Analysis: Gas Prices Immune to Hurricane Disruptions Post-Katrina, Rita

Hurricanes Katrina and Rita wreaked havoc on the U.S. Gulf of Mexico energy infrastructure in August and September 2005, leaving drilling rigs in mangled metal heaps and production platforms and pipelines in ruins.

No worker or contractor lives were lost thanks to evacuations of rigs and platforms ahead of the storm, but the hurricanes disrupted oil and natural gas production in the U.S. Gulf, as well as oil import and refining activities, for months following the storms.

Over nine months later, 22 percent of federal oil production and 13 percent of gas production remained shut-in, resulting in the loss of 150 million barrels of oil and 730 billion cubic feet of gas from domestic supplies, according to the Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE).

While the U.S. Gulf will remain under threat from possible hurricanes until the season ends on Nov. 30, the onslaught of U.S. onshore shale gas that's come on production in recent years means that gas prices would not likely be affected by a loss of gas production from the U.S. Gulf due to a hurricane.

"The initial interest in the deepwater Gulf was that it was potentially a gas play, but now we're learning that it's an oil play," said Ken Medlock, a fellow in energy and resource economic at Rice University's Baker Institute for Public Policy and adjunct assistant professor of economics.

Gas production in the Gulf had been declining even before the storms, "and it's continued, perhaps accelerated by Rita and Katrina, but we've offset that lost supply very rapidly, and that trend is likely to continue. This trend will make the U.S. natural gas sector almost immune to these kind of storms," Medlock said.

Based on central pressure, Hurricanes Katrina and Rita were ranked as two of the ten most intense Hurricanes to ever hit the Atlantic Region and the greatest natural disasters to oil and gas development in the history of the Gulf of Mexico. BOEMRE estimates that 3,050 of the Gulf’s 4,000 platforms and 22,000 of the 33,000 miles of Gulf pipelines were in the direct path of either Hurricane Katrina or Rita, resulting in the destruction of 115 platforms, damage to 52 other platforms, and damage of 535 pipeline segments.

What became apparent in the storms' aftermath was that older energy infrastructure was most significantly impacted in the Gulf infrastructure system, Medlock said. Newer infrastructure that could handle the stronger, taller waves endured. Structures built to replace those torn down by Katrina and Rita are more resilient and is more likely to survive a storm. "Although you should never say never, it's unlikely you'll see the same devastation on Gulf infrastructure caused by Katrina and Rita," said Medlock.

The damage inflicted on energy infrastructure by Hurricanes Katrina and Rita, both of which had winds higher and waves stronger than anticipated in the deeper parts of the Gulf, prompted joint study efforts between the government and energy industry to assess the performance of energy infrastructure and ways to improve infrastructure.

The storms' strength changed the industry's perspective of viewing the Gulf of Mexico as a uniform body of water, API reported. Evaluating the effects of Hurricanes Katrina and Rita and other storms helped scientists discover that the Central Gulf of Mexico was more prone to hurricanes because it acts as a gathering spot for warm currents that can strengthen a storm. The revised wind, wave and water current measurements (metocean data) prompted API to reassess its recommended practices for industry operations in the region.

API reports that the energy industry has continuously improved its hurricane preparation and response plans in wake of Hurricanes Katrina and Rita as well as other storms such as Hurricane Ivan in 2004 and Hurricane Ike in 2008. Industry and government also worked together to identify, coordinate and address hurricane-related issues for offshore oil and gas operations, the American Petroleum Institute (API) reported.
Oil Province

While the U.S. has plentiful natural gas supply thanks to onshore shale plays, the country currently imports approximately 60 percent of its crude oil. This dependence on foreign oil could ultimately have national security implications and leave the U.S. economy vulnerable to pricing power by the Organization for Petroleum Exporting Countries.

U.S. government officials have said reducing dependence on foreign oil is a policy objective, and energy industry officials in recent months have said developing Gulf of Mexico reserves is critical to achieving this objective. In a recent report, insurance provider Grant Thornton noted that the U.S. Gulf contains approximately 19 percent of U.S. crude oil reserves and 15 percent of total U.S. oil and gas reserves.

The aftermath of Hurricanes Katrina and Rita saw the energy industry left on its own to repair infrastructure as the focus of the storms' aftermath was on the devastation of New Orleans and the Gulf Coast and management issues with the Federal Emergency Management Agency. The aftermath of the Macondo spill is being played out in the political arena, with legislation proposed to tighten regulations on drilling and permitting.

"The Macondo spill hasn't really affected production in the short-term, but potentially it could have an impact on commodity prices in the long term. However, the impact will come down to what new drilling regulations are passed. If they're too strict, then capital will move and production in deepwater will not pick up as anticipated," Medlock said.


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Brent Crude Oil : $51.78/BBL 0.77%
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