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S&P: Future Weather-Related Events in Gulf Could Create Market Turmoil

Despite the dramatic destruction and disruptions caused by Hurricanes Katrina and Rita last year, energy companies overall weathered the storms from a credit standpoint, according to a report by Standard & Poor's Ratings Service (S&P). But while strong commodity prices somewhat offset the serious infrastructure damage, future weather-related events could create more turmoil for the markets, particularly for domestic natural gas.

In the report, primary credit analyst Jeffrey B. Morrison said, "Notably, natural gas prices have exhibited significant volatility over the past six months compared with crude oil prices. Many factors have caused natural gas prices to drop steeply after soaring just after the storms, including rising gas storage levels, an unusually warm winter in the Northeast and the return of roughly 86% of natural gas production from the Gulf region following Katrina and Rita."

But, said Morrison, progress on infrastructure repair in the Gulf region has been much slower in the past three months.

"In the near term, labor, services/equipment and repair vessel availability in the region are expected to remain key constraints for operators as they complete repairs and work to return to full production. The oilfield services sector had already experienced tight labor supply, as high commodity prices have encouraged exploration and production operators to increase their capital spending," Morrison wrote.

The Gulf of Mexico rig count has dropped 15% from pre-storm levels in late August 2005, the analyst noted. "However, some of this could be attributed to rigs moving to various international markets and to damaged rigs that are undergoing repairs. This contraction in rig supply could continue to inflate already high day rates for the Gulf of Mexico rigs, at least in the very near term and until new-builds begin to enter the market."

To view the full report, visit www.standardandpoors.com .

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