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The New York Times: Another Storm Casualty: Oil Prices: “Shell, the company with the largest operations in the Gulf of Mexico, also said yesterday that it would dispatch an aircraft to review the status of its assets in the area.”: Tuesday 30 August 2005



Published: August 30, 2005


The region that produces and refines a major portion of the nation's oil and natural gas was largely shut down by Hurricane Katrina yesterday, further tightening strained energy markets and sending prices to new highs.


Gulfport, Miss., and New Orleans suffered major damage.

As oil companies evacuated offshore operations throughout the Gulf of Mexico, oil production in that region was reduced by 92 percent and gas output was cut by 83 percent.


The latest interruptions in oil supplies are likely to send retail gasoline prices even higher than the current average of $2.60 a gallon. They have prompted the Bush administration to say it would release emergency oil stocks from the Strategic Petroleum Reserve if needed.


"We are still in the soap-opera phase where everyone is still wondering what is going on," said Dan Pickering, the president of Pickering Energy Partners, a Houston-based energy research firm. "The next 24 to 48 hours, as the companies get out to see if there has been any damage, are really going to determine how significant this is."


Halfway through the hurricane season, the storm hit at an especially bad time for consumers, who have seen gasoline prices climb to their highest level in a generation, and adds to worries that oil prices might be hurting the American economy.


Hurricane Katrina could result in insured damages of more than $9 billion, making it perhaps the costliest storm since Hurricane Andrew in 1992, according to Risk Management Solutions, which assesses catastrophes and is based in Newark, Calif. The storm disrupted maritime traffic and trade, as well as caused losses at port and shipping facilities.


Crude oil prices on the New York Mercantile Exchange closed at $67.20 a barrel yesterday, up 1.6 percent, after touching a high of $70.80 a barrel in earlier electronic trading.


Natural gas futures soared 11 percent after operations at a major hub in Louisiana were temporarily halted. They closed at $10.85 a thousand cubic feet, after reaching a high of $12.07. Disruptions at refineries also pushed futures for gasoline and heating oil to record highs on Nymex. Gasoline contracts closed up 6.9 percent at $2.06 a gallon while heating oil gained 3.9 percent, to $1.91 a gallon.


Producers are currently pumping as much oil as they can and have little spare capacity left to make up for any shortages. While that leaves no margin for major disruptions from hurricanes and other disasters, most analysts cautioned that it would be days before a full assessment of the damage to pipelines, refineries and offshore platforms was completed.


The Gulf of Mexico, which produces 27 percent of the nation's oil and a fifth of its natural gas, is dotted with nearly 4,000 platforms linked by 33,000 miles of underwater pipelines. Over the weekend, oil companies withdrew their workers from 615 platforms and 96 drilling rigs in the gulf.


Oil production was reduced by about 1.4 million barrels yesterday and gas production by 8.3 billion cubic feet, according to the Minerals Management Service, a unit of the Department of the Interior. Since Friday, oil output has been cut by a total of 3.1 million barrels. Along the coast, at least nine refineries were closed in anticipation of the storm. These have a total refining capacity of about two million barrels a day, or 10 percent of the nation's refining output.


Oil companies now have to wait until heavy winds and rain die down before they can dispatch helicopters to survey their deepwater facilities and get an idea of the destruction. That is unlikely to happen before today at the earliest. But in one of the earliest indications of the damage from the storm, Royal Dutch Shell said that tracking devices onboard two offshore drilling rigs showed that they had shifted out of location yesterday. The rigs are contracted to Shell and owned by two companies, Nobel and Transocean. Shell, the company with the largest operations in the Gulf of Mexico, also said yesterday that it would dispatch an aircraft to review the status of its assets in the area.


Valero, the nation's largest independent refiner, indicated that it might be two weeks before it could restart its St. Charles refinery in Louisiana. The refinery was under three feet of water and sustained "minor damage" to its cooling tower, the company said.


Hurricane Katrina is the most severe storm to affect the oil industry since Hurricane Ivan tore through the gulf last September. That storm destroyed seven offshore platforms and cut 7 percent of the region's yearly oil production and 4 percent of its total gas output. It also caused huge damage to the underwater pipeline network, requiring as much as six months to repair.  


The ability of refineries to resume production quickly will be another factor likely to weigh on oil markets this week. The largest refinery shut by the storm has a capacity of 493,500 barrels of oil a day and is run by Exxon Mobil in Baton Rouge.


"The crunch is on refineries," said Roger Diwan, a managing director at PFC Energy, an oil consultancy in Washington. "Restarting a refinery is a very delicate operation. These things can blow up. They are complicated, old and cranky.


"If refineries don't start by Wednesday or Thursday, the stock draw is going to be dramatic," he said. "Already, gasoline stocks are low. This will further tighten the market."


The storm forced the temporary closing of crucial oil terminals, including the Louisiana Offshore Oil Port, the largest oil-importing port in the United States. The shutdown, which also stopped pipeline deliveries of oil from the port, could prevent about a tenth of the nation's oil imports from reaching refineries.


To make up for any shortfall in supplies, the Department of Energy said yesterday that it would consider lending crude oil from the nation's emergency stockpiles if refiners asked for it. So far, no such call has been made.


Last year, after Hurricane Ivan disrupted production, the Energy Department agreed to lend more than five million barrels to refiners from the strategic reserve, which currently stocks 700 million barrels.


President Bush alluded to the energy situation today during a appearance in El Mirage, Ariz., where he was speaking on Medicare.


"You just got to understand that the situation we got ourselves into, dependency on foreign sources of oil, took a while to get there, and it's going to take a while to become less dependent," Mr. Bush said.


Senate Democrats have pressed the president to use the reserve to help bring prices down.


"If there was ever a time for the Strategic Petroleum Reserve to be tapped, it would be now," said Senator Charles E. Schumer of New York.


In response to the storm - and rising prices - Saudi Arabia's oil minister, Ali al-Naimi, said his country, the world's top oil producer, would make sure no one would run out of oil.


"Saudi Arabia stands ready to increase crude oil production immediately to 11 million barrels per day and sustain that level to replace any shortages in the crude oil market," Mr. al-Naimi said in a statement carried by the Saudi Press Agency. "We continue to be in close contact with all our customers, especially, those in the U.S., to assist them with any shortfall in oil supplies."


Refineries might prove more resilient in recovering from the storm than other energy infrastructure, like undersea pipelines or floating oil and natural gas platforms, according to some refining experts.


"This was a big and severe storm and it hit where a substantial portion of our production and refining capacity is concentrated," said Edward H. Murphy, the general downstream sector manager for the American Petroleum Institute, an industry trade group. "Refineries are built to withstand storms."


Almost all refineries in the Gulf Coast area were designed for protection from very high winds, according to S. Frank Culberson, chief executive of the Rimkus Consulting Group, a forensic consulting company that examines energy installations after they are hit by natural disasters.


"Usually the refineries fare pretty well, as long as they batten down the hatches and wait it out," Mr. Culberson said. "There might be damage to some storage or marginal operations, but the main refining units should remain shut down only temporarily."


Some airlines were also concerned about the rising premium they have to pay for jet fuel. Airports in a swath from Atlanta to Dulles outside Washington depend, at least in part, on one refinery in Memphis. Some analysts said that with the Louisiana terminal closed and imports curtailed, the refinery might run out of crude oil stocks within the next couple of days.


Even part of the Strategic Petroleum Reserve in Louisiana was shut down, with workers in New Orleans evacuated and operations in Bayou Choctaw, where 72 million barrels of oil are stored near Baton Rouge, closed and evacuated. Other locations of the reserve, in Texas and Louisiana, remained in operation yesterday, the Department of Energy said.


Oil refinery officials, meanwhile, remained cautious yesterday as they waited for an opportunity to send employees back to Louisiana to assess the effects of the storm. Mindy West, a spokeswoman for Murphy Oil of El Dorado, Ark., which operates a refinery in Meraux, La., with normal capacity to process 125,000 barrels of oil a day, said that today would be the earliest the company could examine the refinery.


Adam E. Sieminski, the chief energy economist at Deutsche Bank in New York, said: "The real story is not going to be known until workers can get back on the platforms and assess the damage. Are the platforms still there? Have they been damaged? Are the pipelines still there? Have they moved?" 

Jad Mouawad reported from New York for this article and Simon Romero from Houston. Reporting was contributed by Anne E. Kornblut in El Mirage, Ariz.; Micheline Maynard in Detroit; and Vikas Bajaj in New York.


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