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THE WALL STREET JOURNAL: White House May Tap Oil Reserves: Tuesday 30 August 2005

Closure of Wells in Region
Prompts Capacity Concerns
Amid Fragile Global Supply

By RUSSELL GOLD in Austin, Texas, BHUSHAN BAHREE in New York and THADDEUS HERRICK in Lafayette, La.
August 30, 2005; Page A2

Hurricane Katrina's march through the Gulf of Mexico and its key oil and natural-gas production facilities sparked fears of damage and rattled energy markets, moving the White House to signal its willingness to open the nation's emergency oil stockpile if needed.

The extent of the hurricane's effect may not be known for weeks, and preliminary inspections of offshore oil and gas facilities have only begun. But the concerns underscored the extent to which the U.S. has come to rely on this vital energy region in a time of world-wide supply concerns.

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U.S. Energy Secretary Samuel W. Bodman said President Bush was willing to tap into the U.S. emergency crude oil supply, known as the Strategic Petroleum Reserve, to offset Katrina's impact if necessary. Yesterday, Citgo Petroleum Corp., a unit of Petroleos de Venezuela, said it needs 500,000 barrels of crude oil from the reserve to keep operational its Lake Charles, La., refinery. The reserve has been tapped in the past following big storms.

Oil futures surged past $70 per barrel in overnight electronic trading, reaching a new nominal high, but fell back during daily trading. Oil for October delivery settled at $67.20, up $1.07 from Friday's settlement price but still below the previous record. Oil prices are still well below the high of $95.26 reached in April 1980 when adjusted for inflation. (See related article.)

Gasoline and heating-oil futures also rose, amid worries that the region's refineries may not be able to meet demand. Both could be vulnerable to more increases if any of the half-dozen major refineries near New Orleans suffers damage or is flooded and cannot restart in the next few days. Larry Goldstein, president of New York-based Petroleum Industry Research Foundation, estimated that U.S. households were likely to spend an extra $250 on gasoline bills this year, due to both the hurricane and earlier surges. He also estimated it was likely to have to spend as much as $500 extra in heating bills this winter alone.

As production has declined elsewhere in the U.S., the gulf now supplies roughly one-quarter of the oil and natural gas consumed domestically. The New Orleans area also is home to 12% of domestic refining capacity -- the industrial complexes that turn crude oil into gasoline, jet fuel, heating oil and other products. The region's concentration of production platforms, pipelines and refineries has created a giant chokepoint for the industry. And as oil companies drill farther offshore, the gulf industry has become more vulnerable to weather disruptions such as Katrina.

Though damage isn't yet known, experts believe it might be extensive and could conceivably cripple production for months. Katrina was rated a Category 5 hurricane, with winds of 175 mph, as it swept through the gulf's most prolific offshore producing region, though it weakened as it hit land.

The region's production was shut-in -- an industry term for temporarily closed off -- before the storm struck, as a precaution. The federal Minerals Management Service reported that 92% of daily oil production, or 1.4 million barrels a day, and 83% of gas production, or 8.3 billion cubic feet, remained shut-in yesterday, although the government noted the figures could be low due to underreporting.

As Katrina moved onshore, oil companies began preparing to dispatch planes and divers into the gulf to begin evaluating how badly rigs, pipelines and production platforms, which represent hundreds of millions of dollars of investment, may have been damaged. "It's just going to take some time for this to pass through before people can get out there and then it will take some time to inspect for damage," said Tony Lentini, a spokesman for Apache Corp., one of the top producers in the Gulf of Mexico.

Royal Dutch Shell PLC reported that two drilling rigs it had under contract -- Transocean's Nautilus and Noble Corp's Jim Thompson -- had been moved by the storm. The rigs are designed to float and are being tracked by their owners.

A BP PLC official said a fly-by inspection on Monday afternoon of several deepwater platforms showed no significant damage. Helicopters have landed small teams on several of the platforms to perform a more detailed inspection. Spokesman Hugh Depland said the platforms Na Kika, Mad Dog, Thunder Horse, Horn Mountain and Holstein -- all expensive deepwater facilities -- appeared to be in good shape.

Mr. Depland said a floating rig operated by Ensco International Inc. had apparently broken from its mooring and drifted 20 miles, within a mile of Holstein. He said there was no indication the two pieces of equipment hit each other during the storm.

It is not uncommon for these floating semisubmersible rigs -- used to drill wells in the gulf's deep waters -- to be moved about by Gulf of Mexico hurricanes. Last year, during Hurricane Ivan, Transocean's Nautilus was blown 70 miles but was not damaged badly.

Hurricane damage is difficult to assess quickly. When Ivan, a slightly weaker storm, took a less destructive path through the gulf last September, initial reports were encouraging. It was later discovered that the hurricane triggered hundreds of underwater mudslides that wreaked havoc on the pipeline system and took months to repair.

Oil prices have continued to surge higher in recent weeks on concerns that spare crude production capacity, now estimated to be about 1.5 million barrels, is so thin that any disruption could create a shortage. Most of that extra capacity is in Saudi Arabia, whose oil minister Ali Naimi yesterday repeated a promise to increase its pumping to full capacity to resolve any shortages in the world's crude-oil market.

Still, a note of cautious optimism was sounded by Claude Mandil, executive director of the Paris-based International Energy Agency, which coordinates the release of emergency stocks of its 26 member nations. He said the U.S. has plenty of crude oil and refined products like gasoline in inventory that could be drawn down over the next week or 10 days, by which time the damage to oil facilities will become clear. "The first thing to do is to avoid a knee-jerk reaction," he said in an interview.

--John J. Fialka contributed to this article.

Write to Russell Gold at, Bhushan Bahree at and Thaddeus Herrick at

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