MARKET WATCH
Energy prices retreat in profit-taking

Sam Fletcher
Senior Writer

HOUSTON, Oct. 3 -- Energy futures prices retreated in profit-taking Sept. 30, albeit to still high levels as traders continued to worry about possible supply shortages this winter.

Robert S. Morris at Banc of America Securities LLC, New York, said: "While uncertainties regarding the resumption of both Gulf [of Mexico] production and refining operations underscored the rise in oil prices during the first half of [last] week, concerns about demand destruction along with an unexpected build in US gasoline inventories, due largely to a nearly 30% rise in gasoline imports along with a drop in gasoline demand, weighed on oil prices as the week wrapped up. The back-to-back impact of Hurricanes Katrina and Rita have left around 20% of US refining capacity, or nearly 2 million b/d, offline, while nearly 1.5 million b/d of offshore gulf production (not including state water and onshore volumes) remains shut in."

The rise in natural gas prices continued to outpace that of oil prices because of the hurricanes' potentially greater impact on gas supplies from the gulf, said Morris in an Oct. 3 report.

The US Minerals Management Service said 471 offshore platforms and 33 drilling rigs in the gulf remained without crews Sept. 30. MMS reported 1.5 million b/d of crude and 7.9 bcfd of natural gas are still shut in, which amounts respectively to 97.8% and 79.4% of normal production from the gulf. Cumulative lost production from the Gulf of Mexico since Aug. 26 totaled 40.8 million bbl of crude and 196.5 bcf of gas.

"However, we believe that total shut-in volumes were underestimated given that production in state waters and onshore along the Gulf Coast are not included in the MMS data, which is the only cumulative data available on shut-ins even though several companies have noted they shut in onshore volumes," said Morris. "Thus, it is still difficult to assess the real level of 'backed-out' demand [for natural gas] at this juncture."

Rigs damaged
Meanwhile, the industry is still assessing storm damage to Gulf Coast oil and gas infrastructure. MMS officials said 35 offshore platforms were destroyed by Hurricane Rita, while 16 more sustained extensive damage. It said 13 rigs went adrift, with 6 becoming grounded and 9 reporting other problems.

"Hurricane Rita proved to be even more destructive than Katrina for drilling rigs," said Angeline M. Sedita, senior vice-president of oil service equity research at Lehman Bros. Inc., New York.

Two of Diamond Offshore Drilling Inc.'s semisubmersible rigs, the Ocean Saratoga and the Ocean Star, broke free from their moorings during the storm and grounded in 35 ft of water 100 miles from their original positions. "Both rigs will see some downtime for repairs but will return to service in the fourth quarter," said Sedita.

Ensco International Inc. sustained minor damage to three rigs. "The drill floor of the ENSCO 68 shifted, the ENSCO 69 skid-off drilling package also shifted on the oil company platform, and the ENSCO 90 is not trim," Sedita said.

GlobalSantaFe Corp. reported severe damage to two jack up rigs, the GSF Adriatic VII and the GSF High Island III. "It is likely these two rigs will be considered total losses," predicted Sedita.

A Nabors Industries Ltd. deep drilling barge, Rig 300, sustained water damage to the electrical, power, mud pump, and other systems that will take weeks to repair. The control systems and quarters of the firm's Dolphin 111 jack up suffered water damage, while the mast of another jack up, Rig 54, was blown over, Sedita reported.

Noble Corp.'s Noble Max Smith semisubmersible drifted 123 miles from its prestorm location and had a hole punctured on its starboard outboard column. The submersible Noble Joe Alford's support members below the hull "were either bent or broken." Three other submersibles, the Noble Therald Martin, Noble Paul Romano, and Noble Amos Runner drifted many miles from their original locations during the hurricane, while the Noble Lorris Bouzigard broke at least one of its mooring lines and shifted from its prestorm location. "All of the rigs will require some shipyard time," said Sedita.

Three of Rowan Cos. Inc.'s jack up rigs, the Rowan-Odessa, the Rowan-Halifax, and the Rowan-Fort Worth, were not found at their prestorm locations and may be declared total losses. The hull of another jack up, the Rowan-Louisiana, broke away from its legs and ran aground off Louisiana. But it may be repaired within 6-9 months, Sedita said.

Transocean Inc.'s Transocean Marianas semisubmersible rig sustained damage to its mooring system and drifted 140 miles northwest of its original location. The semisubmersible Deepwater Nautilus went adrift as a result of a towline break and had to use its thrusters to move to a safe location.

Sedita reported, "The rigs are covered by insurance; however, the amount of coverage varies fairly dramatically. In total, Katrina will likely end up claiming two jack ups, and Rita, another four to five jack ups."

Energy prices
The November contract for benchmark US light, sweet crudes dropped 55¢ to $66.24/bbl Sept. 30 on the New York Mercantile Exchange. The December contract dipped by 6¢ to $66.23/bbl. Gasoline for October delivery plunged by 11.35¢ to $2.14/gal on NYMEX, while heating oil for the same month lost 5.74¢ to $2.07/gal. The November natural gas contract plummeted by 27.5¢ to $13.92/MMbtu.

In London, the November contract for North Sea Brent crude fell by 36¢ to $63.48/bbl on the International Petroleum Exchange. The October gas oil contract lost $2.50 to $626.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 11 benchmark crudes declined by 15¢ to $58.02/bbl on Sept. 30. So far this year, OPEC's basket price has averaged $49.94/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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