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Industry Starts to Dig Out From Catastrophic Katrina

Four days after the rampaging Hurricane Katrina made landfall on the Louisiana Coast the natural gas industry was just beginning to get some idea of the extent of the damage to onshore facilities, some of which were still under water, and offshore rigs, platforms and pipelines, some damaged and some missing in action. The only sure thing was that Katrina would go down in the record books as "catastrophic," and just about the most devastating storm in 100 years or more. The word heard over and over was "unbelievable," which was an understatement.

At the end of the week, producers, processors, and pipeline companies, and their helicopter and supply boat service companies, had managed to make contact with most of their employees, many of whom had spent the early days contending with their own survival and that of their families and homes. Some shut-in production had been brought back online, mostly in the western part of the Gulf away from the storm's path, and some pipelines had been declared fit for use but others were awaiting underwater testing to determine the extent of the damage. Much of the natural gas in the Central and Eastern Gulf remained shut in.

The near-month futures contract soared to an all-time high of $12.30/MMBtu in Access trading on Wednesday and settled for the week at $11.691. Most were hesitating to assess the market impact, waiting to see just how many days, weeks or months it would take the industry to recover from the pounding waves and flooding of the massive storm which swept through Louisiana, Mississippi and Alabama, destroying lives and property. Katrina crossed the Gulf of Mexico as a Category 5 storm with 160 mile and hour winds and dropped to Category 4 with 140 mph winds before making landfall.

The widespread loss of power through the stricken states made communications impossible and severely hampered recovery operations. By the end of the week it was estimated 1.6 million customers remained without power due to Katrina, primarily in Louisiana, Mississippi, and Alabama.

Onshore infrastructure took most of the attention last week, but offshore, there were ominous danger signs for offshore platforms and pipelines. Four days after Hurricane Katrina stormed through the warm coastal waters, only about 20% of oil and natural gas production had been restored, according to the Minerals Management Service (MMS). Four days after Hurricane Ivan blasted the region last September, MMS reported that 60% of production ramped up.

Concern was focused on the underwater pipelines that link about 4,000 platforms from the Gulf to the mainland. During Ivan, many of the pipes were damaged, buried or uprooted, and some expect to find similar damage from Katrina. There were some experts with dire predictions. A former Shell Oil Co. chief engineer in the United States, Robert Bea, said last week that several oilfield experts told him that oil and gas pipeline and platform damage could be as much as "10 times" what happened during Ivan.

Many of the top Gulf producers still avoided damage estimates on Friday, noting that they were hindered by several issues: no power, communication losses, the inability to travel on roads and bridges, and the destruction of the communities where many of their employees lived. JP Morgan estimated that Gulf production would be shut in for at least 10 days and refinery operations reduced for two weeks, but it acknowledged in a note to clients that it could be optimistic.

The Market Reacts

Natural gas prices rocketed higher last week following Katrina's devastation, reaching highs of $18/MMBtu at Florida Gas Transmission Zone 3 on Wednesday. On Thursday FGT Z.3 prices were higher than $15 because of concerns over getting gas to the numerous power generation units in the state.

Gas production receipts on Gulfstream Natural Gas, which service Florida, were at zero Wednesday, Thursday and Friday, according to nomination data from Denver-based Bentek Energy. Gulfstream shippers, however, managed to obtain gas from other sources. On Friday the system was flowing at about a 33% load factor with 379 MMcf/d scheduled, compared to its 1.1 Bcf/d capacity.

Meanwhile, FGT was maintaining its flows Friday with 576 MMcf/d of production receipts scheduled and 1,497 MMcf/d of total gas scheduled to flow on its system, which is about 70% of its capacity, according to Bentek data.

Florida wasn't the only place where prices were soaring. Transco Zone 5 in the Mid Atlantic region hit $16 Wednesday, for example. The norm outside the Rockies Wednesday was $10-12/MMBtu. The previous Friday, prices in the Louisiana Gulf Coast area were averaging in the $9.80s, FGT was at $13.08, Transco Z.6 in New York was $10.32 and the market low point was Questar at $7.85.

Katrina arrived at a particularly bad time for the gas market because she set many gas contracts for the entire month of September. The September gas futures contract went off the board at $10.847 on Monday afternoon about eight hours after Katrina made landfall as a category four hurricane with 140 mph maximum sustained winds. The September contract had risen $1.055/MMBtu from the close of the previous trading session and was $3.153 higher than where it had opened as the near-month contract on July 28. It is hard to believe that the near-month gas futures contract was trading in the $6.90s at the end of June.

While skyrocketing gasoline prices were making the most noise last week the natural gas impact may not hit the public until this winter. Some market analysts now believe the stage is set for gas futures prices to rise to $15 by December. Futures reached a new open outcry session high of $12.25 last Wednesday. Analyst Philip Verleger, a visiting fellow at the Institute of International Economics and former director of the Office of Domestic Energy Policy at the U.S. Treasury Dept., said last week that he expects the "coming squeeze will equal or exceed the one in 2002." In a written report on Katrina's impact on Wednesday, Verleger noted, "In that year spot natural gas prices increase by 60% between August and the end of December. This year we can expect a similar if not larger increase."

He predicted that the tightness in gas will spill over into heating oil through arbitrage. "As gas prices rise, power system operators will dispatch oil- not gas-fired generation. Oil demand will go up as will prices. If supplies are tight, prices will increase even faster." He predicted that homeowners will see at least a 50% increase in heating bills this winter.

The worst impact may be on gasoline prices, however, due to the refinery outages from Katrina and apparent consumer insensitivity to cost, he said. "Do I believe retail gasoline prices will reach $10? In a word 'no.' However, I also do not believe the market will clear. Some parts of the country will likely see gasoline lines," he said on Wednesday.

Verleger, a former Yale professor and vise president at Drexel Burnham Lambert, predicted "very severe economic impacts" from Katrina because it will "force consumers to increase expenditures on energy drastically.

"Rising prices are going to require consumers to double expenditures on gasoline, electricity and heating fuels. Other spending will be cut and recession will follow. I am betting that Gulf Coast refineries and natural gas facilities come back online just as demand starts to collapse. This means Katrina's legacy may be an energy glut like the one experienced in 1999."

Ron Denhardt of Strategic Energy and Environmental Research was more hesitant to make predictions due to the significant uncertainty regarding the extent of the damage in the Gulf. "If we lose 100 Bcf of gas production, storage injections still could bring us up to 3,200 Bcf [of gas in storage]," Denhardt said in an interview. "Last year we lost 173 Bcf because of Ivan. About 107 Bcf of that was through October and then the rest of it kind of came in November and December. According to Minerals Management Service most of it was back by January."

If a similar amount is unavailable and we have a colder than normal winter, there surely will be even higher prices, Denhardt said. "The other question is how much demand is going to be destroyed at this price level. Part of what may justify even higher prices is the very high distillate prices." He said if natural gas soars above distillate, demand destruction almost certainly will accelerate. Distillate currently is priced at about $15.42/MMBtu, he said. December gas futures closed at $12.227 on Thursday.

Mike Zenker, a natural gas expert with Cambridge Energy Research Associates (CERA), said Friday that the gas market was already operating under a tight market. If most of the platforms only have minor damage, as has been reported, and if the gas pipelines can be quickly repaired, "clearly, I think it's possible that we'll be well positioned for winter storage. Hopefully, the platforms are no worse than what's been reported. But we have very little demand flexibility left in the market. This will be the first serious test since 2002."

Friday's Shut-In Production Statistics

The amount of gas production flowing out of the Gulf of Mexico rose 617.83 MMcf/d on Friday from the previous day's level, the MMS reported. However, MMS said 7,248.2 MMcf/d of gas remains shut in, based on reports from 69 companies (down from a peak of 8,800 MMcf/d). A total of 328 platforms and 53 rigs were still evacuated.

Based on MMS statistics, on Friday producers remanned 95 more platforms and 11 additional rigs that had been evacuated. The agency calculated that about 40% of the platforms and rigs in the Gulf remained evacuated on Friday.

The amount of oil production still shut in totaled 1,327,953 bbl, a recovery of only about 28,545 bbl from a day earlier. But cumulative oil shut ins as of Friday stood at 8.76 million bbl, and cumulative natural gas shut ins stood at 49.04 Bcf.

Shut ins from Katrina already are approaching 30% of what Ivan caused last winter. The following is the recent history of the impact of hurricanes on Gulf of Mexico natural gas production:

Damage Surveys

As of Friday a total of 41 platforms were lost, but "all of them were small and in shallow water. They were not producing very much," an American Petroleum Institute spokesman said. Nine additional platforms were damaged. Of the rig fleet, three were lost; there were three with extensive damage; and five were adrift. A complete survey of offshore operations may not be completed for weeks but here's a wrap up of some producers' assessments as of Friday afternoon:

Shell Oil Co.'s Mars platform, located in the deepwater Mississippi Canyon, sustained damage although the extent of the damage may not be know for several days. The field had been producing about 150 MMcf/d into the Mississippi Canyon Pipeline before Katrina. There also was "significant" damage to Shell's WD Block 143 "A" platform, which isn't a production platform but is a hub for pipelines from the Mars deepwater field. It transports crude through Port Fourchon into the Louisiana Offshore Oil Port's storage at Clovelly, LA, and its gas pipeline goes to Venice, LA, where one of its key gas processing plants is located.

Although Shell did not confirm the report, the Venice gas processing plant was said to be under water on Friday. "Equipment fabrication to repair WD-143 is underway," Shell said, and it also has teams assessing its Cognac and Ursa platforms. The Western and Central Gulf assets do not appear to have sustained damage, and personnel have already safely returned to North Padre Island and Brazos in the western Gulf and West Cameron, Green Canyon, and Garden Banks in the central Gulf, the company said.

At ExxonMobil Corp., "early indications from our aerial observations are that the damage to the majority of our offshore structures in the Gulf of Mexico has been limited," said spokeswoman Susan Reeves. "Our inland Louisiana facilities are back online. Our gas processing plant [110 MMcf/d] and associated facilities at Grand Isle, LA, sustained some damage." Major equipment appears stable, the company said Friday. "Current reports indicate no visible damage to the onshore or offshore facilities at Mobile Bay, AL, and those are natural gas facilities," Reeves said.

According to early press reports, Grand Isle, LA was completely swamped during Katrina, and most of the structures there were destroyed.

Reeves said ExxonMobil has 100 structures in the Gulf of Mexico. Its Western Gulf operations were not affected. A total of 42,000 bbl/d of the company's oil production and 490 MMcf/d of its gas production remained shut in on Friday.

BP plc reported that inspections had so far indicated no significant damage to its massive deepwater complex. However, seven of its oil platforms toppled and three of its platforms were leaning in the shallow waters of the Gulf.

BP currently produces about 400,000 boe/d; the structural damage in the shallow waters accounts for about 2,050 bbl/d of oil and 7.5 MMcf/d of natural gas, said spokeswoman Ayana McIntosh-Lee. "It's a relatively small number when you consider what we do in the Gulf," she said.

She said Friday that the initial surveys have found no major damage to the company's gas processing plant in Pascagoula, MS, but said that the plant still has no power. Once there is power, she said, BP will need to do an integrity assessment before ramping up.

Chevron continued to assess its facilities, but it also reported transportation problems following the storm. From flyovers, it appeared that offshore platforms had not sustained major damage, but Chevron said it was taking aerial photographs and would get people to the rigs as soon as it could. It offered no other information.

Anadarko Petroleum Corp. boarded staff at its massive Marco Polo deepwater platform last week, but it had issued no damage assessments on Friday.

Among other producers, Newfield Exploration Co. said its A production platform at Main Pass 138 "appears lost in the storm." And Noble Corp.'s semisubmersible rig Jim Thompson, which moved 17 miles in the storm, appeared to show no "damage of a material nature." GlobalSantaFe said all five of its rigs in Katrina's path were accounted for, although two were listing slightly and one drifted off its location and grounded in shallow waters near the mouth of the Mississippi River.

One of Helmerich & Payne Inc.'s (HP) eight active platform rigs in the Gulf of Mexico lost its entire derrick, and suffered considerable damage to the rig floor and substructure. On first assessment, the others are little or not damaged.

Ensco Inc., which reported damage to its deepwater semisubmersible Ensco 7500 rig on Tuesday, said the rig has been reboarded, power restored and it was holding position. The rig initially was listing four degrees, and has now been trimmed and inspection is underway. However, initial observations of Ensco 29, one of the company's three Gulf of Mexico platform rigs, "indicate that the rig apparently sustained significant damage," the company said.

Apache Corp. lost eight of its production platforms in Katrina, but a company spokesman said it will take time to assess all of the damage before issuing a full report. Aggregate gross production from the platforms before the storm totaled 7,138 bbl/d of oil and 12.1 MMcf/d of natural gas. Apache platforms lost to the storm were Main Pass 312-JA; South Timbalier 161-A; South Pass (SP) 62-A; SP 62-B; WD 103-A; WD 103-B; WD 104- C; and WD 133-B. A detailed inspection of damage to other facilities is underway. Apache personnel have begun the process of restoring production as pipeline and processing facilities become available, which may take some time.

Two of Kerr-McGee's deepwater production facilities, Nansen and Boomvang, resumed operations in the western Gulf, and its Red Hawk facility was scheduled to restart last week. Another crew was expected to assess its Neptune deepwater facility and two shelf operations, Main Pass and Breton Sound as soon as it is feasible, a spokesman said.

Enterprise Products Partners LP, a midstream operator, said three of its 11 natural gas processing facilities, the 60.3%-owned Toca (160 MMcf/d), 29.4%-owned Yscloskey (1,850 MMcf/d) and 13.1%-owned Venice (810 MMcf/d) plants, were impacted by flooding, but did not appear to have significant structural damage. The Yscloskey and Toca plants are located in St. Bernard Parish, which was devastated in the storm.

"Based on initial onsite inspections, we believe the Toca facility, which is operated by Enterprise, could be operational within a few weeks after the flood waters recede," the company said in a statement. "Onsite inspections are required to fully assess the status of the Yscloskey and Venice plants." Both of these plants are operated by a third party.

Enterprise's five natural gas liquid (NGL) fractionators and its propylene fractionator in Louisiana are currently operational or expected to be operational within a few days. Enterprise also has completed initial onsite inspections of its 100%-owned Norco fractionator, and it expects that it will be operational within a few weeks. The 13.1%-owned VESCO NGL fractionator, which is adjacent to the Venice natural gas processing plant in Louisiana, was also impacted by flooding and will require further inspection by the third party operator.

Offshore, Enterprise said it had performed onsite or aerial inspections of the partnership's seven offshore platforms, including the Marco Polo, Viosca Knoll, Garden Banks and Falcon Nest platforms, and "have not detected any material damage," Enterprise said. "Our large platforms at Ship Shoal 332, which are the initial injection point for the Cameron Highway Oil Pipeline System and an intermediate injection point for the Poseidon Oil Pipeline, are fully operational."

Enterprise's NGL storage facilities in Louisiana also are fully operational. The partnership's natural gas and NGL storage facilities near Hattiesburg, MS did not suffer any damage, but have been affected by a power outage. Once power is restored, which is expected "in a few days," the facility is expected to be operational. "Until power is restored, one of the natural gas storage facilities is limited to making withdrawals of gas for deliveries to pipelines." Enterprise said that it has been able to use its integrated system to provide NGL products from its complex at Mont Belvieu, TX to industrial consumers in Louisiana, where traditional NGL supplies have been disrupted.

Devon Energy Corp. had restored about 50% of production that it had voluntarily suspended prior to the hurricane. The company also said it expects to bring on an additional 30,000 boe/d upon completion of damage assessments and any necessary repairs to third-party facilities and transportation systems.

Pipeline Update Although there was a near complete disruption to human life along the Gulf Coast, the initial reports from pipeline companies were of only minimal damage to operations aside from flooding of certain facilities and power outages at compressor stations, processing plants and other facilities.

Enbridge was among the few companies reporting some damage to its operations. The Mississippi Canyon offshore pipeline system was directly in the path of Katrina and appears to have sustained damage to its operations, the company said on Thursday. Mississippi Canyon had been flowing more than 500 MMcf/d prior to Katrina's arrival. Enbridge said it would take more time to conduct thorough underwater inspections.

No gas was nominated to flow on Wednesday, Thursday or Friday into Mississippi Canyon, or on Enbridge's Stingray system. However, its Garden Banks system had started to return to service on Thursday.

"The Garden Banks and Manta Ray systems are currently flowing volumes at 150 MMcf/d and are expected to increase over the next several days," the company said on Thursday. "Start-up of the Stingray and Green Canyon facilities is dependent on resumption of offshore production and onshore interconnecting receipt systems provided that no damage is identified during start-up." Garden Banks was expected to flow about 295 MMcf/d on Friday compared to nearly double that a week earlier.

Enbridge said Destin Pipeline, which it owns with BP, was only partially operational on Friday. It was receiving no production, according to receipt point data from Bentek Energy. Prior to Katrina, the Enbridge Gulf Offshore System was moving an average of 3 Bcf/d, or about half of total deepwater production.

El Paso Corp. said it nearly completed the process of restaffing and inspecting its production facilities and found that only one platform, producing 1 MMcf/d, was gone out of the 77 platforms that it operates along the Gulf Coast. The company also reported minimal damage to the facilities on ANR pipeline and isolated damage to facilities on Tennessee Gas Pipeline and Southern Natural Gas (SNG). "Limited resources and challenging logistics are hampering efforts to access and fully inspect offshore pipeline facilities at this early stage," the company said.

El Paso reported about 1,650 MMcf/d of gas production shut in behind its three Gulf Coast pipeline systems: Southern Natural (550 MMcf/d), Tennessee Gas (700 MMcf/d) and ANR (400 MMcf/d). About 3 Bcf/d was initially shut-in upstream of those systems. On Tennessee, the Bay Saint Louis compressor station in Mississippi and the Leeville and Port Sulphur stations in Louisiana sustained water damage as have the Toca and Olga stations on Southern Natural, El Paso said.

Tennessee, which operates the east leg and header sections of the Blue Water Gathering System, said 150 MMcf/d of production was able to enter the header and flow to the west on Thursday. "The timing of additional volumes becoming available is difficult to predict given the uncertainty of potential repairs on [Tennessee] and because producers are still evaluating their platforms upstream of El Paso's pipelines," the company said.

Williams said the Transco and Gulfstream pipeline sustained no major damage but some compression had switched over to running on natural gas rather than utility provided electricity. Spokesman Chris Stockton said about 500 MMcf/d of production was still shut in upstream of Transco and he said Gulfstream was flowing about 500 MMcf/d.

Southern Union, which owns Florida Gas Transmission, Trunkline Pipeline, Trunkline LNG in Lake Charles, LA, and Sea Robin Pipeline, said initial inspections revealed no major damage. However, it expected to complete a more thorough assessment of Trunkline's offshore operations over the weekend. "Employees working in the coastal area have been accounted for and disaster recovery crews have been deployed to assist with clean up efforts," the company said.

Florida Gas Transmission was flowing up to 1.7 Bcf into the Florida market area on Friday, according to Southern Union. Sea Robin's throughput for Friday was 356 MMcf. Trunkline was flowing about 835 MMcf Friday and Trunkline LNG's volume was 240 MMcf.

"The damage assessments we have completed thus far have confirmed that our interstate transmission systems in the area are operating safely and reliably," said Jeryl Mohn, Southern Union's senior vice president of operations and engineering. "We continue to keep all of those who were impacted by Hurricane Katrina in our thoughts."

Finding employees

Energy companies were contending with a lot of issues last week, but their priority was on finding and assisting their lost employees -- most of whom were focused on their own survival and that of their families and homes in the devastated region.

Chevron Corp., which estimated it has about 3,000 employees in those areas hardest hit by Katrina, was running radio and television commercials throughout the Gulf Coast region with toll-free telephone numbers to encourage affected employees in Louisiana, Alabama and the panhandle of Florida to call the company to let it know of their current situations.

Chevron planned to open a tent city within a few miles of its Pascagoula, MS, refinery by Saturday to provide enough beds for up to 1,500 refinery employees and their families whose homes were destroyed or severely damaged by Katrina. Like a massive mobile hotel, Chevron's tent city will provide full services, including water, catering, power, satellite communications, sewage treatment, medical services, bedding and laundry.

"The demand is great," Chevron said in a statement. It estimated that between 15-25% of its Pascagoula employees, or about 250 people, lost everything to Katrina. An additional, and significant, number of employees' homes have been seriously damaged. Chevron plans to run the camp as long as it's needed. The company also will provide fuel for the vehicle fleet that supports the camp.

ExxonMobil also established a toll-free assistance line for employees (877-294-8617). For employees impacted by the hurricane the company is offering interest-free emergency loans, advances in salary, paid time off to attend to personal needs, and access to temporary transportation assistance. ExxonMobil also said it was increasing its contributions to the hurricane assistance fund to $7 million. It previously had pledged $2 million.

Along with impacted energy companies, Minerals Management Service (MMS) employees, whose Gulf Coast duty station is Jefferson Parish, LA, were given excused absences for two weeks beginning Aug. 29, without loss of pay and without charge to leave while they cannot report to a work station. Payrolls also were being processed and everyone was expected to receive their pay without interruption. The MMS was planning to have a new temporary office in Houston by Sept. 10 for 60-90 days, which will accommodate about 100 employees, however long term, MMS said it wanted to reoccupy its Louisiana offices if possible.

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