During the 3 weeks since hurricane Katrina ploughed across the passes of the Mississippi southeast of New Orleans, La., tentative damage assessments have evolved into a clearer picture of the full impact of the storm. The volume of shut-in gas production, which amounted to nearly 90% of the Gulf of Mexico's 10 Bcf/d when the storm hit, dropped quickly to 40% in the first week. Although the recovery stalled a bit, the shut-in volume is continuing to drop, and the US Minerals Management Service (MMS) reported that about 34% of the Gulf's gas production remained shut-in on Thursday, Sept. 15. The volume of shut-in oil seems to have leveled off at an even higher plateau of about 56% of the Gulf's 1.5 million b/d of oil. Twenty-two days since the first wells were shut in, the cumulative volume of lost production estimated by the MMS is 21 million bbl and 102 Bcf; roughly 4% and 3% of annual Gulf of Mexico production, respectively.
Nearly half of the reduction in gas flow is due to damage to lines and platforms in the West Delta, Main Pass and South Pass areas feeding into El Paso's Southern Natural system, as well as damage to Tennessee Gas's Blue Water pipeline system and lines in the South Timbalier area. Enbridge's Mississippi Canyon system, which was directly in the path of the hurricane, is still down for inspection at press time. Serious damage to Dynegy's Venice and Yscloskey processing plants could require months to repair, creating a bottleneck that could impede production even if upstream damage can be repaired quickly. Companies are developing work-a-rounds, however. Discovery Gas LLC is reconfiguring its system to offer pipelines processing at plants that escaped damage.
On the oil side, the MMS reported that about 35% of shut-in oil is a result of damage to onshore infrastructure. Four of Shell's damaged platforms remain off production. Shell's net Gulf of Mexico production, which as the Gulf's largest producer averaged 450,000 boe/d prior to Katrina, has returned to 160,000 boe/d. The company expects that 180,000 boe/d will remain offline at the end of the year. This is primarily due to the fact that Shell's Mars tension-leg platform (TLP), which was producing 175,000 boe/d, suffered the collapse of its platform rig and remains shut-in.
Damage to at least 34 platforms has been confirmed, of which 18 have been destroyed. According to Rigzone, Katrina caused notable damage to 18 drilling rigs (more than 25% of those in her path), of which five are likely to be scrapped.
Naturally, these statistics lead to box score comparisons with last September's hurricane Ivan, which followed a path nearly parallel to that of Katrina but just 100 miles to the east.
The fact that we are well into a decades-long uptick in the number of major hurricanes has been widely reported (see graph). If meteorological history is a guide, we can expect things to get worse before they start getting better and shouldn't expect things to calm down (relatively speaking) for another 10 years or so. Last year's Ivan was one of six major hurricanes, this year's Katrina is the third of a predicted three to five major storms - and the season isn't even over. Of course, a destructive storm can strike at any time, regardless of long-term trends, Camille (1969) and Andrew (1992) being two dreadful examples.
From the standpoint of the oil industry, a key difference between the two peaks on this graph is that today the Gulf of Mexico accounts for 33% of Lower 48 oil production. Back in the late 1970s, at the bottom of the hurricane severity trough, the contribution stood at just 10%. In the 1950s the industry was just being born. While the Gulf's share of Lower 48 gas is roughly the same now as it was in the late '70s (about 25%), the tightness of today's gas market leaves few options for replacing lost production outside of increasing LNG deliveries and drawing down storage.
It's an unfortunate fact of nature that the Atlantic hurricane season comes when it does, precisely when gas storage should be topping off for the winter heating season. Surprisingly, the Energy Information Administration (EIA) marked total US working gas in storage at 2,758 Bcf for the week ending Sept. 9, following a net injection of 89 Bcf in spite of Katrina-caused withdrawals. Storage levels are 3.6% lower than a year ago but still 3.7% above the 5-year average. Although injection volumes over the remaining portion of the injection season will likely be reduced, a drop in demand could be a mitigating factor for expected storage problems.
Although natural gas demand fell by about 1.45 Bcf/d in the Gulf Coast area since the hurricane, this demand reduction is expected to be a minor factor as service is gradually restored. Forecasts predict cumulative gas demand reduction will total 32 Bcf over the life of the event, only partially offsetting the supply losses. Depending on the speed of recovery, EIA expects the Henry Hub Spot price for natural gas for the fourth quarter of 2005 to range from US $11/Mcf to $13/Mcf, compared to $9.53 in August.
The damage to onshore support facilities (e.g., Venice and others) will complicate efforts to get oil and gas production back to pre-Katrina levels. In addition, the effects of personnel dislocation and property loss should not be underestimated in the toll it will take on companies' ability to restore full operations over the coming weeks. Of course, all of this will need to be accomplished with one eye on the weather forecast, waiting for the next storm.
We really have no choice. The MMS predicts that oil production from the Gulf of Mexico will rise to 2.3 million b/d and natural gas will grow to 13.24 Bcf/d by 2011. The relative importance of these streams of energy will only continue to grow along with the gap between overall domestic oil and gas supply and energy demand. Patching up Katrina's damage and planning for the next major hurricane is as important as any other "homeland security" effort currently underway.
But there is one trend that looks promising. The World Meteorological Organization is in charge of naming tropical storms, and they have prepared a list that extends through the 2010 hurricane season. Now no one can deny that there is a certain Russian flavor to these last two storms that have been so damaging to the Gulf of Mexico oil and gas infrastructure ... Ivan the Terrible, Catherine (Katrina) the Great. Maybe the Gulf of Mexico will catch a bit of break until we get to the next Russian name on the list: "Tanya" in 2007.

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