslides and churning water below the surface that moves pipes and platforms that are either buried or anchored to the Gulf floor".


On the gas side, she said, the Henry Hub, the delivery point for the Nymex future contract and the biggest, most liquid trading point in North America, also had to be shut down. Henry Hub managed to avoid a hit, however, and was reopened later in the day, preventing a crisis in natural gas markets. Nonetheless, it will take several days to determine overall damage to the sector.


"That a significant percentage of natural gas production in the Gulf of Mexico is currently shut in due to the impact of Hurricane Katrina is a given," Ms Spector said. "But damage to offshore pipelines and production facilities now becomes paramount to the gas market."


Mark Flannery, of equity research at Credit Suisse First Boston, said almost 10 per cent of US refining capacity had been directly affected by the storm, meaning refined product supply was likely to remain tight in the coming weeks.


"The direct impact of Katrina will be yet higher gasoline prices," said Paul Sankey of Deutsche Bank. The hurricane was downgraded from a Category 5 - the top designation - to a Category 4, and then a Category 3, with sustained winds near 125mph and faster gusts being reported.


Damage was, nonetheless, expected to be extensive, with warnings of hurricane-force winds spreading as far as 150 miles inland along the path of Katrina.


The National Weather Service reported coastal storm flooding up to 20 feet above normal tide levels, along with "large and dangerous battering waves". It also warned that up to 15 feet of flooding was still possible in the greater New Orleans area, bringing water near the tops of the levees.


As much as 15 inches of rain was expected in some areas, and tornado warnings were issued for Mississippi, Alabama and Florida.


New Orleans is considered the heart of Gulf of Mexico oil and gas production. Leading oil and gas companies issued lists of production and refining facilities they shut as the storm pounded south-east Louisiana and southern Mississippi. About 70 companies were expected to report to the Minerals Management Service on the hurricane's impact on their Gulf production. Royal Dutch/Shell, for example, said it had closed all its daily production in the Gulf of Mexico, equal to about 420,000 barrels of oil and 1.3bn cubic feet of gas. Shell and BP said it was impossible to speculate on the possible damage.


The bigger fear was about what impact the hurricane would have on longer-term production and refining. "The full effect of the storm will likely not be seen until refiners are able to return to facilities to assess damage," said Mr Flannery.


Last September, Ivan caused huge disruption to oil production for several months after pipelines were damaged by mudslides in the Mississippi delta. It also destroyed seven platforms and severely damaged six others but the impact of the pipeline damage was more serious.


Production from the Gulf of Mexico was still 200,000 barrels a day below normal two months after Ivan devastated the coastline. Speculation has centred on whether President George W. Bush should release some of the nation's 700m barrels of strategic oil reserves, but analysts said this was unlikely to help in the short term.


Adam Sieminski, oil analyst at Deutsche Bank in New York, said: "Use of the strategic reserve is not really appropriate for an event such as this. The SPR is crude oil, but the big problem we have at the moment is gasoline and the impact from the hurricane on capacity in refining. Where the SPR might become useful is if there is damage to pipelines like we saw with Ivan."


Deborah White, senior oil analyst at Société Générale in Paris, said: "The big concern is refinery operations. We have been building crude stocks for ages, but the industry is short of product stocks, particularly gasoline. And we have no refinery spare capacity to compensate for the Louisiana refinery shutdowns."


There are 17 petroleum refineries with a combined crude oil distillation capacity of more than 2.7m barrels a day in Louisiana, the second highest in the US after Texas. Ivan at its peak shut 1.4m b/d of production, sank several off-shore platforms, damaged over 100 underwater pipelines, and disrupted refinery operations.


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