Still Reeling, Energy Companies Brace for Another Storm Season

HOUSTON, May 18, 2006 (Dow Jones Commodities News Select via Comtex)

With the clock running down ahead of the start of hurricane season, U.S. Gulf of Mexico oil and gas producers are relying more on faith - rather than operational improvements - to spare them from devastation this time around.

Last August and September, Hurricanes Katrina and Rita destroyed platforms and pipelines, leaving massive production outages that continue to persist. For the upcoming season, companies are helpless to avoid more of the same should major storms come their way again, experts say. Their only option is to hunker down and hope for the best.

In the fast-growing deepwater Gulf, oil majors and large independents have been so busy restoring their damaged platforms that they haven't had enough time or manpower to boost their resistance to hurricanes. They're hoping that their mammoth projects will be able to withstand the winds and the waves without any significant design changes.

"In such a short amount of time, they certainly can't do any re-engineering that's going to make an impact on this hurricane season," said Jim Flanagan, a Houston-based director at energy consultancy IHS. "They just have to hope it's not going to be that bad a year."

The rest of the U.S. is also keeping its fingers crossed. The U.S. Gulf accounts for about a quarter of oil and gas production in the contiguous U.S., and last year's interruptions sent energy prices skyrocketing.

Weather forecasters are anticipating 17 named storms this season, almost twice the average. Since last year's record-breaking 27 storms, some operators have divested their assets in the shallower part of the Gulf, an area plagued with declining reserves and older platforms more vulnerable to tempests. But others are willing to increase their exposure there, attracted by the area's near-term productivity.

"There's still a lot of life left in the Gulf, and it's still vital to our nation's production," said Tony Lentini, spokesman for Apache Corp. (APA), which has expanded its operations in the shallow Gulf.

Outages Linger

About 78% of oil and 87% of natural gas production in the Gulf has returned since last year's storms, according to the U.S. Minerals Management Service, which supervises offshore hydrocarbon production. Hydrocarbons production could flow back to pre-hurricane levels by the end of 2006 if the next storm cycle, extending from June 1 to Nov. 30, "is not a bad hurricane season," MMS Director Johnnie Burton said at a Houston conference earlier this month.

Two of the last four major deepwater projects still down - Royal Dutch Shell PLC's (RDSB.LN) Mars platform and Kerr-McGee Corp.'s (KMG) Red Hawk facility - are just now ramping up to normal operations.

Another one, Total SA's (TOT) Matterhorn platform, has completed repairs but is awaiting the restoration of a pipeline to resume production. Total is targeting a mid-June restart.

Shell's Cognac platform is scheduled to come back on line in the fourth quarter of 2006, according to MMS.

A significant portion of the shut-in oil output will start pumping once the 140,000-barrels-of-oil-equivalent-a-day Mars platform and other structures come back in mid-year. Dave Pursell, a Houston-based analyst with Pickering Energy Partners, estimates that up to 200 million cubic feet of gas could come back from Mars and neighboring fields.

But the remainder "is going to take a long time," Pursell said, as companies grapple with pipeline damage that was more extensive than expected. The MMS revised its count of damaged larger diameter pipelines to 101 from 64, of which 32 have returned to service.

"Even though they're ready to produce, there's some bottleneck due to pipeline or processing facility," he said.

Lessons Learned

Producers were still repairing the damages caused by Hurricane Ivan in September 2004 when Katrina and Rita struck in 2005. Meteorologists say the Gulf of Mexico has entered a decades-long high-intensity storm cycle - and oil and gas companies are still assessing how to deal with the added risk in the upcoming season.

Shell is designing a more secure rig clamp system for platform rigs. A displaced rig - used to drill development wells in the seafloor - caused most of the damage that incapacitated the Mars platform. The company also said that data collected from the storms will result in tougher design criteria for new structures.

The industry is also focusing on reinforcing mooring standards for mobile drilling units, giant floating structures that tend wander off when struck by a major storm. The dragging anchor of a wandering semisubmersible drilling rig was responsible for rupturing Mars' oil and gas export lines, Shell said.

Noble Corp.'s (NE) executives said in April that the company's first upgraded rig will be operational in July.

But for the most part, implementation of proposed changes is still months away, and in the short term, existing platforms will have to weather hurricanes with little extra protection.

"In a year's time, the industry has focused mostly on trying to get repairs," said IHS' Flanagan. "It's not likely that in that short amount of time they were able to retrofit to withstand another Katrina."

Riskier Shallow Waters

The shallower parts of the Gulf, where the offshore oil industry first began wetting its feet in the 1940s, has long been a declining play shunned by Wall Street investors. Last year's hurricanes destroyed more than a hundred platforms in the area, exacerbating the oil province's woes.

The fact that "we're in another multidecade cycle of increased hurricane activity creates more uncertainty," Pickering Energy's Pursell said. "It's like Mother Nature kicking sand in your face when you're down."

On Tuesday, Noble Energy, Inc. (NBL) said it would sell its shelf Gulf assets for $625 million. Other medium-sized companies like Houston Exploration Inc. (THX) or bigger operators like Kerr-McGee and BP PLC (BP) have also divested assets in the area to concentrate on more predictable prospects onshore, or in the richer, deeper waters of the Gulf.

But others are holding fast or even increasing their exposure to the region, despite the risks. Some, like Newfield Exploration Co. (NFX), have the technical expertise to reap profits from the deeper gas fields in the shallow waters, dubbed the shelf, Pursell said.

Apache, which entered into an agreement in April to take over BP's shelf assets for $1.3 billion, is attracted by the cash flow emanating out of shallow Gulf assets, the single largest cash generator for the company. Prior to the acquisition, more than 40% of Apache's oil and 17% of its gas production in the shelf was still down due to hurricane damage.

"It's the cash cow," said Apache's Lentini. "We use a lot of the money the Gulf generates to help us expand into other regions of the world."

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