As the anniversary of Hurricane Katrina approached, the energy industry was watching ominous Tropical Storm Ernesto, which was strengthening in the Atlantic Basin Friday night. As of 5 p.m. EDT Friday the National Hurricane Center (NHC) was predicting that Ernesto would become the season’s first hurricane by Monday and could track right into the center of the Gulf of Mexico possibly targeting the Texas or Louisiana coasts.

In its 5 p.m. advisory, the NHC said Ernesto was located 300 miles south-southeast of San Juan Puerto Rico and moving west-northwest at 16 mph. The forecast showed the storm becoming a hurricane after it crosses over Puerto Rico. The projected track of the storm would take it over the western tip of Cuba and into the Gulf of Mexico.

If the storm escapes an area of high wind shear into Monday, “we could end up with a dangerous hurricane in the Gulf of Mexico (GOM)” by midweek, said Wunderground meteorologist Dr. Jeff Masters.

The possibility of a hurricane affecting GOM production led to a surge in gas futures prices in the overnight Access trading session and early in the morning on Friday. However, near-month futures lost energy around 11:30 a.m. Friday, and the market gave up significant ground in the afternoon to end the day up only 7.8 cents at $7.157 after having reached a high of $7.520. Some sources attributed the afternoon sell-off to rumors that the storm might weaken. However, after the 5 p.m. NHC update, that did not appear likely.

Meteorologists believe the tropical storm’s rate of speed is crucial. If the storm moves too fast, it could get ripped apart, some forecasters said. If the storm continued at a speed of about 20 miles per hour, it could encounter a “strong zone of shear to its west,” said Kristina Baker, AccuWeather meteorologist. “On the other hand, if the storm slows down, then the winds to the west will relax some, enhancing an environment that would support the storm’s intensification into a hurricane, possibly a major hurricane.”

Others were more direct. Dr. Jim Siebert, director of Meteorological Operations at WeatherInsight.com in Houston said, “It does appear that this (Ernesto) will have an impact on the Gulf of Mexico and production.”

Masters said two storm models indicate the disturbance could dissipate by Sunday, and “this is a reasonable forecast. However, the trough is forecast to split apart on Monday and leave a region of low shear very favorable for intensification…in the western Caribbean.” Masters noted two models “prefer” intensification, “bringing the storm across Cuba and into the eastern Gulf of Mexico as a hurricane. This is also a reasonable forecast.”

Wood Mackenzie’s Eugene Kim, a senior analyst for North American natural gas research, said the tropical storm is one “with the potential we are really looking out for.” Kim and several members of Wood Mac’s energy team spoke about the “calm before the storms,” — plural — in preparation for what could become another active hurricane season this year. Thus far, storm activity has been relatively calm, but Kim noted that most of the GOM’s worst hurricanes have occurred after mid-August, with many of the most damaging in September. Ernesto is a storm to watch, but its “development and pathway have yet to be determined.”

Particularly damaging to the psychology of energy traders is the lasting impact of Hurricane Katrina on the nation’s oil and natural gas industry. Katrina made landfall on Aug. 29, 2005, and by the next day, nearly all of the GOM oil and gas production had ceased. Producers worked to restaff platforms and make repairs, but today, production is still below pre-Katrina levels.

The Minerals Management Service (MMS) tallied the gas infrastructure damage as it related to the annual gas output, which it measured at around 10 Bcf/d. Damage from hurricanes Katrina and Rita have so far shut in about 166 million bbl of oil and 803 Bcf of natural gas, with 9% of pre-Katrina production still out, said Chris Oynes, MMS’s GOM regional director. Oynes noted the two storms alone destroyed more than 100 rigs, and another 18 rigs were unmoored. One pipeline was moved almost a mile from where it had been laid, he said.

Wood Mac analysts said GOM gas production won’t reach 10 Bcf/d for quite some time because of the massive destruction and ongoing infrastructure damage. Instead, Kim said once repairs are completed it probably will eventually climb to between 8-8.4 Bcf/d.

Besides its lost production, the industry is paying an enormous price for last year. The American Petroleum Institute estimates offshore damages to rigs, platforms and pipelines at around $18-31 billion, or more than 20 times what insurers collected in insurance premiums for the year. As a result, insurance premiums were increased for GOM producers and oil service companies.

Transocean, one of the GOM’s largest drillers, reported its insurance rates jumped from $13 million per quarter to $20 million. Royal Dutch Shell estimated its costs for 2005 hurricane evacuation, relocation and repairs were between $250-300 million. Including lost production, BP plc estimated last year’s damages at $1.6 billion; Chevron Corp. estimated its costs at $1.4 billion. El Paso Corp. estimated its hurricane-related damages will total around $575 million, including repairs to offshore pipelines and platforms and some onshore facilities.

On Friday, many Houston-based oil and natural gas companies were taking a wait-and-see approach to the possible storm threat. BP was one of the few to officially announce it might evacuate nonessential personnel from its rigs on Friday. None of its production was expected to be affected.

At El Paso, spokesman Joe Hollier said the company was monitoring the storm, and it was prepared to activate a storm plan if it’s necessary. In any case, Hollier said El Paso has “accelerated” its evacuation plans, moving them up “a day or two for offshore and onshore as well,” he said. Since last year, he said El Paso has installed new systems to improve employee safety. “Our communications have increased a bunch. We now have satellite phones on all of our helicopters, and we have an employee 1-800 tracking number. That is a big thing.”

Skip Simmons, a gas researcher for Wood Mac, said the onshore gas processing plants also now are better prepared for a major storm.

“The processing plants were affected in a major way last year,” said Simmons. “Those same plants this year would face similar exposures. But many of them, as they have reconstructed their facilities, tried to insulate themselves from some of the damage, particularly to onsite flooding. Last year there was an inability to get water away from the sites and restore operations.”

When the damaged gas processing plants were rebuilt, Simmons said they were raised “further above ground. Any facility as near as they are to the Gulf of Mexico and to beach structure would be potentially subject to damage again. We learned some valuable lessons from last year.”

BP plans to spend $100 million plan to build the first-ever undersea fiber-optic cable linking oil and gas platforms, which could be in place by next summer. By the end of this year, BP hopes to begin laying cable in waters as deep as 6,000 feet between Freeport or Corpus Christi, TX, and Pascagoula, MS. The cable network wold hook into a system that would be monitored from BP’s Houston headquarters, according to Kenny Lang, vice president of BP’s GOM operations.

The “main thing,” said Lang, is to monitor the health of a facility during a storm. However, communications are especially difficult at the most critical times. Producers and oil service companies operating offshore typically use satellite and microwave links to communicate with deepwater facilities. However, those links can be poor during fairly mild weather and are usually out during heavy storms. The fiber-optic cable would be virtually untouched by weather, proving more resilient and allowing more accurate data transmission, according to Lang.

Among other things, the system will allow BP and others to monitor how much a particular storm has impacted infrastructure by comparing post-storm calculations to pre-storm calculations. BP would own the network, but it would lease some of the bandwidth to other companies that wanted to link their offshore platforms to it. Lang said several producers have expressed an interest in the system, including Royal Dutch Shell and Chevron Corp.

The BP executive envisions a time in the not-to-distant future when personnel could be evacuated from the offshore before a storm hits, but platforms would continue to fully operate. Lang noted that today “the last person to leave turns the lights off.” However, by monitoring platforms onshore, BP would be aware of when the platform was safe to board, and post-storm preparations could be done onshore.

Another step the producer has taken to prepare for this hurricane season included moving one of its older rigs to a less storm-prone area of the GOM. Lang said the move was undertaken to lower the risk of it becoming unmoored and slamming into a newer, semi-submersible platform. Collisions, he said, can result in costs of $500 million or more.

Many newly interconnected pipelines make it less likely that a single damaged line would cut off oil and gas production, said Lang. Post-Katrina, BP had to shut in all of its production in the GOM for a period because it had no workable pipeline to transport product to shore.

In all, BP estimated it has spent about $100 million this year alone to decommission some of the 15 platforms lost or severely damaged by last year’s storms. It also has plugged or repaired about 62 wells. The London-based major expects to spend another $100 million by the end of the year to decommission some remaining platforms and wells damaged. BP currently is repairing a damaged oil platform offshore Louisiana, which has been leaking oil off and on for several months. BP estimated about 93 bbl of oil leaked from an undersea valve on its Grand Isle Block 47 at a site where its Platform C was located. The company expected the repair would take only a few days.

Wood Mac’s Kim said all of the offshore industries affected have done what they can to prepare for this year. But even though several design upgrades and facilities improvements have been proposed “little could be done before the peak 2006 hurricane season.” He said “manpower, assessment, repair, supply, logistic and contractor resources were overstretched. The emphasis has been directed mainly at improving redundancies in terms of having enough supplies on hand, duplication of major communications and logistical equipment and access to supplemental onsite standby power generation.”

El Paso’s Hollier said he thought the energy industry was as prepared as it could be for hurricane season. “The industry is always prepared as a whole. We have moved up our evacuation plans mostly to prepare the onshore as well as we have the offshore. Nobody takes these things for granted when one comes through. We’ve lived it. We know what to expect. We have implemented things that will only help us get back on faster.”

Overall, Wood Mac assumes that the 2005 season, which spawned 28 GOM hurricanes, “will not be repeated,” said Kim.

“There will be a steady but slow recovery of Gulf of Mexico production through the fourth quarter…But development and exploratory activity were severely hampered by the impaired offshore Gulf of Mexico drilling fleet and its supporting infrastructure, as well as the diversion of available resources for assessment, restoration and upgrade operations,” said Kim. “We expect exploratory efforts will recover in 2006 and beyond.”

Despite the decline in overall gas production, Wood Mac is more optimistic about the future of the GOM, “especially in the resource areas such as the deepwater, the deep shelf and the ultra-deep shelf,” said Kim. “A lot of deepwater fields will be ramping up, new fields started as well, and there is still a large area that remains to be developed…” He said the decline in production is “short-term production, rather mitigated by the lasting impacts of storms. Moving out forward, we still see supply growth.”

Several deepwater GOM fields scheduled to ramp up last year “were delayed for several months or longer,” Kim noted. Most have since begun to produce, but BP plc’s Thunder Horse field was delayed into 2007 because of subsequent manifold leaks discovered after the hurricanes. Other field projects were “indirectly delayed” because resources and corporate development were diverted or modified, he said. For instance, he noted that the GOM Atlantis field, which was expected to ramp up later this year, now will be delayed “at a minimum” to early 2007.

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