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Pricing pressure builds as oil majors count the cost of Katrina

Financial Times: Pricing pressure builds as oil majors count the cost of Katrina

“The Mars platform, one of the Gulf’s biggest producers of oil and gas, has sustained some damage, Royal Dutch Shell, the operator, said. But not only production wells have been affected. Exploration rigs, of which there are almost no spares available worldwide because of surging demand from oil companies keen to cash in on the high oil prices, were also within the path of Katrina.”

By Carola Hoyos in London, Sheila McNulty in Houston and Victor,Mallet in Jakarta

Published: August 31 2005

As the oil industry yesterday assessed damage done by Hurricane Katrina to rigs, pipelines and refineries in the Gulf of Mexico, pressure continued to build on oil and gas prices.

“At some point the relentless drumbeat of news driving oil and gas prices higher is sure to stop, but we gave up holding our breath about two years ago,” said Ken Sill, head of CSFB’s oilfield services and equipment research group. “Katrina is just another example of how life interferes with plans and projections in the energy complex – uncertainty remains a constant.”

He said damage reports for rigs and production facilities would dribble out more slowly than normal because of mandatory evacuations, flooding, and power outages that mean there are few personnel in place to go offshore and inspect damage.

At this point, Chevron appears harder hit than any other oil company. It had 160 platforms that faced hurricane force winds and 230 that were exposed to the lower-force tropical winds, according to rigzone, the industry website.

David O’Reilly, Chevron chief executive, said experience of previous hurricanes suggested it could take days to assess accurately the extent of the damage caused by Hurricane Katrina even after initial aerial surveys.

“My caution is, don’t count on the initial assessment to tell the whole story,” he said in an interview in Jakarta, the Indonesian capital. “It didn’t the last time, and it may not this time. And there’s a lot more damage to the communities onshore than there was from [last year’s Hurricane] Ivan.”

He said some people had at first dismissed Ivan’s impact as nothing. “As we really got into it as an industry – I’m not talking about Chevron alone – we found lots of challenges, pipelines that had been dislocated, so that even if our platform was up and running we had nowhere to put the oil.”

In total, hurricane Katrina has shut down more than 1.4m barrels of oil a day, about 7 per cent of US demand. The number is almost exactly equal to the maximum amount of spare oil capacity left in Saudi Arabia, the world’s largest supplier of oil, which has already offered to increase production to make up for the shortfall.

Nearly 2,800 platforms, more than 500 of them manned, were within Katrina’s path. About 1,100 of those platforms were exposed to hurricane force winds in excess of 74 miles an hour, before Katrina faded into a storm.

The Mars platform, one of the Gulf’s biggest producers of oil and gas, has sustained some damage, Royal Dutch Shell, the operator, said. But not only production wells have been affected. Exploration rigs, of which there are almost no spares available worldwide because of surging demand from oil companies keen to cash in on the high oil prices, were also within the path of Katrina.

More than half of the 231 rigs exploring for oil in the Gulf were hit by Katrina. Overall 117 rigs, valued at a total of $7bn (€5.7bn, £3.9bn) had to weather the storm, rigzone said.

ChevronTexaco was by no means the only company affected, however, and many of the smaller firms, for which the Gulf of Mexico represents a larger share of total revenues, are likely to be most hurt.

The Gulf of Mexico is a primary source of light sweet crude, said Robin West, chairman of PFC Energy, the industry consultancy, to explain the importance of the area to the industry. Light sweet crude can be used by virtually all refineries, which makes it essential at a time of heightened demand. The loss of its production, therefore, is particularly damaging.

“Up until now, people thought that politics was the big risk to the business,” Mr West said. “Now weather is proving to be just as big.”

So far few crews – this will change as day goes by – have been dispatched to the platforms to assess damages, although some first impressions from the air were being collected yesterday. But floating rigs – including two owned by Royal Dutch Shell, Europe’s second largest energy group – and even rigs stuck in bridges have been sighted.

Mr Sill said it would probably be late this week before the market knew the full impact of the storm on rigs, and even longer for the impact on production facilities, as workers need to physically inspect them. “We assume there could be some supply disruptions and rig damage given the severity of the storm,” he said.

The share prices of the big oil and gas companies were trading higher yesterday, on expectations that the higher commodity prices arising from supply disruptions would benefit their bottom lines. Yet Mr West noted that the companies also stood to lose much from damage to their equipment and facilities. He said it was unclear whether they would come out on top.

“The companies are dealing with a new environment, where they have more and more money and more and more risks,” Mr West said.

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