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Industry Struggles to Recover as Cumulative Gulf Shut-In Totals Mount

As shut-in Gulf production barely budged last week, gas industry number crunchers were just beginning to realize the magnitude of the gas supply problem that consumers will face this winter given the damage by Hurricanes Katrina and Rita. Forecasters are predicting that possibly more than 3 Bcf/d of gas production could remain shut in through December, which would put the cumulative total at nearly 500 Bcf of gas by the end of the year.

To put that number in perspective consider that the Energy Information Administration (EIA) expects total U.S. dry gas production in the fourth quarter to be 4,750 Bcf. The total annual gas production from the offshore Gulf of Mexico is 3,650 Bcf.

The Minerals Management Service (MMS) said Friday that 7,941 MMcf/d of offshore Gulf gas production was still shut in and the cumulative offshore production loss as of Friday was 196.5 Bcf.

Meanwhile, Golden, CO-based consulting firm Bentek Energy reported that gas nominations into Gulf pipelines from onshore and offshore production facilities was down about 8,437 Bcf Friday from pre-Katrina levels. Bentek, which gathers its data from official pipeline company bulletin boards, puts cumulative onshore and offshore shut ins at 209.6 Bcf currently.

"Hurricanes Katrina and Rita will have a combined cumulative impact three times as large as that from Hurricane Ivan in 2004," Global Insight's Jim Osten said in his Natural Gas Weekly. Osten forecasts that by the end of December the cumulative shut-in Gulf production (both onshore and offshore) from hurricane damage will total 500 Bcf, compared with 174 Bcf from Ivan through last March.

Osten said he expects as much as 3 Bcf/d could remain offline through December because of damage to processing, deepwater platforms, rigs and other gas facilities. There's a broken link in the supply chain for a lot of folks, he said.

"I think we'll probably see an average of about 90 Bcf/month (shut in or delayed through December), including things like the delay for the Thunder Horse platform, which was supposed to produce about 200 MMcf/d," Osten said in an interview with NGI. Shell's Mars and BP's Thunder Horse platforms are the "big ones that are damaged. Many other smaller rigs and platforms were just wiped out. There's also more damage to gas plants onshore than there was with Ivan. It still isn't even clear what the magnitude of the damage is to pipelines. There's a lot more damage to platforms. Drilling rigs also are an issue.

"With Ivan you also still had most of the onshore base for the offshore industry intact," he said. "I think there are some problems with the base areas this time. We've lost several hundred thousand homes, whole communities. The personnel side certainly will be an issue for a while.

"We may be overly pessimistic, but there are a lot of things that we don't know about the processing, the people and the pipelines and some of the rigs and projects," said Osten. "I think if you count the MMS numbers, plus the onshore situation and the foregone production, you are going to get a high number. I hope I'm being too pessimistic."

Osten is expecting working gas levels in storage to reach only 3,050 Bcf by the end of October, which is about 277 Bcf less than working levels entering last year's heating season. "A growing deficit in storage will support double-digit prices into next spring," he said.

Consultant Stephen Smith basically agreed with that assessment. He predicts storage will enter the heating season 275 Bcf lower than levels at the same time last year and that will lead to $12/MMBtu average gas prices for the winter (November-March), which really isn't that bad considering the winter strip currently is more than $14.

"Gas prices should begin to ease once production shut in by Rita is visibly coming back," Smith said in his Monthly Energy Outlook. This recovery process should be well underway by late October. In such a recovery environment, our estimate is that a 250 Bcf deficit versus last year-s storage peak might warrant a $1.50-$2 premium to last year's early November gas-[residual fuel oil] cash spread of $2.09/MMBtu. This leads us to a November bidweek forecast in the neighborhood of $12/MMBtu."

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