Tales of The Tape: Ike Battle Seen As Oil Producers' Victory

HOUSTON (Dow Jones Newswires), October 1, 2008

Although Hurricane Ike wreaked damage to energy infrastructure and halted oil output, the storm's toll is seen as a partial victory in oil producers' battle with Mother Nature.

Preliminary damage assessments indicate that Ike had a smaller impact than past major hurricanes - such as Katrina and Rita in 2005 - on crude oil and natural gas production in the U.S. Gulf of Mexico.

While it's still too early to quantify the impact, analysts say the hit to oil companies' bottom lines isn't expected to be substantial, and Ike will turn out to be less costly than previous storms. Katrina and Rita were more intense hurricanes, but the improvements companies made in their wake also played a key role this time around.

"From what we know so far, the damages from Ike seem less severe than those associated with Katrina and Rita," says Phil Weiss, analyst at Argus Research in New York. "Accordingly, while there should be some negative impact on earnings from Ike, it should be less than in 2005."

To be sure, refining operations on the Gulf Coast also experienced disruptions before and after Ike, which made landfall on Sept. 13 in Galveston, Texas. Recently, though net income to be had from procuring and processing crude oil and then selling on oil products such as gasoline and diesel have been weak compared with bumper profits from production due to high oil prices.

As of last Wednesday, Ike destroyed 52 platforms and damaged another 62 of the existing 3,800 offshore production platforms, according to the U.S. Minerals Management Service. About 57.4% of oil and 52.8% of natural gas was still offline as of Friday. Gulf output is expected to rebound to similar pre-storm levels in a matter of weeks. Some producers like Anadarko Petroleum Corp., however, are warning that although producing platforms were not affected or have been repaired, curtailed and damaged pipelines could slow down the restart process and may negatively affect third- and fourth-quarter results.

But Ike's toll of destruction is smaller compared with the destruction caused by Rita and Katrina in 2005. Both storms destroyed 115 platforms, leaving about 22% of the Gulf's oil production and 13% of natural gas output offline for more than nine months, according to MMS, which oversees offshore oil and gas development in the federal waters of the Gulf of Mexico.

Proving Resilient
 
Rita and Katrina were also a financial disaster for oil producers. They stripped, for example, $700 million from BP PLC's third-quarter earnings in 2005.

This time around, most companies haven't yet detailed the possible economic costs of Ike and also Hurricane Gustav, which made landfall near New Orleans Sept. 1. Gustav destroyed one platform and damaged 40, according to preliminary reports, and the storm also forced oil companies to evacuate all personnel and shut down production.

The loss of production will make a minor dent in oil company profits, which have tracked higher as oil futures prices surged to all-time record highs above $145 a barrel. More specifics will emerge in early November when firms report profits for the third quarter.

A major factor in why damages and long-term production impact are expected to be less significant than Rita and Katrina is that Ike was less intense. Also, most of the facilities destroyed by Ike were smaller, older platforms located in Gulf's shallow waters and not in deep waters from where most of the Gulf's production comes. Production from the destroyed platforms represented about 1% of the total output from the Gulf.

However, industry observers and companies say that damages were more moderate than in Katrina or Rita also because the oil industry took steps to reinforce offshore structures, which they said proved to be more resilient.

"We didn't see the degree of wreckage that we saw after Katrina," said David Sexton, a top executive with Royal Dutch Shell PLC in the U.S. "Our structures did extremely well."

Sexton, who was speaking at a conference call on Sept. 16 after the company conducted flyovers to assess damages, attributed the resilience of the Shell's structures to the improvement of moorings for floating rigs and platforms and a rise in height of jackups to avoid being swamped by high waves.

Based on failure analysis made after Katrina and Rita, all producers in the Gulf had to do similar reinforcements.

Shell, which is one of the largest oil and gas producers in the Gulf with about 17% of total output there, reported that none of its offshore facilities suffered significant damaged after Ike. Some of its main platforms, however, suffered minor problems from Hurricane Gustav.

Shell, however, was not that lucky three years ago, when Katrina toppled the rig on its Mars, the biggest Gulf platform in terms of production volumes at the time. Katrina crushed part of the platform and Shell took nearly a year to bring it back on line.

After Ike, Anadarko, Exxon Mobil Corp., BHP Billiton Ltd. and Apache Corp., among other large offshore producers, also reported minor or no damages and were in the process of slowly restoring production.

"What you have seen is a more resilient fleet of structures and more cautions procedures to restore production," said Steve Maloney, a managing consultant in energy risk management at Towers Perrin. "This demonstrates that there were some important lessons learned from the Rita and Katrina events that in some ways slowed restoration but smooth out the recovery process."
 
By No Means Harmless
 
Ike wasn't harmless. Chevron Corp. reported that several of its platforms were toppled by Ike. The oil giant has not disclosed yet details about the amount of production affected by the destruction or the names of the platforms overturned.

But the San Ramon, Calf.-based company said two of its major projects, Blind Faith and Tahiti, made through the storm without significant damage.

BP, the second-largest oil and gas producer in the region, was also among the less fortunate. Although it said most of its platforms were structurally sound after Ike and Gustav, the drilling derrick of its massive Mad Dog platform, 190 miles south of New Orleans and one of its largest projects, was turned over, having been directly in the path of Ike. The derrick is on the seabed.

"What we try to do is to reduce the impact of the storms, but it's almost impossible to eliminate damage when major hurricanes hit the Gulf," said Roland Goodman, manager of upstream standards at the American Petroleum Institute, an oil industry group. "Upstream" is an industry term that refers to exploration and production activities.

"We could build indestructible structures, but they won't float," Goodman said.

Copyright (c) 2008 Dow Jones & Company, Inc.

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