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Aug.27

3:10 PM ET

Wednesday, 27 Aug 2008

Gustav to Test Gulf Infrastructure

Posted By:Patti Domm

Topics:Currencies | Stock Market | Investment Strategy

Sectors:Oil and Gas

Companies:Anadarko Petroleum Corp | ENI S.p.A. | BP p.l.c. | ROYAL DUTCH SHELL PLC | Chevron Corp

Wednesday's weather models reinforce that Hurricane Gustav could be the most powerful storm to rip through Gulf of Mexico oil and gas production areas since Katrina. It will be the first storm to test the industry's efforts to reinforce its oil and gas production infrastructure.

U.S. light, sweet crude oil [US@CL.1 Loading... () ], natural gas [US@NG.1 Loading... () ] and gasoline [US@RB.1 Loading... () ] are all moving higher, in part on worries about the storm.

The National Hurricane Center says it could be a category 4 and some models show it aimed straight for Louisiana or Mississippi by Monday morning. Models also show it landing anywhere from Pensacola, Fla. to Corpus Christi, Texas; one even shows it going to Mexico, before heading back into the Gulf.

The storm, which quickly developed into a hurricane Tuesday, fizzled to a tropical storm as it moved over Haiti, but it is expected to regain strength as it moves across the water.

Weather forecasters warn that Gustav's path is far from determined, but Aaron Studwell of Weather Insight says there's a 70 to 75 percent chance the storm will hit the central Gulf Coast.

He says he believes that it will not necessarily head for New Orleans as some models suggest, but could land a bit away from the city -- closer to Lake Charles and the Henry Hub, the main collection point for gas pipelines as they go on shore.

Studwell, senior manager of research and analytics, said most of the Gulf's oil production infrastructure lays in the projected path of Gustav, if it were to strike the Central Gulf Coast. About 1.2 million barrels per day of oil production could be disrupted, while about half of that could be subject to long term damage.

Natural gas production is also at risk, with 6.2 billion cubic feet of the 7.4 billion cubic feet in production susceptible to disruption. Of that, about three bcf per day, or 40 to 45 percent, could be subject to long term damage.

"The National Hurricane Center is underplaying it a little bit," said Studwell, whose firm provides weather forecasting services for commodities traders.

"We're looking at a situation where the hurricane center is underplaying it a little bit. We're looking at a situation when that crosses Cuba, the low shear and the warm sea surfaces could cause this thing to just blow up," he said.

The southern Gulf waters are currently about 88 degrees Fahrenheit and Studwell expects the storm to enter the Gulf as a category 3.

Some of the deep water platforms that are in the projected path include Anadarko's [APC Loading... () ] Marco Polo; ENI's [E Loading... () ] Allegheny Green Canyon; Royal Dutch Shell's [RDS Loading... () ] Mars; BP's [BP Loading... () ] Holstein; BP's [BP Loading... () ] Mad Dog and Chevron's [CVX Loading... () ] Genesis, Studwell says.

Companies are already preparing to evacuate personnel. British Petroleum, Shell and Noble Energy today say they are evacuating non-essential personnel, and Noble Energy says it will have more than 600 workers evacuated from its eight rigs by Saturday.

"This storm is headed right for the heart of production territory whether that be crude or natural gas. These rigs have not been tested for three years by a major storm," said Addison Armstrong, director of market research at Tradition Energy.

"All of the platforms out in the Gulf were reinforced to some degree and anchors were added to them, but they were never tested in a real life situation. Katrina wasn't a [category] five until she went on shore," he said.

Armstrong said flood protection was put in place at some of the refineries along the coast since Katrina, but there is just as much concern about on-shore facilities as the offshore production.

If the worst case happens? "The resulting damage could be hundreds of millions of dollars and take months, if not years, to repair. We'd be talking about $150 crude very quickly," he said.

"As of yesterday, offers for physical gasoline all along the Gulf coast were drying up," he said. Armstrong said today spot gasoline in that market was trading as much as 20.5 cents above RBOB on the NYMEX.

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