IE 11 is not supported. For an optimal experience visit our site on another browser.

All prices soaring as Katrina damage unfolds

Two weeks after Hurricane Katrina slammed into the U.S. Gulf  Coast, the scale of the damage to the nation's energy hub is at last becoming clear.
/ Source: Financial Times

Two weeks after Hurricane Katrina slammed into the U.S. Gulf Coast, the scale of the damage to the nation's energy hub is at last becoming clear.

Virtually every part of the energy complex has been affected: six refineries and four natural gas processing plants remain closed, hundreds of rigs and production platforms have been evacuated, almost 800,000 customers are still without power, and the port of Louisiana is still closed to commercial traffic.

"Hurricane Katrina has been the perfect storm for the U.S. energy industry," says Bernard Picchi, an analyst at Foresight Research. "It has touched every aspect of the energy industry, especially refining and natural gas.

For U.S. consumers already smarting from soaring petrol prices, it is unwelcome news. The destruction wrought by the hurricane is expected to raise the price of everything from winter heating to plastic cups.

Pat Furey, senior commodity manager at Ariba, a supplier of spend management software and services, says even the price of his daily cup of coffee has gone up. Deliveries of coffee to Louisiana's port have been disrupted, as have the petroleum by-products used to make the plastic lid and packaging.

"Items people use every day, from plastic bottles to vinyl siding, will be impacted" by the hurricane, Furey says.

Analysts say up to 10 percent of U.S. refining capacity remains off-line. Six refineries are closed, four of which could be out of action for several weeks or months.

The extent of the damage offshore has yet to be determined. An attempt to inspect underwater pipelines from offshore facilities failed this week when bad weather forced back the boats. However, early indications have alarmed oil traders.

Royal Dutch Shell said on Friday it may not be able to restore output from its Mars field, which accounts for up to 15 percent of Gulf production, until next year. The International Energy Agency, the consuming nations' watchdog, added to gloom by saying that production could take even longer to recover than it did after Hurricane Ivan a year ago.

Ivan knocked out undersea pipelines and stalled oil and gas production from the U.S. Gulf for months. On Friday, Deutsche Bank said the offshore damage from Katrina looked even worse this time around. Initial estimates are that 10 percent of producing platforms sustained material damages.

At its worst, 95 percent of the U.S. Gulf's daily oil production and 88 percent of its natural gas production was shut. By Friday, some 900,000 barrels a day of oil a little more than 60 percent of normal production and 40 percent of natural gas production remained down But the speed of recovery has slowed in the past days.

The U.S. Gulf usually produces almost 30 percent of the U.S.'s oil and a little more than 20 percent of its natural gas.

Perhaps most significant for consumers, however, is the growing possibility of a heating crisis this winter, with some analysts predicting prices could be twice what they were last year.

Jamal Qureshi, market analyst at consultancy PFC Energy, says because so many refiners were shut in the wake of Katrina, the industry is focusing on replenishing petrol production, instead of turning toward home heating oil, as they normally do at this time of year.

"Once they solve the very, very tight [petrol] situation, it will be pre-winter," Qureshi said. "The panic is going to switch to heating oil."

Natural gas, used to heat many U.S. homes, is expected to be in short supply, with the four natural gas processing facilities down for up to six months, due to Katrina. Two of them were heavily damaged and remain flooded, said Jason Gammel of Prudential Financial.

Natural gas production will remain "crippled for months" with no relief in sight, according to a report yesterday from Wood Mackenzie, pushing record high prices to an even higher plane.

Yet demand is expected to be high this winter, with weather forecasters predicting October will be colder than normal in the eastern and Midwestern states that are key natural gas consumers. Analysts believe Katrina's damage to the natural gas market is going to have more of an impact on consumers than damage to any other part of the energy chain.

Adam Sieminski, chief energy economist at Deutsche Bank, says there are no strategic natural gas reserves anywhere in the world, so the loss of that gas is going to be impossible to make up. "Prices are going to be high, and consumers are going to feel the pinch," he says.

Samuel Bodman, U.S. energy secretary, said on Thursday that Americans should improve their energy efficiency and home insulation now. "There is no doubt that this is going to be a very tough winter season for the American economy, for American homeowners."

The question is whether the government will require people to cut back on their energy use or allow the market to act as a brake on demand. The second option could have dire consequences for the poor.

In previous crises, the U.S. has been forced to shut factories and schools to keep homes warm. Analysts warn that could recur this winter.

Qureshi says imports of refined products from Europe can make up only part of the shortfall, and will be delayed given the limited supply of tankers. "You're going to be extremely low going into winter," he says. "You could find a situation where grandmas are freezing in their homes."