Analysts: Storms Could Affect Gas Prices
Saturday May 26, 12:37 am ET
By John Porretto, AP Business Writer
Analysts: Gas Prices Are Certain to Climb if Season's First Storm Enters the Gulf of Mexico
HOUSTON (AP) -- If you think gasoline prices are high now, consider the eye-popping possibilities if another monster storm pummels the Gulf of Mexico this hurricane season, the way Katrina and Rita battered the petroleum-rich waters in 2005.
The petroleum industry has spent nearly two years trying to repair the damage from those historic Gulf hurricanes, rebuilding the complex web of platforms, pipelines and refineries in a region that produces roughly 25 percent of the nation's oil and 15 percent of its natural gas.
The National Oceanic and Atmospheric Administration said this week it expects a busy hurricane season, forecasting 13 to 17 tropical storms, up to 10 of which could become hurricanes. That's higher than the 10 or so storms and hurricanes that form in an average year.
Already this spring, gasoline prices have climbed even higher than post-Katrina-and-Rita prices. Analysts say prices are certain to shoot higher -- $4 a gallon, perhaps -- if and when the season's first storm enters the Gulf of Mexico.
The average U.S. retail price of unleaded, regular gasoline hit an all-time high of $3.227 a gallon on Thursday, AAA reported. That's closing in on the inflation-adjusted peak of $3.29 a gallon in March 1981, according to the U.S. Energy Department.
As they prepared to fix the Gulf's devastated oil and gas facilities, industry representatives realized standard repairs weren't enough. So the companies that own the platforms, drill the wells and manage the pipelines have spent hundreds of millions of dollars to improve and strengthen their operations. Moorings are stronger, pipelines deeper, backup power in greater supply.
When the 2007 hurricane season begins June 1 -- after a much-needed mild 2006 season -- many companies that work in the Gulf oil patch say they've prepared as best they can for whatever Mother Nature has in store.
"I think it's important to say, 'as best we can be,'" said Frank Glaviano, vice president of production for Shell Exploration and Production, an arm of Royal Dutch Shell PLC. "We thought we were prepared, and then we saw a storm like never before in terms of Katrina. ... Rita and Katrina are now part of what can happen -- not a possibility, but a probability."
Those storms destroyed 113 of the Gulf's 4,000 oil and gas platforms and damaged 52 others. The Minerals Management Service, a division of the U.S. Interior Department that manages offshore leases, says the "vast majority" of production from two years ago has resumed, but it didn't have precise figures.
Katrina provided one of its biggest blows to Shell's enormous Mars production platform, the Gulf's most prolific producer. The storm's 175-mph winds and 75-foot waves broke the steel clamps that attached the 1,500-ton rig structure to the platform and knocked a 200-foot derrick into the water. The surge caused the rig to rise up and slam into the platform, causing heavy damage.
The rig is now held on to the primary structure with clamps Shell says are four times stronger than the ones previously used. The platform resumed operation in May 2006 and is currently producing 190,000 barrels of oil equivalent a day, 20 percent more than pre-Katrina levels.
"We've closed the book on Katrina, but we took a lot of learnings forward," Glaviano said.
Shell wasn't alone. In fact, soon after the 2005 storms, a number of industry players -- Shell, Chevron Corp., MMS officials and the American Petroleum Institute, among them -- began looking at ways to protect themselves against such disasters and minimize the damage and subsequent supply disruptions that contribute to spiking gasoline prices.
One of the key conclusions was the need for stronger mooring systems that anchor rigs to the sea floor, sometimes in thousands of feet of water. That's prompted major rig owners like Transocean Inc. and Noble Drilling Inc. to increase the number of anchor lines from eight or nine to 12 in some cases.
One of Transocean's moored rigs, the Marianas, broke free during Hurricane Rita in September 2005 and drifted 140 miles. Another, the Deepwater Nautilus, was set adrift a month earlier by Katrina.
Such unscheduled voyages can be costly. Besides lost revenue, Transocean spent $25 million to fix and upgrade the two rigs, both of which now have 12-point mooring systems.
Noble, whose rig fleet also was damaged in the storms, said it's spending as much as $30 million apiece to upgrade the moorings on six deepwater rigs. The company also has added new monitors to rigs that will allow it to track via the Internet wind speed, wave heights and pitch and roll during a storm.
"We'll be able to see key things happening in real time," Noble spokesman John Breed said.
In the storms' aftermaths, some loose rigs dragged mooring lines and anchors beneath them, raking the sea floor and damaging pipelines. El Paso Corp., the largest U.S. natural gas pipeline outfit, has buried some offshore pipelines deeper and added breakaway joints that automatically shut off the flow of gas if the line is broken.
On the refining side, the two biggest challenges after the storms passed were power disruptions and flooding -- both of which prompted refiners to examine their practices and make adjustments, said Cindy Schild, refining issues manager for the American Petroleum Institute, a trade group. After Katrina and Rita, refineries accounting for 29 percent of U.S. refining capacity were temporarily shut down, according to the U.S. Energy Department.
Some refineries have raised critical equipment so it won't flood, Schild said. They've also beefed up plans to get backup power as quickly as possible, she said.
"It wasn't that they weren't prepared," Schild said. "They had contingency plans, shutdown procedures. I just think getting two, back-to-back hurricanes in such a similar location compounded everything."
Asked during a briefing this week what oil and refining companies have done to prepare for the approaching hurricane season, Homeland Security Secretary Michael Chertoff responded, "The companies have improved plans and facilities, but there is only so much you can do."
Analysts say all the enhancements are important. Whether they'll lessen the impact of another major storm, however, remains to be seen.
"The proof's in the pudding," said David Pursell, an analyst with Pickering Energy Partners in Houston. "Obviously, rig guys and drilling guys are going to be more cautious. The question is: What can you do to a fixed structure that's going to make it less susceptible to 60-foot waves? I think you have to live through one to see if anything's changed."
Added Joe Gordon, the MMS' deputy regional supervisor for field operations: "Hopefully, we've seen the worst Mother Nature can throw at you in the Gulf. There were some hard lessons learned, but I think we're in better position today than we were pre-Katrina."
Companies also learned after Katrina and Rita that it's impossible to run operations offshore if you can't find and take care of your people onshore. The hurricanes shattered communications and scattered people for hundreds of miles.
Shell has arranged to create base camps -- complete with lodging, showers and food preparation -- for hundreds of refinery and pipeline workers about eight hours after a storm passes. The facilities would be hauled in by 18-wheelers and erected at prearranged sites.
Beginning June 1, Shell also will have generators the size of mobile homes atop 18-wheelers in various locations across the Gulf Coast, ready to roll at a moment's notice. They'd be used to power the base camps, retail stores along evacuation routes and other sites, said Mike Meeuwsen, who oversees emergency management for Shell Oil Products.
"If you need people to get your operations back in business, the sooner you can meet their needs, the better off you are," Meeuwsen said. "That's what this is all about."
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