Sunday Telegraph: Shell prepares to weather this year’s storms

Last Updated: 12:39am BST 13/05/2007

The oil industry is bracing itself for a return of the hurricane season. Sylvia Pfeifer takes the temperature in the disaster-prone Gulf of Mexico

Some 130 miles off the south-east coast of Louisiana, a small city sits floating in the warm waters of the Gulf of Mexico. Food and supplies are shipped in on a regular basis but otherwise its 150 inhabitants operate as a self-sufficient unit, generating their own power and producing their own drinking water.

But Ursa, as it is called, is much more than a mini-city. It is one of the world’s largest and most innovative oil platforms, sitting in 3,800ft of water. Moored to the seabed by a series of steel pipes attached to a foundation, the entire structure displaces nearly 100,000 tonnes of water.  

Owned by Shell, the Anglo-Dutch oil giant, Ursa operates 24 hours a day, 365 days a year. Shell is one of the biggest producers in the Gulf and, with oil prices above $60 a barrel and global demand strong, every barrel counts.

Its oil and gas are transported via underwater pipelines to refineries onshore where they are processed, ready to be distributed round the country. The region is a vital source of the domestic supplies needed to quench America’s thirst for energy; it produces 1.4m barrels of oil every day – about 7 per cent of US demand – and is also the hub of the country’s refining industry, with a quarter of its total capacity.

Two summers ago, all that production was abruptly cut off when Hurricane Katrina ripped through the region, destroying platforms and refineries along the coast. While Ursa sustained its own damage – waves took out a steel stairway some 100ft above the water – Shell’s other platform, Mars, seven miles away, found itself right in the heart of the storm. Katrina’s fury lifted the drilling rig, slammed it back onto the platform and tossed the derrick into the ocean. The resulting production shortfalls forced America to step up imports of refined products from abroad.

The official start of this year’s hurricane season is still three weeks away, but experts are already warning that, with inventories tight, any production stoppages could send oil and gas prices rocketing and have a knock-on effect on inflation. Analysts reckon that each $10 a barrel increase in the price of oil adds between 0.3 and 0.6 percentage points directly to inflation.

“Given that natural gas inventories are below the five-year average, any supply disruption could have a major impact and trigger speculations that drive natural gas prices well above $10 per million cubic feet,” says Fadel Gheit, a senior energy analyst at Oppenheimer, the New York investment boutique.

The approaching hurricane season is just one of several pressure points facing the industry today. As oil majors scramble to find more reserves, they are being hampered by increasing state ownership in countries such as Russia and rising resource nationalism in nations including Venezuela. The two factors are seen as long-term threats to global oil supplies.

Elsewhere, in countries such as Nigeria, civil unrest has led to production stoppages and contributed to recent price spikes. Such operating constraints are one reason why the oil majors are continuing to invest in domestic, albeit more mature, areas such as the Gulf of Mexico, which still holds significant reserves.

For Shell’s employees in the Gulf, a repeat of 2005 is not a welcome prospect. Although hurricanes are part of their everyday lives, another Katrina is unthinkable.

“It was kind of scary,” remembers David Majors, an industry veteran of several decades who was among the first to return to Ursa after the storm. Dead fish had been thrown up on the lower deck, parts of the fibreglass deck grating were missing and the fast rescue boat was discovered floating 80 miles away.

Katrina cost Shell up to $300m (£150m) in damages and repairs but the figure pales in comparison with the cost of lost production and profits. Shell does not separate out exactly how much its Gulf operations produce but its operations in the Americas (of which the Gulf is a significant part) account for 23 per cent of the 3.5m barrels of oil equivalent the company produces every day. Its exploration and production activities in the Americas generated earnings of $4.7bn last year, 31 per cent of the total profits from that division.

Jon Unwin is the operations manager for Ursa. Unwin, who previously worked in the North Sea, says that after hurricanes Ivan (in 2004) and Katrina, “our data set changed. The norms are different now.”

During hurricane season, every oil company has a detailed plan in place in case a storm hits. Shell maintains a “T-time” of 24 hours to make its platforms safe and evacuate staff but also to facilitate a rapid start-up once the danger has passed.

Unwin says that while the design of the so-called tension leg platforms such as Ursa and Mars proved itself during the storm, the company has put in place a number of changes to equipment design and processes.

New and improved clips have been installed to hold down drilling rigs – the failure of the clips on Mars allowed the platform’s rig to topple. The mooring systems of its mobile offshore drilling units have been changed to ensure that there is no anchor damage to pipelines from dragging chains.

Work is also under way to improve the communication systems for the group’s offshore facilities, including the installation of an undersea fibre-optic system. In the event of an emergency and all else failing, employees onshore can also shut down operations offshore at the push of a button.

With its headquarters in New Orleans out of action for several months after Katrina, Shell moved some 400 of its 1,000-strong workforce to the town of Robert, 45 miles to the north of the city. Portable office trailers were brought in to cater for them, while the remainder were relocated to Houston in Texas. Shell has since established a permanent back-up facility at Robert.

In the wake of the storm a number of oil companies moved their operations to Texas permanently but Shell was among those that decided to return to New Orleans.

Today, almost two years on, the city still bears the scars. The historic French quarter escaped relatively unscathed and this year’s Jazz Fest, which ended last Sunday, boasted record visitor numbers. But some of the other parts have remained derelict; in the Ninth Ward in the east of the city, many homes stand empty, their roofs and doors blown away by the hurricane.

One topples precariously on one edge, its foundations exposed to the sky. In other areas, work has begun to rebuild old neighbourhoods, some houses now sponsored by multinationals such as Coca-Cola.

Locals insist the region is on the recovery path. Some areas, at least, will continue to reap the benefits of the current oil boom. Despite the perennial threat of hurricanes and the fact that the Gulf of Mexico is among the oldest offshore oil provinces in the world, it is enjoying an influx of foreign companies keen to tap into the riches that traditional players in the region such as Shell and BP have been reaping.

In a further attempt to boost domestic production on the outer continental shelf in the Gulf and off Alaska, the US government last month announced a new programme of licence sales. The entire programme could produce 10bn barrels of oil and 45 trillion cubic feet of natural gas, generating almost $170bn.

It is an opportunity not lost on companies such as Shell. According to Frank Glaviano, the vice-president of production for Shell’s Americas operations, one of the hallmarks of the region that make it so attractive is that “the reservoirs flow well so the challenge is to continually keep finding more”. While the region “requires high capital”, this is compensated for by low operating costs. “Price is the incentive right now,” he adds.

New technology is also allowing the companies to reach ever greater depths. More computing muscle and advanced software also help engineers and technical experts decide which areas might hold lucrative hydrocarbon reserves.

In a darkened room at Shell’s head office in New Orleans, for example, the company’s technical experts often don virtual reality goggles in meetings. With a touch of their keyboards, they can call up a detailed three-dimensional image of the subterranean fields off the coast. After slicing and dicing the picture, they highlight the hydrocarbon reserves within the rock and pinpoint with far greater accuracy where the oil wells are.

It is advances such as these that keep the smile on the face of industry veterans such as Unwin, who predicts that the Gulf’s riches “will certainly outlast my career”.

Back on Ursa, its staff are just as upbeat – and sanguine about the hurricane season. The general feeling is that there is little companies can do other than prepare for the worst and batten down the hatches if a storm breaks.

Veterans such as Terry Smith are back on deck. What impresses him most about Ursa, he says, is its sheer size and the fact that it floats. “It’s like a city,” he grins.

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/05/13/ccshell13.xml

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