Gustav to test lessons of Katrina

The oil industry girds for a potentially devastating hurricane in the the Gulf of Mexico - the home of 25% of U.S. production.

EMAIL  |   PRINT  |   SHARE  |   RSS
 
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)
By David Goldman, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- As officials evacuated New Orleans, the oil industry shut down rigs and pulled back personnel as Hurricane Gustav bore down on the Gulf Coast over the Labor Day holiday weekend.

A lot is at stake as the industry faces potentially its worst storm since Hurricanes Katrina and Rita devastated crude and gas facilities in 2005.

The Gulf of Mexico is home to 4,000 drilling platforms and 33,000 miles of pipeline, which send 1.3 million barrels a day to the Gulf Coast's 56 refineries.

About 1.3 million barrels a day are produced in the Gulf - 25% of the oil produced in the United States, according to the U.S. Energy Information Administration. The region also accounts for more than 10% of the country's natural gas production.

Gustav is expected to make landfall Monday after raking through Cuba as a Category 4 hurricane. It struck Louisiana as a Category 3 storm and then was downgraded to Category 2 as winds weakened to 110 mph.

Forecasters had warned that Gustav could hit Louisiana with devastating effect.

The hurricane's path may steer right through the heart of the region's biggest concentration of oil and gasoline producers. Its impact on crude oil prices, which settled on Friday at $115.46 a barrel, was tested Sunday when the New York Mercantile Exchange opened electronic trading three and a half hours earlier than normal to give traders more time to react to Gustav.

In that special trading session, oil prices spiked more than $3 before pulling back to $116.70 a barrel, or $1.24 higher. On Monday, oil rose above $118 a barrel but retreated to $114.81, or 65 cents lower, on news that Gustav was not gathering strength as it neared the Louisiana coastline.

Much offshore oil production has been shut down and experts say it could get worse. Gustav could damage gasoline refineries, which could send the price of oil and gas back up near record highs.

"Production will be shut down in the path of the storm," said Cathy Landry, a spokeswoman for the American Petroleum Institute. "Not every rig will be in the storm's path, but the oil companies tend to be very cautious."

Production at risk

Gustav has already interrupted production. The average hurricane halts oil drilling production for more than a week, according to API. Rig workers, who generally need to flee two to three days before a storm hits, have already evacuated many facilities in the Gulf.

"Platforms have to withstand not just the winds, but also waves, rain and currents," Landry noted.

The U.S. Department of the Interior estimates that 76% of the Gulf of Mexico's platforms and 67% of Gulf pipelines were in the direct path of Hurricanes Katrina and Rita in 2005. The cyclones, both of which reached Category 5 strength, destroyed 113 offshore oil and natural gas platforms and damaged 457 pipelines.

Gustav appears to be heading in the same direction - right up the gut of the oil drilling and refining region.

"If the storm was heading West or East, then companies could just shut down one region of the Gulf," Landry said. "But it looks to be heading through the center, so a good portion of the Gulf will be shut down."

The big storms in 2004 and 2005 did considerable damage to oil drilling platforms in the Gulf of Mexico, severely cutting into supply to gasoline refineries on the shore.

Though slow-moving, weak tropical storms over the Gulf of Mexico can halt oil drilling, powerful hurricanes that hit land can knock out refineries. That's because about 40% of U.S. refining capacity is located on the Gulf Coast, namely in oft-hit states like Texas and Louisiana. After Katrina and Rita, 30% of Gulf Coast refineries were shut down or operating with reductions.

It's rare for a refinery to be totally knocked out by a hurricane, but many are susceptible to wind and water damage that can limit supply to and from the facilities. Similar to offshore drilling platforms, refineries are sometimes shut down for more than a week before they can return to full operability, according to API.

Part of the reason Katrina and Rita led to such a spike in gas prices was that there weren't enough functional facilities to make up for the lost output. Although capacity at many U.S. oil refineries has been expanded, there hasn't been a new refinery built in the United States in three decades.

Prices could jump

Some of those living on the Gulf Coast have already reported seeing gas prices jump nearly 10 cents over the past few days. If Gustav damages refineries, prices could go much higher.

"Depending on the timing and impact, the storm could really move this market," said Alaron Trading analyst Dan Flynn. "It's not a far stretch to see oil back over $125 and gas back above $4."

Flynn noted that Tropical Storm Hanna also threatens to enter the Gulf of Mexico, though its path is less certain.

In 2005, the Gulf Coast was battered by two hurricanes - Katrina and Rita - in the span of a few weeks, bringing many Americans their first glimpse at $3 a gallon for regular gas. The destruction from Hurricane Katrina alone led gasoline prices to jump 46 cents, or 17%, in just one week to a national average of $3.11, according to the U.S. Energy Information Administration.

A similar surge now would send gas prices to nearly $4.40 a gallon, well past the previous record of $4.11 a gallon set in July and erasing all the declines seen over the last few weeks.

"The bottom line is what the damage to the refineries will be, but the markets still tend to overreact," Flynn added. "We'll likely see a big spike in the price of gasoline prices."

Lessons learned?

Experts say that the lessons learned from Katrina and Rita might mitigate the fallout of Gustav.

"Yes, there will be an impact on the market, but we're much better prepared now than we were before Katrina and Rita," said Landry.

Since 2005, the industry began making changes to the structures. The Interior Department in April 2008 imposed more stringent design and assessment criteria for both new and existing structures located within particular Gulf of Mexico areas.

For example, drilling rigs moored to sea floor in the Gulf had been attached with eight lines, and are now required to be moored with 12 to 16 lines. New rigs are built higher out of the water than ones that were built previously, and old rigs were strengthened, according API.

And pipelines, which carry most of the oil and gas from the production platforms to the shore, now are equipped with redundant electric generation stations to ensure the power to the pumps will not be interrupted.

"This storm will be a good test for the [new standards]," said Landry. To top of page

Features
They're hiring!These Fortune 100 employers have at least 350 openings each. What are they looking for in a new hire? More
If the Fortune 500 were a country...It would be the world's second-biggest economy. See how big companies' sales stack up against GDP over the past decade. More
Sponsored By:
More Galleries
8 must-have travel apps Whether you've got wanderlust or an airline grievance, here are some apps to pack onto your phone. More
Hot stocks: 10 record breaking companies The S&P 500 is trading at all-time highs, and many well-known businesses are leading the charge. Time to buy or sell? More
My biggest retirement mistake Five CNNMoney readers share stories about saving that you can learn from. What they would do differently if they had another chance. More

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.