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Slow Restoration Continues; Analysts Say Shortage Warnings Premature

The extent of the damage from Katrina became a little clearer last week, but predictions on how long the repair process will take and when full production will be restored varied widely. Secretary of Energy Samuel Bodman and Interior Secretary Gail Norton, who toured the damaged area in the Gulf Coast region on Tuesday, warned that natural gas shortages are possible this winter, but analysts interviewed by NGI predicted high prices likely would balance supply and demand.

The American Chemistry Council called on Congress Friday to rush the "amphibious resources" of the Navy, Coast Guard and Army Corp of Engineers to southern Louisiana to help rebuild levies and get eight shut-down gas processing plants back into operation. And the head of the Minerals Management Service (MMS) predicted it would be three to four months before most Gulf production was back in the market because of damage to onshore facilities (see separate stories).

With 54 producers reporting, the MMS said Friday shut-in natural gas production in the Gulf totaled 3.384 Bcf/d and cumulative shut-ins stood at 105.777 Bcf. Shut-in oil production totaled 840,921 bbl/d. Meanwhile, 84 platforms and two rigs remained evacuated. They exclude the 46 producing facilities and four rigs destroyed by the hurricane.

And there was more. On Friday the Louisiana Department of Natural Resources' Office of Conservation issued its own damage report, showing 359 MMcf/d of onshore production shut in and another 1.77 Bcf/d unaccounted for, meaning it may or may not be shut in. Confirmed onshore shut ins total 14.5% of total onshore production, the agency said.

About 354 MMcf/d of onshore production in the eight-parish region of the survey has been restored. The agency said 568 wells out of 2,641 oil and natural gas wells in the region damaged by Katrina have been restored to production. However, 1,176 wells remain shut-in, while the status of another 897 wells is unknown.

Bodman and Norton told reporters last week that gas shortages are possible because of the slow recovery to damaged production and related facilities both on and offshore. The two flew to Baton Rouge, LA, from Houston after meeting with several senior energy executives last Monday night to discuss their recovery efforts following the hurricane.

"The great concern is about natural gas," said Bodman. Less is known about the damage to the gas supply system than the effect on crude oil production because of possible offshore gas pipeline damage still not discovered and flooded gas processing facilities onshore.

Eight Louisiana-based gas processing plants still are not functioning, "and the status of many of them is uncertain," Bodman said. With the United States headed into the winter heating season, gas inventories are at "lower levels than we would like." The U.S. has no emergency gas reserve similar to the strategic oil reserve, he noted.

Leaping into the breach, the American Gas Association (AGA) quickly noted last week that there are other supply sources outside the Gulf of Mexico and gas storage is at above average levels. AGA expects no supply disruptions this winter.

The Energy Information Administration (EIA) then further supported that assessment, reporting a larger than expected 89 Bcf injection into storage for the week ended Sept. 9, which showed that more gas was available for injections due to the demand destruction from the hurricane and high gas prices. Working gas levels in storage nationwide totaled 2,758 Bcf, or 102 Bcf less than last year but 98 Bcf more than the five-year average.

"Shortage is a dangerous word because it kind of implies that people who need gas just aren't going to get it," said Martin Edwards of the Interstate Natural Gas Association of America, which represents interstate pipeline companies. "But my impression is that if you need gas you are still going to be able to get it. You may have to pay more for it, but you are going to get it. Higher prices will end up driving some demand away, which is the way the commodity markets work." Industrials, including the chemical manufacturers, are the ones likely to be driven away (see related story).

Kevin Petak of Arlington, VA-based consulting firm Energy and Environmental Analysis Inc. (EEA) said his estimate for season ending storage levels is 3.15-3.2 Tcf. "That number is below last year, but is still a pretty robust storage level," he said. "It's all about winter weather at that point. If we see normal winter weather then I think we are going to be okay. I think the draws on storage will be pretty strong. I think prices will be fairly high in the $10 ballpark, but I don't see shortages."

But if the winter is colder than normal, say 7% colder, Petak believes there could be some trouble. "How quickly is the production that is still offline going to come back online? That's a real wild card right now," he noted. The news has been pretty scarce, and I think that's what has some hitters in the marketplace. No one really knows what the status is of the processing plants.

"Assuming that production comes in something similar to what happened after Ivan, and assuming that we don't get another major hurricane in the next six or seven weeks that will further damage things or disrupt production, then my guess is we are going to be in okay shape from a supply standpoint for the upcoming winter."

Petak said EEA expects production shut-ins to fall to 2.2-2.5 Bcf/d next month on average and then 1.2-1.5 Bcf/d in November. "But certainly not the more dire predictions that some are making that 3 Bcf/d stays offline through the winter. I expect some of the pipeline disruptions to continue, but service to be completely restored by late winter or at the latest early spring."

Nevertheless, he expects gas prices to be high and volatile, moving up and down sharply with an average at $10 for the winter.

"It's really a question of what price is required to balance the market," said energy consultant Ron Denhardt of Massachusetts-based Strategic Energy and Economic Research.

"The price will be higher and will destroy some demand so there won't be a shortage. Some people will be priced out of the market." That's already happening, he noted. The futures market, which basically represents the best guess of everyone in the market, currently has put prices near $12.70 for January. Prices at that level will prevent some industries from making a profit and others from staying in business (see related story). If prices reach the level of distillate, said Denhardt, another 2.5 Bcf/d of demand destruction could occur.

"Let's say we lost 2 Bcf/d of production and we had to destroy that much [demand]; what would it take? Well, we would have to get prices above distillate, and you could kill about 1 Bcf/d for fuel switching in the industrial sector and probably at least 0.5 Bcf/d in the electric power sector during the heating season," he said. "That's 1.5 Bcf/d that you could make up, and LPG prices (propane, butane) aren't that different than distillate right now, so there's another 1 Bcf/d of switching there." Distillate is around $14.50/MMBtu.

"That doesn't even take into account what response you are going to get from people shutting back thermostats or even being driven into bankruptcy or not getting enough credit to buy gas." He said many companies are facing credit issues because prices have almost doubled. "We are going to have a huge amount of demand destruction at these prices."

In fact, Denhardt believes it is likely the market already has overshot the mark for January. He expects prices at some point this winter to fall below where the market is currently.

"Prices tend to overreact to situations until they figure out what is going to happen. Unless shut-ins are a real surprising amount or we get a real cold winter, what is likely to happen is that we will destroy enough demand that when we get into the latter part of winter the market will look kind of soft relative to what the current forward market looks like," he said. "But there are just so many 'ifs' right now. It is hard to say exactly what is going to happen."

Last year by mid December there was still about 600 MMcf/d of gas shut in from damage due to Hurricane Ivan. Many believe the damage from Katrina is more severe. Denhardt predicts there will be more than 1 Bcf/d shut in or curtailed through the end of the year.

Norton said about 90% of the Gulf oil platforms are expected to be capable of production by the end of September. However, damage to onshore facilities may reduce oil output offshore, and in turn slow processing onshore. "There is more concern about gas."

Offshore gas production's return to normal "depends on things like Highway 23," she said. Highway 23 runs south from New Orleans along a narrow peninsula highway running parallel to several refineries, gas processors and pipelines, which is where Katrina came onshore.

Among the gas facilities located along Highway 23 is Dynegy Inc.'s Venice, LA plant in Plaquemines Parish, which was flooded, which has a capacity of 1.3 Bcf/d. Another Dynegy gas processing plant, the damaged Yscloskey facility in flooded St. Bernard Parish, processed 1.85 Bcf/d. Another damaged gas processor, Enterprise Products Partners LP's plant in Toca also is damaged, and it may be returned to service in a few weeks, said spokesman Randy Burkhalter. The plant has a 1.1 Bcf/d processing capacity.

The highway and the region remain under water in many places, and the area also is blocked by many obstacles, including wrecked boats, Norton said. She based her comments on aerial photographs taken of the damaged region.

Ian Ashcroft, an energy analyst with Wood Mackenzie, said the center of Katrina's critical path was through the Gulf of Mexico's "bread basket," where the winds were in excess of 150 mile per hour. Of 4,000 Gulf platforms, Ashcroft estimated 2,400, or 60% were exposed to tropical storm winds or higher. The worst damage was on the eastern side of Katrina's path, along the Mississippi Canyon, in Medusa and Shell's Mars/Ursa fields, which were "closer to the center of the storm. These are the key fields, and most of the damage is around the Mars area, West Delta 143."

Shell, which reported Friday it is still assessing extensive damage to its Mars, Ursa and West Delta 143 facilities, does not expect to have repairs completed in the fourth quarter. It said, however, inspection has shown no damage to underwater facilities. The damage is all topside.

Ashcroft said "West Delta 143 holds the key to the Mars/Ursa corridor," which is also a hub facility for the Mensa facilities. "This holds the key to about 700 MMcf/d of gas production, and it appears there is at least some damage to 143." The leased platform drilling rig on Mars collapsed, he said, and smashed through the tension leg platform, damaging the well bay and some process facilities. "There is a question mark on the physical structure."

However, producers and pipelines are finding creative ways to get around the damage. Tennessee and Columbia Gulf are working with Discovery Gas Transmission to reroute gas away from the damage by reversing flows on Discovery and utilizing its 500 MMcf/d of available transportation capacity and its operational processing plants.

The Discovery system has a gas processing plant at Larose, LA, with a capacity of up to 800 MMcf/d. Its fractionator in Paradis, LA, has a 42,000 bbl/d capacity. Throughput on the pipe is about 300 MMcf/d, with capacity up to 800 MMcf/d. Discovery's facilities sustained only minor damage during the hurricane and have been in full operation since Sept. 3.

Pipeline Assessments

The most significant pipeline damage remained on Tennessee Gas Pipeline and sister company Southern Natural, two El Paso Corp. operations, last week.

Tennessee Gas has about 700 MMcf/d of production shut in upstream of its pipeline facilities (estimates from Denver-based consulting firm Bentek Energy showed shut ins on Tennessee as high as 1.26 Bcf/d on Friday). Tennessee's compressor station 527, at Port Sulphur, LA, was under water and not accessible until last Monday. The liquid separation equipment, compressor units, and ancillary equipment will need repair or replacement. Tennessee said it was looking into providing producers with alternative flow routes. "For example, we are investigating reconfiguring valves at the Discovery interconnect to allow gas upstream of 527 to flow to Discovery." Discovery, which is operated by Williams, announced making arrangements to reverse flow on its Market Expansion unit to offer processing services for producers on Tennessee and Columbia Gulf. Tennessee said that it identified damage on the east leg of the Bluewater system and reversed flow to allow gas on the header to be processed at the Bluewater processing plant on the east leg. Tennessee isolated the east leg of Bluewater from Vermilion 245 to Ship Shoal 198. Additional damage has been identified in the Bay Marchand, Ship Shoal, and South Timbalier areas, where multiple pipeline leaks were found. Tennessee noted that Dynegy's damaged Yscloskey gas processing plant is on its 500 line. "We are working closely with the plant operator and others to consider short term processing alternatives for the 500 line."

Southern Natural had a force majeure in place for receipt points upstream of its Toca Compressor Station, which suffered damage and was still partially under water. The affected receipt points upstream of the station were flowing 550 MMcf/d into Southern prior to the hurricane, the company said (Bentek puts Southern's shut ins closer to 840 MMcf/d). Southern also has found damage at pipe supports at levee crossings north of Toca but believes repairs can be completed without impacting gas flows. Damage to Main Pass 298 junction platform offshore also was discovered last week but the company still is trying to determine the extent of the damage. Southern said it was not aware of any significant damage to offshore pipelines. The company said it has pressure on following lines: West Delta 105, Mississippi Canyon 397, 22-inch diameter Venice/Lake Washington line, and the Main lines from Toca to Olga (through Gate 6), but it will have to complete detailed assessments to ensure that there is no additional damage. The 26-inch diameter line from Olga to Main Pass 298, and from Main Pass 298 to Main Pass 289, has pressure but might have to be depressurized in order to repair the Main Pass 298 junction platform. "Resumption of flows upstream of Toca to pre-hurricane levels will be impacted not only by the condition of our facilities, but also could be affected by damage to facilities owned by third parties, including producers and processors," Southern said.

Enbridge Inc., which has interests in five major offshore pipelines in the Gulf, reported some progress toward restoring its operations. "Enbridge is currently transporting approximately half of the 2.7 Bcf/d of natural gas that we delivered from the Gulf of Mexico prior to Hurricane Katrina, including some gas nominated from onshore storage connected to the Destin corridor," said CEO Patrick D. Daniel. "We're also completing our assessment of the Mississippi Canyon pipeline system this week to be ready for startup when upstream production operations resume." The Stingray, Garden Banks and Green Canyon pipelines are back in service delivering gas volumes at close to pre-hurricane levels. Mississippi Canyon, which was in the direct path of the hurricane and was flowing about 500 MMcf/d Aug. 26, is still not operating. Enbridge is working on contingency plans for Mississippi Canyon flows to bypass the Venice processing plant. More than half of the flow can bypass the plant if damaged production platforms complete repairs and resume deliveries before the repair of the processing facility. "Since Enbridge is dependant on disclosures by producers and the Venice processing facility on timing of repairs, the company cannot predict the duration of the downtime for the Mississippi Canyon corridor," it said.

Destin Pipeline, which is operated by BP plc., suffered minimal damage, but still has limited receipts from production facilities. The pipeline, which was flowing nearly 800 MMcf/d of gas production prior to Katrina was receiving only about 216 MMcf/d on Friday with the remainder of its gas coming from storage and interconnected pipelines. Part of the problem also is that downstream oil and natural gas liquids pipeline facilities owned by others experienced damage and are not operational.

Williams said its Transco and Gulfstream natural gas pipeline systems are fully operational and continue to transport available supplies. However, the Mobile Bay natural gas processing plant is being held up by a damaged downstream liquids pipeline. For now, the plant is able to deliver unprocessed gas into Gulfstream. Transco still has about 30 MMcf/d shut in. Williams' said its Canyon Station fixed-leg platform in East Main Pass Block 261, returned to service on Sept. 13 and is processing nearly 200,000 Dth/d of gas. Williams worked with the MMS to allow for the delivery of condensate to an alternate outlet.

ANR Pipeline suffered no significant damage. However, the company told shippers on Friday that capacity on its southeast system would be reduced to 625 MMcf/d due to unexpected engine maintenance at its Patterson Compressor station in Louisiana.

Processing Plants

Eight of the 15 natural gas processing plants located in Alabama, Mississippi and Louisiana were impacted by flooding, damage to equipment or power failure during Hurricane Katrina, and repairs are underway. The seven gas processing plants that are operating include two CrossTex plants (Gibson and Plaquemine); four Enterprise Products Partners LLC plants (Calumet, Neptune, North Terrebone and Pelican); and one Williams/Duke midstream plant in Mobile, Bay, AL -- however, Mobile Bay's output has been impacted by a damaged liquids line.

The plants out of service or limited include following:

Production Facilities

Gas production shut ins in the Gulf were still at 3.38 Bcf/d on Friday, or 34% of the Gulf's total gas production. About 84 platforms and two rigs remain evacuated, the MMS said. A total of forty six producing facilities were destroyed and 20 more were extensively damaged by the storm. Four rigs also were destroyed and nine others were damaged. Here's the latest from individual production companies:

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