MARKET WATCHKatrina hikes crude, natural gas prices

Aug. 30, 2005
The expiring September natural gas contract hit an intraday high of $12.07/MMbtu on Aug. 29 as the New York Mercantile Exchange declared "force majeure" against future deliveries for the first time in the 15 years it has been trading natural gas contracts.

Sam Fletcher
Senior Writer

HOUSTON, Aug. 30 -- The expiring September natural gas contract hit an intraday high of $12.07/MMbtu on Aug. 29 as the New York Mercantile Exchange declared "force majeure" against future deliveries for the first time in the 15 years it has been trading natural gas contracts.

That move came after Sabine Pipe Line LLC on Aug. 28 closed the Henry Hub, the central point for natural gas deliveries in Louisiana. Sabine Pipe Line, a Houston subsidiary of Chevron Corp. that owns and operates the Henry Hub, reopened that facility the afternoon of Aug. 29.

Meanwhile, the October contract for benchmark US sweet, light crudes jumped to a record $70.80/bbl in overnight electronic trading Aug. 29 on NYMEX, the biggest one-time gain for a front-month contract in 29 months (OGJ Online, Aug. 29, 2005). But it settled lower on speculation that the US Department of Energy may release crude from the Strategic Petroleum Reserve and an offer by Saudi Arabia to boost its oil production to 11 million b/d to compensate for supply losses caused by Hurricane Katrina.

Citgo Petroleum Corp. said it requested 250,000-500,000 bbl of SPR crude on Aug. 29 to ensure supplies for its Lake Charles, La., refinery. President George W. Bush has not yet said he'll authorize such a withdrawal as he did in 2004 when Hurricane Ivan struck the Gulf Coast, but administration officials said final details are being worked out. However, the nearly 700 million bbl of SPR oil is stored in underground salt caverns along the Gulf Coast, near some of the areas flooded by Katrina. That could interfere with its withdrawal and transportation.

As for Saudi Arabia's offer to increase production, most of its incremental supply is heavier oil with a higher sulfur content that fewer refineries can process.

Storm's impact
"There is still very little information regarding Katrina's impact to the Gulf of Mexico," said analysts on Aug. 30 in the Houston offices of Raymond James & Associates Inc. "Clearly, we think (based purely on speculation) that there is likely to be some significant damage to Gulf of Mexico infrastructure."

As of Aug. 30, the US Minerals Management Service reported 645 offshore platforms and 90 rigs remained evacuated in the Gulf of Mexico, with 1.4 million b/d of oil and 8.8 bcfd of natural gas shut in. Cumulative production lost to Katrina during Aug. 26-30 totaled 4.6 million bbl of oil and 25.4 bcf of natural gas.

When Hurricane Ivan hit the US Gulf Coast in September 2004 it forced the evacuation of 69 rigs and 575 production platforms. Ivan also proved to be the most damaging hurricane ever to the US offshore oil and gas industry, destroying 7 offshore platforms, damaging 24 others, and wrecking segments of 102 pipelines before making landfall.

An accommodation unit owned by Petroleos Mexicanos was undergoing work at a shipyard when it broke free of its moorings during Hurricane Katrina and struck the Cochrane-Africatown USA bridge along US 98 in Mobile County, Ala., said Raymond James analysts on Aug. 30.

Transocean Inc. reported its moored Deepwater Nautilus semisubmersible rig had drifted off location during the latest storm.

Noble Corp. said its semisubmersible Noble Jim Thompson, working for Shell Exploration & Production Co. in Mississippi Canyon Block 935 off Louisiana, broke away from its mooring lines and has moved 17 miles north-northeast from that location. An anchor-handling vessel and a tug were preparing to secure the rig, and a crew was scheduled to board the rig on Aug. 30. A flyover inspection indicated no material damage to the rig, said company officials.

Following flyover inspections of its units, GlobalSantaFe Corp. reported its GSF Celtic Sea and GSF Development Driller I rigs were listing slightly and that its GSF Arctic I drifted off its original location and was grounded in shallow waters near the mouth of the Mississippi River. Marine surveyors will be dispatched to determine the condition of the Arctic I, and workers were scheduled to arrive at the other two rigs Aug. 30 to assess their condition.

Raymond James analysts also said ENSCO Offshore Co.'s ENSCO 7500 semisubmersible was reported adrift. "Over the next couple weeks, we expect additional information to continue to filter in, as companies get a chance to send teams out to inspect the damage," they said.

Royal Dutch Shell PLC reported an aerial inspection of its Mars field production platform indicated some damage to its upper deck.

Newfield Exploration Co. said an aerial survey of its operations in the eastern Gulf of Mexico indicates that its A production platform at Main Pass 138 was lost in the storm. That facility was producing 1,500 b/d of oil (gross) prior to being shut in before the storm, and Newfield was operator with 92% working interest.

No damage to offshore pipelines was reported as of Aug. 30. "We're assessing the situation. Systems along the coast were either closed or derated prior to landfall," said Raymond Paul, director of public affairs for the Association of Oil Pipelines, which represents more than 50 of the nation's largest pipeline companies.

Raymond James noted "several refinery outages" along the Gulf Coast after Kristina moved through, including "some that are only expected to last a day or 2, some that may be out for several weeks, depending on the restoration of power."

At least eight Gulf Coast refineries representing 2.3 million b/d of cumulative refining capacity were shut down or had reduced operations, according to company and DOE reports on Aug. 30.

ExxonMobil Corp. said its 494,000 b/d Baton Rouge, La., facility operated at reduced capacity for a short time before resuming normal operations.

Units completely shut down included Chevron's 325,000 b/d refinery in Pascagoula, Miss., Valero Energy Corp 's 260,000 b/d St. Charles refinery in Louisiana, Motiva Enterprises LLC's 255,000 b/d facility in Convent, La., and 242,000 b/d refinery in Norco, La., ConocoPhillips' 247,000 b/d Alliance refinery, Marathon Oil Corp.'s 245,000 b/d Garyville, La., refinery, Chalmette Refining LLC's 187,200 b/d facility; and Murphy Oil Corp.'s Meraux, 125,000 b/d refinery.

Valero said it could be as long as 2 weeks before its St. Charles refinery can resume production. The refinery has no power, and officials said it could take as long as 3 days to restore power. The company reported 3 feet of floodwater in two units and minor damage to its cooling towers. However, officials said no major damage is apparent and no evidence of spills or leaks.

Other refiners did not make any projections for bringing their units back online.

Still, said Jeffrey Morrison, a credit analyst at Standard & Poor's, a division of The McGraw-Hill Companies Inc., "High commodity prices throughout 2005 are expected to provide some financial cushion for affected companies to withstand the expected temporary service and production disruptions and restoration efforts."

Energy prices
Katrina already has had twice the impact on crude prices and caused natural gas prices to climb 40% more than did Ivan, said James Williams of WTRG Economics

The October crude contract settled at $67.20/bbl, up by $1.07 for the day on NYMEX. The November position advanced by 85¢ to $67.74/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., increased by $1.07 to $67.21/bbl. Gasoline for September delivery jumped by 13.37¢ to $2.06/gal on NYMEX. Heating oil for the same month escalated by 7.22¢ to $1.91/gal.

The September natural gas contract soared by $1.06 to close at $10.85/MMbtu on NYMEX. The new front-month October contract shot up by $1.33 to $11.14/MMbtu.

The International Petroleum Exchange in London was closed on Aug. 29. The average price for the Organization of Petroleum Exporting Counties' basket of 11 benchmark crudes increased by 57¢ to $60.33/bbl.

Contact Sam Fletcher at [email protected]