The recovery of oil and natural gas production has been stalled from the Gulf of Mexico in the aftermath of Hurricane Katrina largely because of damage to pipelines and storage facilities, said some industry observers. Also, at presstime last week, a handful of Gulf Coast refineries remained shut down due to the storm, as did several gas processing plants.
Shell Pipeline Co. LP, a unit of Shell Oil Co., confirmed crude leaks from an aboveground storage unit into a containment dike at a company tank farm in Pilottown, La., and from a 20-in. pipeline in Nairn, La.
Damage to the pipeline resulted from a breach in a hurricane protection levee. Damage to the storage tank was apparently caused by the hurricane’s strong winds. At last report Sept. 14, workers had recovered more than 6,200 bbl of the estimated 10,000 bbl leaked in Pilottown. The Nairn leak was estimated at 250 bbl, said company officials.
Nairn also is the site of three branches of Shell’s Delta pipeline system that transports crude from the gulf to refineries and Chevron Corp.’s Empire, La., terminal, a major storage facility for Heavy Louisiana Sweet crude. Chevron confirmed 23,000 bbl had leaked from an oil tank at that terminal.
The terminal remained closed Sept. 14 as workers assess the damage.
Meanwhile, restart of some shut-in offshore platforms awaits the reopening of the terminal.
The US Minerals Management Service said Sept. 13 that crews had not yet returned to 87 platforms and 2 drilling rigs in the Gulf of Mexico. Officials reported that 846,720 b/d of oil remain shut-in, or 56.5% of the normal production from those waters. Also, 3.7 bcfd of natural gas is shut in, or 37.2% of the gulf’s normal production. Cumulative production lost to Hurricane Katrina from Aug. 26 through Sept. 13 totaled 19.7 million bbl of oil and 95.5 bcf of natural gas.
Several US oil companies apparently participated in the bidding that closed Sept. 9 for the sale of as much as 30 million bbl of crude from the Strategic Petroleum Reserve (OGJ Online, Sept. 6, 2005). The Department of Energy said it expects to award contracts by Oct. 16.
Half of the crude offered is sour. DOE set a base reference price for $68.67/bbl for sweet and $61.66/bbl for sour crude.
Refineries remain shut
In addition, DOE said Sept. 13 that four Gulf Coast refineries with a combined capacity of nearly 900,000 b/d, or 5% of total US refining capacity, remained shut down: Chevron Corp. in Pascagoula, Miss.; ConocoPhillips, Belle Chasse, La.; ExxonMobil Corp., Chalmette, La.; and Murphy Oil Corp., Meraux, La.
Meanwhile, Valero Energy Corp. was in the process Sept. 13 of restarting units at its 84,000 b/d Wilmington, Calif., refinery, which was shut down safely Sept. 12 because of a total power failure, involving a Los Angeles utility company. Neighboring plants also were affected, said a company representative.
“These [storm-damaged] refineries could remain off line for 3 months or longer,” said Robert Morris, Banc of America Securities LLC, New York, in a Sept. 12 report.
Analysts at Friedman, Billings, Ramsey & Co. Inc. in Arlington, Va., said, “Assuming that these refineries normally run at a 90% utilization rate and that approximately 50% of the product yield is gasoline, then inventories should have declined by about 8.2 million bbl [in the week ended Sept. 2], not 4.3 million bbl,” they said.
Therefore, they said, “We estimate there will be an additional 4 million bbl drop in gasoline inventories...that should either be reported in future data via higher implied demand or a revision.”
The Friedman, Billings, Ramsey analysts expect gasoline inventories to continue falling over the next few months, supporting strong refining margins. “A gradual decline in inventories may not cause retail gasoline prices to spike to $4/gal, but it should keep prices at the $3/gal level for longer,” they said.
Gas processing plants
Four onshore natural gas processing plants with a combined processing capacity of as much as 4 bcfd could also remain off line “for several months,” said Morris.
DOE said that 15 natural gas processing plants in Alabama, Mississippi, and Louisiana sustained flooding, damage to equipment, or power failure as a result of the storm but that 7 were operating again as of Sept. 9.
Resuming operations are two Crosstex Energy Inc. plants, Gibson and Plaquemine; four Enterprise Products Partners LP plants, Calumet, Neptune, North Terrebone, and Pelican; and Williams Cos. Inc.’s Midstream plant in Mobile Bay. “It appears that only a few plants have sustained damage and could take a few weeks for them to come online again,” DOE said.
“We fear the impact to natural gas may be longer lasting” than oil effects, said Ronald J. Barone, UBS Securities LLC, New York. “Two weeks prior to Hurricane Katrina, a warmer than normal summer eliminated the year-over-year [natural gas] storage surplus, leaving just a 98 bcf surplus over the 5-year average and placing the 3.2 tcf consensus storage target for Nov. 1 in jeopardy (UBS currently estimates storage of 3.1 tcf).”
Furthermore, he said: “Given the continued increase in natural gas demand when combined with continued production declines, many industry watchers have questioned whether 3.2 tcf is enough in storage to enter a typical winter heating season. Unlike oil, due to limited LNG import capacity, the US must rely on US and Canada production for the majority of its natural gas needs.”
Citing the decline of US gas production despite record rig counts, flat imports from Canada, modest LNG growth before 2008, rising finding and development costs, and damage from the hurricane, Barone said, “We expect natural gas prices to remain high.” ✦