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Producers Begin to Assess the Financial Impact of Rita, Katrina

Recovery from the Katrina-Rita one-two punch has progressed slowly and producers began to take a closer look at the impact on third-quarter earnings from lower production, facility repairs and downtime due to third-party infrastructure damage.

BP plc said the two hurricanes combined will cut into quarterly profit by more than $700 million and lower 2005 oil and natural gas production forecasts. BP said Katrina and Rita cost the company 145,000 boe, and the storms will reduce average 3Q production by about 80,000 boe/d. The impact of higher prices on production sharing contracts will reduce output by a further 50,000 boe/d.

"The trading conditions experienced by BP in the third quarter of 2005 were significantly impacted by Hurricanes Katrina and Rita and their aftermath," said BP in a statement. "These effects include profits foregone due to lost oil and gas production from the U.S. Gulf of Mexico, where BP is a leading producer, as well as reduced refinery runs at BP's Texas City refinery and reduced marketing margins as a result of the sharp rise in wholesale petroleum product prices following disruption to the U.S. refining system.

"Additional costs were incurred due to facilities damage, clean-up and repairs. Although it is not yet possible to exactly quantify these impacts, BP currently estimates that the impact of these factors on third quarter replacement cost profit before interest and tax will be in excess of $700 million."

BP measures earnings through a method that measures replacement cost profit before interest and taxes, stripping out the impact of inventory gains and losses. The London-based major's replacement cost profit was already facing a $700 million charge following an explosion at its Texas City, TX refinery earlier this year.

About $100 million in costs were booked in the third quarter to repair and secure the Thunder Horse deepwater platform in the Gulf of Mexico, which was damaged not only by Katrina and Rita, but also Hurricane Dennis last July. Ramp-up of Thunder Horse, which was expected in the fourth quarter, has been postponed to sometime in 2006.

Chevron Corp. said on Sept. 28 that it expected the impact on 3Q after-tax profits from Katrina alone to total about $350 million. Total shut ins due to Katrina were expected to reach 75,000 boe/d. Chevron said last week that 80% of its Gulf oil and gas production remained shut in. Many of its facilities were damaged or were knocked over and need repair. Restarting output also will depend on whether the pipelines and onshore terminals are operating.

"Approximately 20% of the company's net production in the Gulf of Mexico has been restored," Chevron said. "A number of production facilities sustained damage and 14 structures were toppled."

ConocoPhillips said Hurricanes Katrina, Rita and Dennis together cost it about 20,0000 boe/d in the third quarter. The company will announce quarterly earnings Oct. 26. The biggest hit came from Katrina, when seven Gulf Coast fields in which ConocoPhillips has an interest were shut in. Six fields have ramped up, but the Ursa field, which is jointly operated with Shell Exploration and Production, sustained topside damage, and it remains shut-in, pending a full assessment and infrastructure coming back online.

Rita's impacts "are largely expected to be short-term in nature," ConocoPhillips said in a statement. These production impacts primarily occurred in the Gulf of Mexico fields and the onshore Louisiana and Texas fields in which ConocoPhillips has an interest. The company-operated Magnolia field sustained minimal damage and production is expected to resume shortly, contingent upon resumption of operations at non-operated related infrastructure, such as pipelines and utilities.

Third quarter production on a boe basis, including Syncrude, is expected to be "slightly lower" than output in 2Q2005, with the three hurricanes, along with unplanned downtime in Alaska and the United Kingdom, negatively impacting output. Exploration expenses also are expected to be higher.

Shell Oil Co. did not estimate the financial impact of the hurricanes, but said last week post-Rita underwater damage surveys discovered that its Auger 12-inch gas export line was damaged at two locations on the ocean floor. The current estimate for pipeline repairs is four to six weeks, weather permitting. The Auger structure was not damaged by Rita and topsides damage is minimal, the company said. Auger will be ready to ramp up once the pipeline repairs are made.

Post-Katrina, Shell's current net production -- operated and outside-operated fields -- is 160,000 boe/d, a huge drop from the 450,000 boe/d it averaged in the first six months of 2005. This week, production at the Shell-operated Brutus, Glider, Bullwinkle, Enchilada, Popeye, Fairway and North Padre Island fields is flowing and ramping up to pre-hurricane rates. Over the next few weeks, Salsa and Cougar will ramp up, along with partial production at Ram Powell and Main Pass 252.

Meanwhile, W&T Offshore Inc. said several offshore platforms were damaged when Rita struck, five significantly, including East Cameron 338 A and Eugene Island 397 A. W&T's pre-Katrina and Rita volumes were approximately 245 MMcfe/d, and the company is currently producing 24 MMcfe/d. W&T is evaluating several alternative methods for bringing shut-in production online, including temporary infrastructure and other operators' platforms. Currently, total repair cost for both hurricanes is expected to be $35 million net for operated fields; W&T does not carry business interruption insurance.

"In the last month, we have successfully evacuated all of our offshore and office personnel twice," said W&T CEO Tracy W. Krohn. "By my estimates, Hurricane Rita represents the most catastrophic storm ever in terms of impact on oil and gas operations in the Gulf of Mexico. The damage that was suffered by W&T appears to be in line with the reports of other significant operators in the Gulf of Mexico. However, I am very pleased with the pace of our repair operations."

W&T's drilling and construction projects have been delayed 10 days; however, no drilling rigs working for W&T were damaged because of the hurricane. Of the rigs reported to be severely damaged or lost by major rig operators, none are expected to affect the 2005 or 2006 drilling program.

McMoRan Exploration Co.'s initial assessment of exploration and development operations, production facilities and the Main Pass Energy Hub platforms indicated no apparent major damage. However, because of shut ins and repairs to downstream facilities, McMoRan expects 3Q2005 production to average 40 MMcfe/day, including 11 MMcfe/d for McMoRan's share of production at Main Pass Block 299. Absent production downtime for Katrina and Rita, McMoRan estimates quarterly production would have been 57 MMcfe/d, including 17 MMcfe/d for McMoRan's share of production at Main Pass 299.

Helicopter operator Offshore Logistics Inc.'s helicopter fleet operating in the Gulf did not sustain any damage from hurricanes Katrina and Rita, however, Katrina caused a total loss of the company's shore base facility in Venice, LA and Rita severely damaged the shore base facility in Creole, LA. Rita also caused extensive flooding at the shore base facility in Intracoastal City, LA.

In response to the hurricane damage, Offshore Logistics increased flight activities from its operations headquarters at the Acadiana Regional Airport in New Iberia, LA and consolidated flight activities at its remaining shore base facilities. In addition, the company expanded its shore base facility located at Galliano, LA because of the damage to the Venice facility. "Despite the disruption caused by the hurricanes, the company is currently meeting all of its customers' needs for flight services from its remaining facilities," the helicopter company said in a statement.

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