US oil producers brace for Gustav

US Gulf oil and gas producers are shutting down production today as hurricane Gustav stormed into the Gulf of Mexico.

US oil and gas producers curtailed production yesterday as hurricane Gustav entered the Gulf of Mexico. The dangerous category-four storm has the potential to inflict major damage to oil installations and has forced the closure of America's two biggest energy terminals.
According to the US National Hurricane Center in Miami, the hurricane could be upgraded to category five, the most severe storm rating, just hours before potentially reaching the Louisiana coast tomorrow. "This storm will prove to be a worst-case scenario for the production region," said Jim Rouiller, a senior energy meteorologist with Planalytics, a US business-orientated weather intelligence firm. He warned the hurricane might veer west to make landfall in the oil-rich state of Texas, where it could do even more damage to energy infrastructure than in neighbouring Louisiana.
"The upper Texas coastline to Louisiana mostly remains at risk to receive the brunt of this potentially very dangerous hurricane," Mr Rouiller said. "I expect a major portion of the Gulf energy infrastructure will be shut in, along with a significant increase in damage potential."
Preparing for the storm, the Louisiana Offshore Oil Port, the nation's largest crude oil terminal receiving imports from the Middle East, Africa and elsewhere, is closed. Chevron said it would close down the Henry Hub, a major gas interconnection and trading point in Louisiana that influences natural gas prices across North America. Oil companies including Royal Dutch Shell, BP, Exxon and Chevron evacuated workers, closed down offshore platforms and shut refineries along the coast.
The US government said yesterday that energy producers had shut down 37 per cent of oil production and 77 per cent of gas output in the Gulf, which accounts for about 26 per cent and 14 per cent respectively of total US oil and gas production. Gulf fields produce 1.3 million barrels per day (bpd) of oil and 7.4 billion cubic feet per day (cfd) of gas.
ExxonMobil, the world's largest publicly traded oil company, said it was shutting its Louisiana refinery and had released non-essential employees so that they could evacuate as requested by local authorities. The refinery, with a processing capacity of 192,000 bpd of oil, is a joint venture between Exxon and Venezuela's Petroleos de Venezuela. ConocoPhillips, the second-largest US refiner, said it was closing two Louisiana refineries with a combined capacity of 486,000 bpd. Marathon Oil said it began shutting a 256,000 bpd Louisiana refinery on Saturday. Valero, another petroleum company, said it was closing a Louisiana refinery west of New Orleans, and would consider shutting a second refinery on the Texas coast.Output slowed at some US Gulf coast refining facilities jointly owned by Shell and Saudi Aramco.
As Henry Hub is the pricing point for all gas futures contracts traded on the New York Mercantile Exchange (Nymex), its closure has major implications for futures trading. Sabine Pipeline, the Chevron unit that operates the gas hub, last declared force majeure at Henry Hub ahead of hurricanes Katrina and Rita in 2005, pushing Nymex front-month gas futures to what was then an all-time high of $15.27 per million British thermal units (btu). Natural gas for October delivery traded near $8 per million btu.
The Henry Hub, which has a transportation capacity of 1.8 billion cfd and connects to nine interstate and four intrastate pipelines, escaped major damage from hurricane Katrina. However, hurricane Rita, which followed a few days later, shut down power to the hub and left it with water damage, closing it for more than a week.
Analysts said a prolonged Henry Hub closure following major damage could wreak havoc on the gas futures market because it would leave no facility for physical gas delivery as futures expire. A brief closure might not be a big problem, they said, as the October contract does not expire until the last week of September.
Most US financial markets are closed until Tuesday for Labor Day. However, the hurricane prompted Nymex to announce a special extended trading session starting yesterday at 2.30pm Eastern Daylight Time, with trades to be dated Sept 2. Oil prices settled at roughly $115 a barrel on Friday, not much changed from the day before, as traders bet that the US Strategic Petroleum Reserve would release enough crude to make up for any supply shortfall caused by storm disruption.
But with hurricane Gustav intensifying into one of the most powerful Atlantic cyclones of recent years, a price spike now seems likely when Nymex trading resumes. Three years ago, hurricanes Katrina and Rita sent oil prices sharply higher in late August and the first few days of September. Damage by these major storms cut energy supplies for months, with about 27 per cent of Gulf oil production and 19 per cent of gas output remaining closed the following January. Katrina reached category-five strength while over the Gulf, but had weakened to category three by the time it made landfall. Only three category-five hurricanes have made landfall in the US since records began.
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