Gulf oil production scrambling back

Oil companies send crews back to rigs to issue final damage assessments. Production could return to normal for most rigs by end of week.

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By David Goldman, staff writer

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NEW YORK ( -- As oil companies sent crews back to their rigs to perform in-depth safety checks some operations see production beginning to come online as early as Wednesday.

95.8% of crude oil production and 91.6% of natural gas production in the Gulf of Mexico remains shutdown, according to a report on the damage left in the wake of Hurricane Gustav by the U.S. Department of the Interior's Minerals Management Service. That's down from 100% of crude and 95.4% of gas production that was shut down as of early Wednesday morning.

Oil companies with infrastructure in the Gulf region such as Royal Dutch Shell (RDSA), Devon Energy Corporation (DVN, Fortune 500), Exxon Mobil (XOM, Fortune 500), and ConocoPhillips (COP, Fortune 500) all said they are in the process of returning workers to their offshore facilities Wednesday, but they cannot return their rigs to operability until safety checks are completed.

"Early assessments established we did indeed dodge a bullet on any major damage in the region," said Robert Dodge, a spokesman for the American Petroleum Institute. "Now that they're getting their personnel out there, the companies will need to take a look for damage deep down under water before they can return to operability."

Devon, which maintains 25 manned production platforms and three drilling rigs in the Gulf, said it might be able to resume production in the area as early as Wednesday if the underwater pipelines, which cannot be visually inspected from the air, are deemed serviceable after an on-site inspection.

Powerful hurricanes can shift the seabed, damaging pipelines that deliver oil from the rigs to the onshore refineries, API said.

"We expect to begin producing a small amount of production today, and that will continue to improve throughout the week," said Devon spokesman Chip Minty.

Devon said it did not have a timetable to return to full operability, as it has had difficulty transporting its workers to the rigs. Louisiana airports were hard-hit during the storm, and much of the power remains out. That has delayed helicopter transportation, which is necessary to return crews to the platforms.

Shell said most of its platform workers will return Wednesday with the remaining crews returning Thursday. The company expects production to be restored in three to five days, depending on when power and communications are restored to the rigs.

Power disruptions have affected 55% of all Louisiana customers, according to the Energy Department. That could delay the return to operations for many oil producers, as refineries and pumps for delivery pipelines rely on electricity to operate. The American Petroleum Institute said backup generators were available and could speed up the restoration process.

Exxon Mobil said Wednesday it is in the process of starting up the two refineries it shuttered for the storm, but the company could not yet offer a timetable on the return to operations.

Of the 32 Gulf coast refineries, 13 remained completely shut down Wednesday morning, and 10 were operating with reduced capacity, according to the U.S. Department of Energy. The decline in refinery operations has resulted in about 5.6 million barrels per day in reduced gasoline output.

As a result of the the loss of Gulf production, oil refiner Citgo requested a 250,000 barrel loan from the 707 million barrel U.S. Strategic Petroleum Reserve, which was approved by the Energy Department late Tuesday.

Though Louisiana Governor Bobby Jindal requested that the Energy Department open up the SPR to all companies, the request was refused, and the government said it would deal with SPR loans on a company-by-company basis. Thus far, no other companies have requested an SPR loan, according to the Department of Energy.

Though much of the undamaged Gulf of Mexico infrastructure will return to operability in the next few days, sites without power may not resume full operations until next week, according to Eileen Angelico, a spokeswoman at MMS.

Market unconcerned

But the oil market didn't flinch much at the fact that 26% of total U.S. oil production as well, as about 15% of U.S. refining capacity remains shutdown.

Oil fell about $1 Wednesday after dropping nearly $6 Tuesday. Despite the loss of production, crude prices are at five-month lows.

"Although we're shutting off production in the Gulf, it's not as much of an issue as in 2005 when demand was higher," said Phil Flynn, senior energy analyst with Alaron Trading.

Demand for oil is 1.2 million barrels a day less than it was a year ago, as oil prices are nearly twice as high now as they were when Hurricanes Katrina and Rita devastated the Gulf region three years ago. As a result, refineries are operating at 6.8% less capacity than they were last year, according to the U.S. Energy Information Administration.

"Even if refiners stay down, others can make up for the lost capacity," Flynn added. "Despite the fact that we may have a spot shortage, the supply [currently on the market] is enough to weather us through the storm."

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