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Gulf Coast Slow to Recover from Ike

September 22, 2008
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Damaged offshore natural gas pipelines, platforms and rigs, flooded onshore gas processing facilities and a lack of power hampered a quick return to normal operations last week for Gulf Coast facilities after Hurricane Ike made landfall in Galveston, TX, in the pre-dawn hours of Sept. 13.

The Minerals Management Service (MMS) estimated Friday that 75%, or 5.58 Bcf/d, of the GOM's usual 7.4 Bcf/d gas production that had been halted ahead of Ike remained shut in -- and the ongoing shut-ins now surpass the combined impact on a cumulative basis of hurricanes Katrina and Rita in 2005, energy analysts said.

There were at least 48 offshore platforms destroyed by Ike -- nearly all located in shallow Louisiana waters -- that together produced around 84 MMcf/d of gas and 13,000 b/d of oil. MMS did not know if the structures would be rebuilt. By comparison, hurricanes Katrina and Rita in 2005 destroyed a total of 113 platforms and eight rigs; 52 other platforms and 19 rigs suffered extensive damage (see NGI, Jan. 16, 2006). At least 58 pipelines also were damaged in the 2005 hurricanes.

Besides the loss of gas production, Hurricane Ike caused the largest blackout in Texas history, affecting as many as five million people from Texas into Louisiana. Nearly two million customers, most in the Houston and Galveston area, remained powerless on Friday, and the utilities serving the region warned that some customers may be without electricity into October (see related story).

The Department of Energy's (DOE) Office of Electricity Delivery & Energy Reliability, in its Friday morning situation report, noted that the Sabine Pipe Line, which manages the Henry Hub, had begun to accept gas flow at additional points along its system. Partial compression had been restored at the hub complex, but the pipeline was monitoring the system in case the compression exceeded the pipeline's capabilities.

Enbridge Pipelines, which owns and operates UTOS, Garden Banks, Manta Ray, Mississippi Canyon, Nautilus and Stingray, remained shut-in Friday, the DOE reported. "Inspections continue and more thorough damage assessments will take place over the next few days," DOE said. Enbridge expected the Mississippi Canyon pipeline to return to service on Sunday; the Manta Ray and Nautilus pipelines are expected to return on Friday (Sept. 26). No estimate was given on when the other pipes would return to service.

Nine of the 39 major gas processing plants in the path of Hurricane Ike and Hurricane Gustav, with total operating capacity of 5.23 Bcf/d, also remained shuttered Friday morning, the Energy Information Administration reported. Nineteen plants had resumed operations at reduced or normal levels totaling 7.2 Bcf/d; 10 plants with total capacity of 5.03 Bcf/d were capable to restart once power is restored and/or upstream gas flow begins.

"Any chance of setting new records for natural gas inventory at the end of October this year is quickly slipping away, leaving the year/year storage deficit intact," wrote Barclays Capital energy analysts George Hopley, Biliana Pehlivanova and Michael Zenker. "A slipping crude market may not be the best guide to near-term natural gas price formation, given currently tighter gas supplies than were perceived just two weeks ago."

Lehman Brothers analysts Edward Morse and Dan Guertin said gas supplies may be tight along the Gulf Coast, but they were "comfortable" that adequate gas storage could be reached by the time the winter heating season begins Nov. 1.

"Although hurricane disruptions have slowed the rapid closing of the year-on-year storage deficit, the relative looseness of the market at this point in the injection season relative to last year has been easing the impact of the supply losses that are still ongoing," said the Lehman duo. "As Gulf of Mexico supply gradually returns to normal over the coming weeks, we expect 2008 inventories to resume closing the gap to last year."

The Lehman analysts noted that energy production and refining contribute the "lion's share of industrial demand," and reduced power demand because of outages and evacuations, combined with production and refining shutdowns, resulted in 1 Bcf/d of lost demand "above the demand disruptions from Gustav a week earlier. Ike's demand-side effects have lasted into [last] week as well with power outages affecting nearly four million people across multiple states..." In addition, "temperatures cooled significantly during the week, leading to lower week-on-week gas demand in the power sector by about 3 Bcf/d."

The Barclays team noted that peak volume shut-ins in both the 2005 storms were more than either Ike or Gustav, "but then again, back in 2005, full production from the federal waters reached 10,000 MMcf/d, compared to just 7,400 MMcf/d in 2008."

Combining the "likely" production losses from hurricanes Gustav and Ike -- assuming no sustained damage from either hurricane -- removes enough gas from the September-October balance to "substantially reduce the odds for a fall 'storage capacity crunch,'" said energy analyst Stephen Smith of Natchez, MS. "Over the next few weeks we expect prompt gas futures to firm relatively to prompt WTI futures. That said, our 'bear case' for a well supplied year-ahead gas market is still intact -- the surge in onshore shale gas continues to be the dominant factor for the 2009 gas market."

A surge in crude prices for any of several reasons "might provide some temporary upward support for gas futures at any time in the year ahead, but a stronger sustained gas price is likely to require rebalancing North American supply and demand by first experiencing 12-18 months of prices generally below $9/MMBtu," said Smith.

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