Katrina makes EIA short-term problematic

Agency offers three scenarios based on fast, medium and slow recovery; in all, return to normal production expected by December

Petroleum News

The Department of Energy’s Energy Information Administration said Sept. 7 that because of uncertainties about the specific extent of hurricane Katrina’s damage on facilities in the Gulf of Mexico it is offering three scenarios for oil and gas supply through the end of 2005 and 2006. Fast recovery “assumes a very favorable set of circumstances for getting supplies back to normal” while slow recovery “assumes that significant outages in oil and natural gas production and delivery from the Gulf area continue at least into November” and a medium recovery is in between. But in all cases, the EIA said, “return to normal operations, in terms of oil and natural gas production and distribution, is achieved or nearly achieved by December.” In the medium recovery case all but about 900,000 barrels per day of crude oil refining capacity is back at full rates by the end of September.

The EIA focus on Katrina damage reflects oil and gas activity in the Gulf of Mexico: federal offshore crude oil production accounts for 29 percent of total U.S. production, 1.5 million bpd; crude oil refining is 47 percent of U.S. production, 8 million bpd; and offshore natural gas production is 19 percent of U.S. production, 10 billion cubic feet a day.

Katrina’s immediate impact was a reduction of 1.4 million bpd of crude oil production, a loss of 95 percent, and 8.8 bcf per day, a loss of 88 percent, due to shut-ins as well as direct damage. By Sept. 6 the Minerals Management Service said 58 percent of crude oil and 42 percent of natural gas in the Katrina area remained shut-in.

EIA said electricity had been restored to most refineries and major pipelines were resuming operations. Federal government actions to help alleviate pressure on markets and increase flexibility of the distribution system included the loan of crude oil from the Strategic Petroleum Reserve and the offer of that crude oil for sale; waiver of the Jones Act to facilitate shipments between U.S. ports; and a nationwide waver on requirements for summer gasoline and low-sulfur diesel. The International Energy Agency directed a release of an extra 2 million bpd of oil for the next 30 days, half of this from the Strategic Petroleum Reserve, and a large portion from outside the United States to come in the form of refined products.

Fast recovery: average monthly prices not affected

In the medium and slow recovery scenarios, there is “some incremental crude oil price pressure” for up to three months.

But product prices in all cases reflect Katrina impact.

Increases in petroleum product prices over crude oil prices are expected to subside as the refinery situation improves, and in the fast recovery case, “gasoline and distillate prices may be back to about normal (relative to crude oil prices) by the end of October.”

Limited spare capacity still a factor

WTI crude oil averaged $65 per barrel in August; the September average is expected to be less than $70 per barrel in the medium recovery case, $67 per barrel in the fast recovery case and more than $72 per barrel in the slow recovery case.

The third-quarter average is approximately $20 per barrel above the average from third-quarter last year, $5 per barrel higher than in the agency’s August outlook and quarterly averages for the WTI price in all three scenarios are expected to remain above $62 per barrel for the rest of 2005 and 2006.

Worldwide demand growth is projected to remain strong during 2005 and 2006, the EIA said, but not a strong as in 2004, with annual average worldwide oil demand growth at 2.1 percent, some 1.7 million barrels per day.

The agency said “worldwide spare production capacity is at its lowest level in three decades; in reality, only Saudi Arabia has any spare crude oil production capacity available.” But to market that effectively the “Saudis would need to drastically reduce their heavy oil price,” and continued geo-political risks have boosted the level of uncertainty in world oil markets.

The U.S. total petroleum demand growth in the medium recovery case is projected to average 100,000 bpd, 0.5 percent, which is 60,000 bpd less than the August outlook, “largely due to sharply higher prices.” Oil demand growth for 2006 is now expected to average 330,000 bpd, 1.6 percent, with 2006 average demand, 21.16 million bpd, now 100,000 bpd less than the previous outlook “as a result of the substantial upward shift in energy price paths.”

$8.82 per mcf expected for 2005

The agency said it expects the natural gas market “to stay tight over the next couple of months, particularly in light of the supply impacts from Katrina.”