Oil and High Water

In Katrina's wake oil prices have spiked, but the real price increase may not be felt until the winter
By HILARY HYLTON
Time Magazine
Posted Tuesday, Aug. 30, 2005

As Hurricane Katrina hurled toward the Gulf of Mexico bad memories flashed through Tony Lentini's mind. Last Sept. 7th, Hurricane Ivan hammered a similar area, and Lentini, a vice president of Apache Corporation, an independent oil and gas exploration company in Houston, says that it's taken a year to get some of Apache's facilities back online. In the sixty days after Ivan struck, the Gulf lost 29 million barrels of production. "What you do as the storm approaches is you have to balance your people's safety with the country's dependence on the Gulf," says Lentini.

That precarious balancing act becomes even more difficult when a storm like Katrina, a Category 4 hurricane, rolls into town packing winds up to 140 mph. Ivan, was a smaller Category 3 storm with lower winds and waves. Damage estimates from Katrina are as high as $26 billion, and oil production in the Gulf will certainly be down, at least in the short term. Yesterday, oil futures spiked to $70.80 before easing to $67.90 by the end of the day, and all of this comes at a time when consumers are already paying high prices at the pump.

The United States consumes 20 million barrels of oil a day, and produces 7.7 million barrels a day—a quarter of our oil and gas production comes from the Gulf. Katrina shut down 92 percent of the oil and 83 percent of the natural gas production, according to the federal officials. Onshore wells and pipelines also were affected and seven Louisiana refineries producing 8.5% of the US total production grinded to a halt.

Here's what's known so far about damage to the oil and gas infrastructure:

- Two multi-million rigs are reported to be free of their moorings and Royal Dutch Shell said its huge Mars platform, which pumps 220,000 barrels a day, is offline.

- The Louisiana Offshore Oil Port, the largest U.S. terminal, has yet to open and Midwest refineries may soon experience shortages.

- Producers are moving to restart production on the western and eastern edges of Katrina's strike zone, but assessment of the central zone where up to a third of the Gulf's rigs lie will not begin until midweek.

Even with all the damage, the real squeeze on the consumer's wallet may not be felt until winter when natural gas prices are certain to be higher, since U.S. utilities rely on natural gas for 16-18 percent of their fuel for electricity generation. Then there's oil. After Hurricane Ivan had severely damaged seven oil platforms and key pipelines buried 20 to 30 feet deep in underwater mudslides near the mouth of the Mississippi, President Bush tapped into the Strategic Petroleum Reserve, a move the Administration dubbed "an exchange" since it called for the supplies to be replaced. Political critics are pressing him to repeat that move, but industry analysts are split on whether this really helps keep prices down. Still, most observers expect Bush to approve another "exchange."

If there is any good news to be had, it is for the roughnecks who will repair the rigs and pipelines. "The worry is there are only so many work crews and so many helicopters," Lentini said, "and you don't know until you get out there. Let's hope it didn't do much damage."