THE NEW YORK TIMES: Gulf Hurricanes Are Latest Kink in the Oil Chain

THE NEW YORK TIMES: Gulf Hurricanes Are Latest Kink in the Oil Chain

“”The world has changed,” said Frank Glaviano, the vice president for production for North and South America at Royal Dutch Shell, the biggest oil producer in the gulf. “Given the supply and demand situation around the world, it’s true that any disruption in supplies is more important to markets than it was in previous years.”

Friday 5 August 2005

By JAD MOUAWAD

Published: August 5, 2005

Bob Squires, who was in charge of repairing Petronius, said that the platform had been built to withstand a 100-year storm.

“I was just in shock at the damage,” said Mr. Bruce, a longtime field coordinator on Chevron’s Petronius deepwater platform, which was hit by a 90-foot wave during Hurricane Ivan last September. “I had never seen anything like this. Everything was busted, dangling and messed up.”

Today, with oil prices hitting records and petroleum producers stretched to the limit to meet greater demand from not just the United States but from China, India and other developing countries as well, oil producers worry that hurricanes are as much a risk to a global shortfall in supplies as pipelines blowing up in Iraq or oil workers going on strike in Venezuela.

And with the margin of error so tight, even a temporary disruption of the deepwater platforms, rigs and sub-sea pipelines in the Gulf of Mexico – a region that pumps one-quarter of American oil production – could create big problems for energy producers and consumers alike.

“It’s a new version of the butterfly effect,” said Larry Goldstein, the president of PIRA Energy Group, an oil consultancy in New York. “A hurricane in the Gulf of Mexico can lead to higher prices around the world. That’s how vulnerable oil markets are today to events outside of our control. And it shows how little room there is for errors.”

The hurricane season this year has kicked off to its fastest start since 1851, with seven tropical storms, including two major hurricanes, reaching the gulf since June. On Tuesday, meteorologists at the National Oceanic and Atmospheric Administration stepped up their storm warnings and said they now expected an “extremely active season” with up to 21 tropical storms and up to 7 major storms.

Last year, Hurricane Ivan, one of the worst to hit the gulf in the last decade, destroyed 7 platforms in shallow waters, and severely damaged 24 facilities and 102 underwater pipelines. It was the most costly storm ever to hit the offshore sector, causing an estimated $2.7 billion in damage, according to International Petroleum Finance.

It took six months to repair damaged installations, fix severed pipelines and return oil and gas production to prestorm levels. In total, the storm cut 43.8 million barrels of oil, or 7 percent of the gulf’s yearly output. It curbed gas production by 172 billion cubic feet, or 4 percent of the total yearly output, and cost an estimated $3 billion in lost oil and gas revenue.

As the extent of the damage caused by Hurricane Ivan sank in, oil prices on commodity markets surged 19 percent over the next two weeks, pushing above $50 a barrel last October. Oil is now trading at around $60 a barrel.

“The world has changed,” said Frank Glaviano, the vice president for production for North and South America at Royal Dutch Shell, the biggest oil producer in the gulf. “Given the supply and demand situation around the world, it’s true that any disruption in supplies is more important to markets than it was in previous years.”

The largest storm to hit so far this year was Hurricane Dennis, which made landfall near Pensacola, Fla., on July 10. Nearly all of the 30,000 people who work offshore at any given time had to be evacuated; the storm halted 96 percent of the gulf’s oil production for a day.

A few days later, Hurricane Emily, which took a southerly course, forced the shutdown of Mexico’s offshore industry as well as loading ports, curtailing the crude exports of one of the United States’ top suppliers.

And it is still early in the season. Like many analysts and traders, Roger Diwan, an oil analyst at PFC Energy, said he now monitored the national hurricane center’s Web site every day for signs of storms.

“Ivan had a long, lingering effect because of the damage it caused and because it hit the market with a perception – and a reality – of a lack of supplies,” Mr. Diwan said. “In that sense, it heightened the fear of hurricanes this year.”

Stretching 200 miles into the gulf’s warm waters, more than 4,000 platforms – some as small as a fire hydrant – prod, plow and pump the surface below the sea for hydrocarbons.

There are so many man-made structures that at times it might seem as if visitors could hop back to shore without getting their feet wet.

This makes the region particularly vulnerable. The gulf accounts for a daily oil production of 1.5 million barrels and 11.2 billion cubic feet a day of gas “We have concentrated our facilities where the natural phenomenon of hurricanes occurs,” said Alan Verret, the executive director of the Offshore Operators Committee, an industry trade group. “If a storm is going to hit, it is going to affect everything in the area and there is nothing we can do about it. We’ve put all our eggs in the same basket.”

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Michael Stravato for The New York Times

Damage is still evident on Petronius. The structure, 120 feet high, sits on top of a 1,700-foot tower attached to the seafloor.

Oil Production Suffers Blows in Hurricane Alley

Forum: The Economy

Thanks to new drilling and undersea technology, the Gulf of Mexico has become America’s latest and most prolific exploration frontier and the only region in the nation where production is projected to grow in coming years.

One area in particular is responsible for that growth: the gulf’s deep waters, which are home to the largest platforms, including Petronius.

By 2013, production in the gulf is expected to reach 2.1 million barrels a day, according to forecasts by the Minerals Management Service, a unit of the Interior Department in charge of administering offshore production. Gas production is expected to reach 13.5 billion cubic feet a day.

The techniques pioneered here – such as pumping oil from ground below 10,000 feet of water and drilling 30,000-foot horizontal wells – have been exported around the world to places like the deep waters off Western Africa and the Caspian Sea, allowing oil companies to expand their reach in the search for oil.

The minerals service, in a recent report, estimated that the gulf’s deep offshore region holds ultimate reserves of 71 billion barrels of oil – an amount that would satisfy America’s current domestic consumption for nearly 10 years.

Two-thirds of those reserves have yet to be found.

The challenge for oil companies is that projects have grown in size and cost as the shallower deposits run out. Developing a deepwater field can exceed $1 billion, compared with $100 million for a typical shallow-water development in 100 feet of water. But as projects grow, so do the risks.

Last month, the world’s largest semisubmersible platform, a $1 billion investment by BP and Exxon Mobil, nearly sank after Hurricane Dennis swept through the area. The platform, one of BP’s top projects for the decade, was found tilting at a 20-degree angle after the passage of the storm.

It took six days of work to right the structure, called Thunder Horse. The incident has delayed for months production of up to 250,000 barrels of oil a day, which was supposed to start in October.

But the infrastructure above the water is just part of the risk. Nearly a third of the gulf’s production comes from underwater wells linked to above-water hubs; the entire gulf is crisscrossed by 33,000 miles of pipelines, some buried, some just lying on the seabed.

That network, responsible for bringing production back on shore, proved particularly vulnerable to the underwater currents and storm surge created by Hurricane Ivan.

“The pipes, it’s like spaghetti out there,” said Chris C. Oynes, the regional director of the Minerals Management Service in New Orleans. “When the storm hit, it’s like when you’re sitting in your bathtub and the water is pushed to the wall and comes back to you.”

The storm surge created powerful forces on the sea floor that severely damaged the pipelines. For example, one critical pipeline, 24 inches in diameter, was uprooted and pushed some 2,000 feet from its original position.

Piecing that network back together was one of the main factors that delayed the resumption of production in the gulf.

The industry is now pondering some of the lessons from Hurricane Ivan. One issue is whether the new platforms are high enough to clear waves like the ones produced by Hurricane Ivan.

“We probably need some heavy-duty fine-tuning,” Mr. Oynes said. “Oil companies have a big stake in this. Certainly with oil above $50 a barrel, it was not wise to have Petronius closed for so long. Even if the oil was not lost but just delayed, their cash flow was hurt. They have a strong incentive in this.”

Nearly a year later, there are still signs of the powerful blows that Petronius sustained from last year’s brutal storm, like a large supporting steel beam on the lower deck that remains visibly bent. Most of the rest has been repaired at a cost of some $50 million after a six-month closure.

Although not directly under the eye of the storm, Petronius bore the brunt of it.

On Sept. 16, the day after the hurricane moved through the gulf, a Chevron helicopter made a flyover to inspect the damage and found it could not land on the platform. The helipad was gone. So were the sleeping quarters and the galley, which had all been blown away. The first team did not arrive until the next Sunday, after a journey by boat, four days after the storm.

“Over all, the design criteria was the right one,” said Bob Squires, the Chevron engineer who led the repair effort on Petronius. The structure, 120 feet high, sits on top of a 1,700-foot tower attached to the seafloor. The platform, which produces 42,000 barrels of oil a day, is the world’s tallest self-supported structure, higher than the Sears Tower or two Eiffel towers on top of each other.

Mr. Squires said that the platform had been built to withstand a 100-year storm. But Hurricane Ivan, he said, was much more powerful than those forecasts.

“It was more like a 1,000- or 2,000-year storm,” he said. “That we were just in the path of one – well, it was just bad luck.”

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