Rita Could Land Terrible Blow
By Christopher Edmonds
RealMoney.com Contributor
9/21/2005 10:15 AM EDT
With Katrina in the rear view mirror, Hurricane Rita is staring the Gulf of Mexico in the face -- and oil-and-gas producers can't like what they see.
A Category 4 storm now, Rita is likely to become a Category 5 storm as it strengthens over the warm Gulf waters, possibly packing winds of well over 140 mph at some point in its week-long life. With its path projected to direct it to the Texas coast, Rita will cut another swath through the offshore oil and gas production belt and that may have a marked impact on production this week and, more importantly, in the weeks to come.
The production effects of Katrina still linger. The government reported on Tuesday that over 58% of Gulf of Mexico oil production -- 877,275 barrels per day -- is still offline as a result of Katrina. In addition, nearly 35% of natural gas production remains shut-in, representing about 3.5 billion cubic feet per day. Since the storm hit, nearly 5% of annual oil production and over 3% of annual natural gas production had been taken from the books in 2005.
Those numbers are only going to get worse. A number of companies have already begun to evacuate platforms and rigs ahead of Rita's punch. Majors such as ExxonMobil (XOM:NYSE - news - research - Cramer's Take) and ConocoPhillips (COP:NYSE - news - research - Cramer's Take) to independents like Nexen (NXY:NYSE - news - research - Cramer's Take) and Swift (SFY:NYSE - news - research - Cramer's Take) are all removing workers from Rita's wrath after many had just returned after Katrina. The interruptions will increase the amount of production offline for at least this week and longer should Rita cause even more damage in the Gulf.
While a significant amount of production has returned since Katrina moved through the Eastern Gulf of Mexico, it will now be weeks -- if not months -- before we are back to pre-Katrina production levels. Companies like Oceaneering International (OII:NYSE - news - research - Cramer's Take), which performs inspections of pipelines and underwater infrastructure, suggests it will take weeks just to finish inspections needed to bring production back on-line after Katrina, regardless of the damage.
And discussions with energy service companies that specialize in transportation and repair work in the Gulf of Mexico suggest that the damage from Katrina has been underestimated, with months of works ahead to re-establish much of the production.
Last year's Hurricane Ivan is instructive in that regard. While about half of the production returned quickly after Ivan, it took months for Gulf production profile to return to normal. In fact, companies like Oceaneering and Superior Energy Services (SPN:NYSE) were just completing its last batch of Ivan-related work when Katrina wreaked havoc on the region. Katrina's impact will likely last even longer because it traversed over a portion of the Gulf more densely populated with platforms, pipelines and rigs.
Rita's current path will take it over much of the deepwater Gulf of Mexico infrastructure, which, if damaged, creates unique challenges to the repair effort. The deepwater platforms are larger and more complex and the pipeline connections are deeper and potentially more fragile than those on the Gulf of Mexico shelf. That means it will take more time and resources to address the problems associated with hurricane damage. With transportation, inspection and repair assets already stretched thin from Katrina, another strong storm affecting Gulf energy infrastructure could be devastating.
Ironically, one saving grace from Rita could be a strong demand response. With a plethora of refineries, petrochemical and industrial facilities on the Texas coast, a storm that batters the Corpus, Galveston and Houston areas would likely have a marked impact on energy demand, which could mitigate some supply loss from Gulf production closures.
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