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Gulf Production Restoration Stalls on Damage Assessments

Shut-in natural gas production returned rapidly over the Labor Day weekend but progress stalled last week due to damaged processing plants, pipelines and production facilities. As of Friday, some of the more serious damage left by Katrina was on two of El Paso Corp.'s major pipeline systems -- Tennessee Gas and Southern Natural, three large Louisiana gas processing plants (Venice, Toca and Yscloskey) and several of Shell's deepwater platforms (Mars, Mensa, Cognac and Ursa).

However, significant assessment work still needed to be completed and additional damage may be found. There also is significant uncertainty regarding how long repairs will take or in some cases whether they can even be accomplished given the flooding and destruction from Katrina.

The activity in the cash and futures markets last week largely reflected uncertainty over how long it will take to restore production. Prices fell slowly most of the week but then ended mixed, with spot prices remaining in a range between a low near $8 in the Rockies and highs near $11.50 in the Northeast. Near-month futures closed down about 9 cents Friday to $11.263 after ending the previous week at $11.691.

The Minerals Management Service (MMS) reported Friday that natural gas shut-ins in the Gulf totaled 3.829 Bcf/d, or 38.29% of daily gas output. That's down about 5 Bcf/d from the peak. More than 3 Bcf/d was added over the three-day holiday weekend, but then only 140 MMcf/d was added Wednesday and Thursday, followed by 192 MMcf/d on Friday. The cumulative shut-in gas production between Aug. 26 to last Friday was 80.411 Bcf, equivalent to 2.203% of the yearly production of 3.65 Tcf in the Gulf.

Shut-in oil production totaled 898,161 bbl/d Friday, down from 901,726 bbl/d reported on Thursday. The shut-in oil output is equivalent to 59.88% of daily Gulf production, currently 1.5 million bbl/d. The cumulative shut-in oil production from Aug. 26 to Friday is 16.224 million bbl, which is equivalent to 2.963% of the yearly production of 547.5 million bbl. MMS said Friday that 56 oil and gas producers reported that 124 platforms and four rigs remained evacuated.

Significant progress was made restoring power to the affected region last week. Nearly 75% of the customers in Louisiana and Mississippi who had been without electricity since Aug. 29 when Katrina roared through the two coastal states had power as of late Thursday, the Department of Energy's Office of Electricity Delivery and Energy Reliability said. About 689,185 customers still didn't have power, compared to a peak of 2.7 million.

Despite the progress, however, analysts and consultants remained concerned that the amount of damage and the time it may take to repair facilities could pressure gas prices higher still this winter.

Processing is a major concern. The three downed plants have a combined capacity of 4.3 Bcf/d. "If these or other plants are inoperable for any length of time, the loss could delay a recovery of natural gas production in the area," the Energy Information Administration (EIA) noted. "Even if platforms and pipelines are either unaffected or readily restored to service, the gas often can't flow to market without treatment. In 2003 (the latest year with complete data), almost three-fourths of total U.S. marketed gas production was processed prior to delivery to market."

Dynegy Inc. CEO Bruce Williamson, whose company operates two of the damaged plants, said last Wednesday the Yscloskey plant (1.85 Bcf/d) and the Venice facility (1.3 Bcf/d) may be out of service for three to six months.

Enterprise Products Partners LLC, which partially owns a third plant (Toca, 1.1 Bcf/d) has put no date on when repairs will be completed, but spokesman Randy Burkhalter said repairs are expected to take "several weeks." The Yscloskey plant delivers processed gas to Tennessee Gas Pipeline. Toca serves Southern Natural Gas, and Venice serves Texas Eastern, Columbia Gulf and Gulf South.

"There is still an immense amount of uncertainty about how much gas will be shut-in from Hurricane Katrina," said natural gas analyst Ron Denhardt of Strategic Energy & Economic Research Inc. (SEER). "Probably the greatest question is the amount of lost gas production because of the loss of processing plants."

Dynegy's Williamson said a full assessment of the company's two gas processors still had not been performed on site. "The estimate of damage at this point, from preliminary flyovers, puts the damage at around the $15-20 million mark, and our share would be a percentage of that to repair them," Williamson said. "First and foremost, we are concerned about our employees; the sites have been shut down, and we were told to evacuate the region. That's our first priority. Secondly, we want to get final damage estimates, then get the facilities up and then wait for production to ramp up in the Gulf.

"Of course, the longer the sites are down, the more likely the shortages will crimp the energy supply up into the Northeast and particularly in the Southeast," Williamson said.

Unprocessed gas can leave liquids in the pipeline, which can create operational problems and possible equipment damage. "A limited amount of gas can be blended," said SEER's Denhardt, but pipe "rerouting will not be easy because the processing plants are located in eastern Louisiana and the extra capacity in processing capability is in western Louisiana. The major pipeline flow is west to east. Given the likely basis differentials, we believe that substantial gas will be processed, but at this time, we do not know how much."

While the processing plants are a major concern, the nearby pipelines also have reported significant damage that may take even longer to repair. After Hurricane Ivan damage, it took Southern Natural eight months to complete repairs to its system in the Main Pass area. The pipeline reported on Friday that facilities in the same area were damaged by Katrina. But sister pipeline Tennessee Gas may have even more extensive damage to several areas of its system.

Southern Natural and Tennessee represented the two largest portions of shut-in production on Friday, 52% of the total, according to Denver-based Bentek Energy, which tracks production receipts on the nation's pipeline system (see http://www.bentekenergy.com/).

El Paso officially has about 1,250 MMcf/d of production shut in upstream of multiple damaged facilities on Tennessee and Southern. However, unofficial numbers from Bentek show more than 2 Bcf/d.

El Paso's pipelines had the only confirmed significant Gulf pipeline damage as of Friday. Southern Natural field personnel on Thursday discovered damage to a junction platform at Main Pass 298, which probably will affect gas production receipts from at least 15 receipt meters east of the platform, including points operated by Chevron, Ocean Energy, Shell, BP, Pogo and other producers.

"Other points west of the platform also could be impacted depending on the severity of the damage," the company said.

This is the same general area that took months to repair after Ivan. However, it is only a section of the overall area affected upstream of Southern's Toca Compressor Station. The entire area remains under a force majeure while the company examines the integrity of its facilities. Southern said the affected receipt points were flowing about 550,000 Mcf/d into the pipeline prior to the hurricane. Data on gas production nominations into Southern on Friday, however, show shut ins at 864 MMcf/d, according to Bentek Energy.

Southern said that flood waters have receded at Toca and an investigation of the compression facilities began on Friday. All of Southern's offshore facilities have had an initial damage assessment by personnel in helicopters. The most serious damage so far offshore appears to be to risers on producers' facilities that have been destroyed (West Delta 133, Main Pass 306, South Pass 62) and to measurement equipment at some locations, the company said.

"Complete damage assessments will require on-site investigation, which has not yet been feasible. Initial surveys of our subsea facilities (primarily pipelines) have been hampered by poor weather conditions," Southern said. "Those surveys, which will be conducted by boat, are underway in some areas and will begin in other areas [on Friday] weather permitting. Based on the very limited information that we have currently, we are not yet aware of any significant damage to our offshore pipelines. However, the assessment of our offshore pipelines is in its early stages."

Sister pipeline company Tennessee Gas may be in even worse shape, with at least 230 production receipt points shut in upstream of several damaged facilities in various locations offshore Louisiana.

Tennessee has found leaks on its 26-inch and 36-inch diameter pipelines that make up the East Leg of the Blue Water pipeline system. A portion of the line has been isolated between Ship Shoal 157 and 144, which is offshore Houma, LA. The company has divers out inspecting the line and assessing the damage. In the meantime, some of the production on the East Leg is being rerouted West across the header and into the West Leg of Blue Water.

El Paso's spokesman also said that because the Port Sulphur Compressor station remains largely submerged in Venice, LA, the company has been unable to get there to assess damage. Spokesman Richard Wheatley said the water has receded some, but mainline valve 528 remains shut in.

Tennessee also has found damage in the South Timbalier area, also offshore Houma. Multiple leaks have been seen on various laterals including the following lines: 524J-100, 524J-600, and 524J-800. Tennessee has confirmed leaks on the 524C-100 line and the 524C-600 line. It has sent survey boats to inspect the West Delta, South Pass, and Main Pass areas. The company said it would provide updates as soon as possible, but Wheatley said at this point there is not telling how long it will take to repair the pipeline system.

Tennessee said shut-in production on its system on Friday totaled 700 MMcf/d, but Bentek Energy reported that 1,164 MMcf/d of gas production that was scheduled to flow on Aug. 26 was not scheduled to flow as of Friday (Sept. 9).

El Paso has denied rumors that Tennessee's 500 Leg would be out of service for the entire winter. "We have not said that, and it is simply not true," said Wheatley. Nevertheless, the bulk of the gas that was flowing on the 500 Leg prior to Katrina currently is shut in behind damaged facilities that may take weeks or even months to repair.

There was some good news late last week from Enbridge, which determined that its deepwater Mississippi Canyon pipeline, which had been flowing more than 500 MMcf/d prior to the hurricane, was not damaged as was first thought. Nevertheless, Mississippi Canyon, as well as several other offshore systems, are still shut in because of downed processing plants.

Bentek tallied total shut ins onshore (668 MMcf/d) and offshore (3,190 MMcf/d) at 3,889 MMcf/d on Friday. That compares to the MMS estimate Friday of 3,829 MMcf/d for offshore production shut ins.

Shut ins upstream of the various Gulf Coast and offshore Gulf of Mexico pipelines were reported by Bentek as follows: Southern (864 MMcf/d), Tennessee (1,164), Transco (319), Destin (676), Sea Robin (0 shut ins and 7 MMcf/d more than was flowing on Aug. 26), Florida Gas (0 shut ins and 109 MMcf/d more than on Aug. 26), Trunkline (190 MMcf/d of shut ins), Texas Eastern (323 MMcf/d), Mississippi Canyon (511), Columbia Gulf (no shut ins and 8 MMcf/d more production flowing than on Aug. 26), Garden Banks (7 MMcf/d shut in), Gulf South (63), High Island (23), Texas Gas (3 MMcf/d more gas than on Aug. 26), Stingray (290), Nautilus (18), Chandeleur (121), Sabine (6 MMcf/d more gas scheduled than on Aug. 26), and Gulfstream (33 MMcf/d).

Stephen Smith of Stephen Smith Energy Associates and J. Marshall Adkins at Raymond James & Associates noted there could be 1-3 Bcf/d of gas production shut in for another six months. That, however, would be extremely unusual even for a major hurricane plowing through the Central Gulf. With hurricanes Ivan and Andrew, shut ins were reduced to less than 700 MMcf/d within four months following landfall.

The possibility of such a lengthy recovery sent markets roaring to record highs after Katrina made landfall. And Adkins and Smith, along with many other analysts, believe this market will remain at extreme levels for some time.

The reduction in gas supply already has limited gas storage injections. The EIA reported a weekly injection of 36 Bcf into storage last week for the week ending Sept. 2, which compared to an 80 Bcf injection during the same week last year, a three-year average build of 81 Bcf and a five-year average build of 71 Bcf. Working gas levels (2,669 Bcf) are now about 95 Bcf below levels at the same time last year (2,764 Bcf), but are 95 Bcf above the five year average (2,574 Bcf).

Working gas peaked last year on Nov. 5 at 3,327 Bcf. In order for working gas levels to reach 3,300 Bcf before this winter, about 70 Bcf/week has to be injected between now and the week ending Nov. 4. With deferred production in the Gulf standing at 3.8 Bcf/d, that now seems unlikely. However, high gas prices at more than $11/MMBtu should trigger some additional demand destruction, leaving more supply available to put into storage.

"We should note this reduced supply will be somewhat offset by reduced demand from higher natural gas prices and storm damaged electric generation infrastructure," Adkins said in a report to clients on Tuesday. "That being said, Katrina will have a very meaningful lasting impact upon U.S. natural gas prices and we would expect natural gas to remain near the 6:1 ratio with crude for the foreseeable future." Given that ratio, if crude is near $68/bbl, natural gas would be priced near $11.33/MMBtu.

"Before Katrina, I was hopeful that we could get back to $6.50/MMBtu [New York Mercantile Exchange near-month futures], but now I think $12 is a definite shot," said Energy Venture Analysis consultant Steve Thumb. " I'm not so sure about the $15's and the $20's that you've read in the press; I don't think we can get there because of the fuel switching and [demand destruction]." Thumb said the ultimate possible range of gas futures prices this winter should be $6.50-$12, with more confident expectations that prices will be "toward the $12" area.

Adkins said he does not expect a similar upward spike in crude oil prices because of Katrina. "Crude prices should be held in check by the opening of the U.S. Strategic Petroleum Reserve (SPR) and the fact oil is more of a global commodity than a regional commodity."

Smith is predicting a November bidweek natural gas price range of $10.50-11.00/MMBtu. He believes demand destruction due to high prices could substantially offset any longer-term storage impact from the shut-in production.

Platform Assessments

Besides the damage to processing plants and pipelines, another big concern offshore is the extensive damage reported to Royal Dutch Shell deepwater platforms. Its Mars platform was producing 450,000 boe/d before Katrina. On Friday, Shell said it expects to restore only about 60% of its total upstream production, or 270,000 boe/d, to pre-Katrina levels by the fourth quarter.

It warned that some of its Gulf production, mainly from its Mars, Ursa, Mensa and Cognac developments, "may not be feasible during the fourth quarter, depending on options available for recovery." Shell's output currently stands at 160,000 boe/d.

Before Katrina struck, Mars was producing 100-150 bbl/d of oil and about 150 MMcf/d of gas. Recent natural gas production figures were not immediately available for the other platforms. However, Cognac was expected to be producing 130 MMcf/d of gas and 83,000 b/d of oil; Ursa, which is still under development, was expected to initially reach 30,000 bbl/d of oil and 80 MMcf/d of natural gas; and Mensa was expected to be producing up to 300 MMcf/d of gas, according to the MMS.

The Mars Unit encompasses all or a portion of six OCS leases in the Mississippi Canyon Area -- Blocks 762, 763, 806, 807, 850 and 851 -- located about 130 miles southeast of New Orleans. Shell Deepwater Production Inc. is operator and has a 71.5% interest in the project, and BP plc has the remaining 28.5% interest. The Mars' tension leg platform (TLP) is installed on Block 807 in a water depth of 2,940 feet. Current production facilities are designed to recover about 500 million boe.

Oil from Mars is transported 116 miles via an 18/24-inch diameter pipeline to the Louisiana Offshore Oil Port's storage at Clovelly, LA, and its 55-mile 14-inch gas pipeline goes to the damaged Venice processing plant via the damaged West Delta 143 hub facility. Both pipelines were installed as part of the Mars development. The damaged WD 143 hub is located in 390 feet of water, about 90 miles from New Orleans. The facility is operated by Shell Exploration & Production Co. (SEPCo), and is owned by SEPCo ( 71.5 %) and BP (28.5%).

Next to Mars is the Ursa TLP, which is under development in Block 809 in 3,800 feet of water. It encompasses Mississippi Canyon Blocks 808, 809, 810, 852, 853 and 854. Working interest owners are Shell, operator, with 45%, BP, 23%, ConocoPhillips, 16% and ExxonMobil Corp., with 16%. Initial plans from Ursa call for as many as 14 producing wells from the TLP.

The Cognac Unit encompasses four Mississippi Canyon leases -- Blocks 108, 151, 194 and 195 -- and is located about 105 miles southeast of New Orleans in 1,025 feet of water. Shell holds majority interest, 34.87%, with partners including BP, 21.8%; Agip, 16.5%; Sonat, 10.7%; Chevron Corp., 6.9%; Unocal (pre-merger with Chevron), 4.7%; Murphy Oil Co., 2.4%; ConocoPhillips, 1.2%; and Koch, 1.1%. Oil is transported 28 miles via a 12.75-inch diameter pipeline to South Pass 25. A 16-inch gas pipeline was installed by Southern Natural Gas Pipeline Co. in 1981 and runs 20 miles to South Pass Block 22, where it ties into the Southern Natural Gas Romere Pass Pipeline.

The Mensa Subsea Development is 100%-Shell owned. It is located in 5,300 feet of water, 140 miles southeast of New Orleans, and encompasses Mississippi Canyon Blocks 686, 687, 730 and 731. Mensa initially consisted of three wells connected via individual 6-inch jumpers to a subsea manifold five miles away, which is then tied back to a shallow-water platform at WD 143 via a 63-mile 12-inch flowline. The 68-mile tieback is the longest in the world.

Shell said Friday that production is now flowing from all of Shell-operated assets in the western Gulf: Auger, Brutus, Bullwinkle, Cougar, Enchilada, North Padre Island and West Cameron 565. And in the Eastern Gulf, Shell's Fairway asset and the Yellowhammer Gas Processing Plant near Mobile Bay, AL are operating normally.

Apache Corp., which lost eight platforms to Katrina, restored 430 MMcf/d and 41,900 bbl/d last week, amounting to 76% of the gas output and 60% of oil production shut by the company due to the storm. After damage is assessed and repaired, additional production will return in the coming weeks. Apache's lost platforms had contributed 12.1 MMcf/d.

"We'll be bringing back what we can quickly in the next coming weeks," said Apache spokesman Tony Lentini. He said some of the output may take longer than just a few weeks to restore. Lentini noted after Ivan struck last year, it took Apache almost a year to repair platforms not completely destroyed.

BP returned the deepwater Holstein SPAR facility to production in the Central Gulf, and it is now producing 70,000 boe (gross). The BP operated Caesar and Cleopatra pipelines, which serve the Holstein field, have also been returned to service. BP also returned 55,000 boe to production from the western Gulf and onshore Louisiana. Efforts are continuing to inspect and return the remaining Gulf of Mexico oil and gas fields to production and pipelines to service. Inspections thus far have revealed no major damage to BP-operated deepwater facilities.

"Restoration of remaining deepwater production is largely dependent on resumption of downstream infrastructure," BP said in a statement. Surveys of near shore facilities indicate damage to several small platforms with relatively small production volumes in the West Delta and Grand Isle areas of the Gulf. Power also has been restored to the BP-operated Pascagoula, MS gas processing plant, however the plant is unable to resume operations until offshore pipelines are able to deliver gas to the plant.

For other producers, the site assessments and repairs are ongoing. Chevron Corp. reported its Gulf oil and gas output is now at 45% of pre-Katrina levels. However, it declined to offer specific production figures for the region. Chevron's deepwater platforms Genesis, Petronius and Typhoon did not suffer any significant damage, and both Genesis and Typhoon are producing. The Petronius is awaiting pipeline damage assessment. Only a "handful" of its offshore facilities were damaged, Chevron said.

Marathon Oil Co.'s Ewing Bank platform is producing 17,000 bbl/d and 17.5 MMcf/d. However, it said its three South Pass platforms, which produce 1,500 bbl/d and 7.5 MMcf/d were "severely" damaged, which could take "several weeks and possibly months" to repair. Onshore facilities in Venice, LA, also were damaged, which may affect repairs.

A preliminary assessment by Dominion Resources found only "minimal" damage from Katrina, the company said. However, "further examination of the platforms' underwater pipelines and inspection of facilities is proceeding." It has resumed about 75 MMcfe/d of its recent daily offshore production of 400 MMcfe of natural gas, most from the West Cameron area near the Texas-Louisiana border. Dominion's total offshore and onshore production before Hurricane Katrina was about 1.2 Bcfe/d.

Preliminary examinations by Dominion and its partners showed platforms at its major sites, including Devils Tower, Front Runner, Neptune and Main Pass 281, suffered only minimal damage. However, a smaller platform, Main Pass 270, incurred severe damage and will require further assessment. Main Pass 270 was producing about 11.5 MMcfe/d net to Dominion before it was shut down prior to the hurricane.

Kerr-McGee Corp. suffered limited damage to its offshore facilities, according to COO Dave Hagar. Most production has restarted, and all of the company's employees have been accounted for. "Overall it is a good news story for our particular company," Hagar said at the Lehman Brothers conference. "We feel very fortunate and very lucky."

Kerr-McGee has restarted about 105,000 boe/d of Gulf production, and another 5,000 boe/d will be brought back in a week, Hagar said. Before Katrina, the producer's output had been 130,000 boe/d in the Gulf. Full production will depend on when repairs are made to onshore infrastructure. Because of the hurricane, Kerr-McGee will delay its plans to sell its offshore Gulf assets, Hagar said. The bid deadline for the properties had been Sept. 15.

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