As companies involved in the U.S. oil and gas industry continue to assess the damage that Hurricane Katrina has caused to Gulf of Mexico and Gulf Coast production facilities, Royal Dutch Shell PLC announced on Tuesday that its Mars floating production platform, which generates about 220,000 barrels of oil and 220 million cubic feet of natural gas daily, has sustained significant damage, as reflected by the picture on the left. It appears that the platform’s above-water module has overturned as a result of the storm. Here are the previous posts over the past several days on Hurricane Katrina.
Meanwhile, initial damage assessments from the hurricane sent oil and gasoline futures prices sharply higher as the storm appears to have knocked out about 10% of U.S. refining capacity for what could be an extended period of time. Katrina has flooded the areas around several major refineries and possibly the refineries themselves, so even when crude-oil production in the Gulf of Mexico is restored, converting that oil into gasoline and other products requires refineries that may not be online for quite some time. Eight major U.S. refineries in the Gulf Coast that produce gasoline, heating oil and other products for distribution across the Southeast and the East Coast remain closed as damage assessments continue.

In anticipation of the storm, producers in the Gulf shut down wells that produce 1.4 million barrels a day. To put that in perspective, that level of production is comparable to the excess pumping capacity of OPEC. However, most of OPEC’s excess capacity is in Saudi Arabia, so it takes over a month to import that oil and many U.S. refineries cannot process the high-sulfer Saudi crude oil. Consequently, increased Middle East oil production is not a quick fix to the current shortages being caused by the damage from Katrina.
The wholesale price of gasoline increased by almost $0.42 a gallon yesterday and retail prices went over $2.80 a gallon in Chicago. October crude-oil futures settled up $2.61 for the day at a new nominal record of $69.81 a barrel in trading on the New York Mercantile Exchange. Although frenetic buying ahead of big storms is normal in commodity markets, it is almost unheard of for the after-storm response to be even worse, which is a signal that the markets are betting that the recovery from the storm will take months. Indeed, the next five monthly contracts all closed at successively higher prices (called a “contango” in the trading business), with the last three all higher than $70 and futures for March, 2006 delivery closing at $70.11 a barrel. At very least, in view of the 55 cent per gallon rise in the price of September gasoline futures, my sense is that it is safe to say that we are all in for a huge shock at the gasoline pump over the next several weeks.
The status of most of the New Orleans-area refineries remains largely unknown. For example, Murphy Oil Corp.’s Meraux, La., refinery, which is located 10 miles southeast of New Orleans, is in an area with substantial flooding. Similarly, Chevron has been unable to reach its huge refinery in Pascagoula, Miss. and Exxon Mobil Corp. has not been able to get into its refinery in Chalmette, La., yet. On the other hand, Valero Energy Corp. announced that two key units of its St. Charles refinery were under three feet of water and that widespread electrical damage had occurred. The company estimated that it would take two weeks to re-start the refinery even after power is restored. Thankfully, the Louisiana Offshore Oil Port (“the Loop”)– the key Gulf Coast importation facility for tankers arriving from foreign producers of oil — did not incur any catastrophic damage.
Clear Thinkers favorite James Hamilton has these further thoughts on the probable economic effects of Katrina. And this Wall Street Journal ($) article provides an excellent analysis of the New Orleans levee system and what needs to occur for the flooding in New Orleans to recede. Finally, Houston blogger Banjo Jones has a creative idea on how Houston can chip in to help the homeless of New Orleans.