As Gustav nears, oil companies shut down rigs

With tropical storm Gustav threatening to become a monster hurricane, the oil and gas industry is starting to batten down the hatches on its giant rigs in the Gulf of Mexico.

Already, many of the companies have evacuated roughnecks and geologists and are preparing to turn off the oil and gas deep under water.

On Thursday, Shell Oil Company, which produces about one third of the oil in the Gulf, said it had evacuated 400 workers with another 600 due out on Friday and Saturday. It was in the process of turning off the equivalent of 510,000 barrels of oil.

Any disruption of the oil and gas flow could eventually result in higher prices at the pump much as it did after hurricane Katrina. In recent days, the price of oil has moved up in anticipation of the storm but fell back on Thursday after some governmental organizations said they would release oil from stockpiles if there were disruptions.

"I think we are better prepared than when Katrina hit," says Phil Flynn, an energy analyst at Alaron Trading in Chicago. "The industry should be able to get production back up quicker."

The oil industry produces about 1.5 million barrels of oil per day from the Gulf, about the same as it did in August 2005 before Katrina hit. The month after the hurricane, production dropped to 450,000 barrels per day.

"When Katrina hit, we lost almost all our production for several days," recalls Rick Mueller, an energy analyst at Energy Security Analysis, Inc. in Wakefield, Mass. "They are now closing everything up and it will take a while to bring it back up again."

In case of delays getting oil flowing again, the Department of Energy said on Thursday that it could release oil from the Strategic Petroleum Reserve. "The Strategic Petroleum Reserve is a key safeguard to provide an added layer of protection for the American people during the event of a severe disruption of oil supply," the agency said in a statement.

After Katrina, the DOE opened up the spigots at the SPR and released about 21 million barrels of oil. At the same time, the International Energy Agency, a coalition of 26 member countries, had set a goal of delivering 60 million barrels of oil.

On Thursday, the IEA said it, too, would be ready to release stockpiles.

However, Mr. Flynn is not sure it will be needed. He remembers immediately after Katrina there was a significant drop in demand with people canceling vacations and watching the devastation on television. "I think people are beginning to realize with this storm there could be more damage on the demand side than the supply side," he says.

"What I am hearing is that some 1.1 million barrels of oil per day could be shut down," says Flynn. "Demand in the US is off by about 1 million barrels per day so we have a little more wiggle room for a short-term loss of production."

However, some oil companies drilling for offshore oil are still recovering from Katrina. British Petroleum's massive Thunder Horse drilling platform was badly damaged. "They are still waiting to bring it back on. It should happen by the end of this year," says Mr. Mueller.

Chevron's BP Thunder Horse, another huge platform, flipped upside down and was written off.

Shell has a giant rig, Mars, which also suffered damage from Katrina. It is back in operation and is one of the platforms being shut down now.

Shell says it learned a lot from the Katrina damage. The company says it made mooring system upgrades and design changes including the use of suction pads instead of anchors to reduce damage to pipelines from anchor dragging.

Once the storm comes ashore, Flynn worries there could be damage to the refineries that dot the region. The US is currently producing a little over 7 million barrels a day of refined products at Gulf Coast refineries. "I am more worried about flooding and refinery damage," he says.

Energy analyst Sander Cohan of ESAI says some refiners still may not have recovered from Katrina. "Other are just back on line in the last six months or so," he says.

Many of the refiners are now in the process of shifting production from gasoline to heating oil. Others are closing for maintenance. "Stockpiles are good but not great," says Mr. Cohan. "We could lose a week of production of home heating oil, so this storm has the potential to be very disruptive."