ANALYSIS - Oil cos more cautious on storms after Gulf spill

HOUSTON Wed Jul 28, 2010 11:14pm IST

A road sign expresses local frustration with BP in Belle Chasse, Louisiana along the north/south Route 23 that travels from New Orleans to Louisiana's southeast tip, July 13, 2010. REUTERS/Alexandria Sage

A road sign expresses local frustration with BP in Belle Chasse, Louisiana along the north/south Route 23 that travels from New Orleans to Louisiana's southeast tip, July 13, 2010.

Credit: Reuters/Alexandria Sage

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HOUSTON (Reuters) - Heightened caution following the BP oil spill is prompting oil and gas producers in the Gulf of Mexico to shut more production faster as storms threaten, exacerbating energy price volatility this hurricane season.

Comparing producers' precautions ahead of storms this year with preparations for more severe storms in previous years indicates that companies are taking tropical threats more seriously, even though predictions of a harsh hurricane season have yet to be borne out.

"Companies operating in the Gulf are much more risk-averse than they have been historically," Hussein Allidina, Morgan Stanley's head of Commodity Research in New York, told Reuters.

While interruptions have been temporary, the volumes of production cut have been high and can have a big impact on energy prices. Gulf production accounts for a third of U.S. oil output and more than 10 percent of U.S. natural gas output.

Interruptions from Tropical Storm Bonnie last week helped push oil to 11-week highs near $80 a barrel.

Bonnie cut nearly 52 percent of total Gulf production at its peak, even though it had weakened from a tropical storm to a tropical depression by the time it entered the Gulf and never restrengthened as forecast.

Last year, Hurricane Ida threatened the same area with 100 mph (160 kmh) winds and the maximum oil production shut was 43 percent as a result of that storm.

Total output lost to Bonnie was 2.7 million barrels of oil and more than 4.6 Bcf of gas through Tuesday. By comparison, Ida in 2009 - crossing the same key Gulf production area – cost the market 1.4 million barrels of oil and 4.6 Bcf of gas.

"It appears companies drilling for oil in the U.S. Gulf are taking additional precautionary steps ahead of approaching storms, resulting in sizable supply disruptions," J.P. Morgan said in a research note.

Both the U.S. Coast Guard and the Bureau of Ocean Energy Management said that regulations on drilling have tightened because of the spill, but the government has made no changes in storm-preparation requirements because of it.

The U.S. government has, however, expressed concern about the availability of containment equipment to contain any new spill as most of it is currently deployed to contain the BP spill.


Operating farther offshore in deeper water than in the past also could contribute to increased caution and raise shut-in oil and gas totals, experts said.

Companies contacted by Reuters said only that they always prepare carefully for storms in the Gulf. They already had tightened up tropical weather preparedness at government direction after disastrous storms Katrina and Rita in 2005.

The spill began April 20 when a BP Plc well blew out, killing 11 workers, sinking a drilling rig and spewing millions of gallons of crude.

BP on Tuesday said it was taking a $32 billion charge against earnings to cover anticipated costs for stopping the leak and Gulf clean up.

"It is not surprising that companies should wish to go the extra mile in the wake of Deepwater Horizon," said Antoine Halff of NewEdge Group in New York. "BP itself cannot afford another disaster. The others are keen to distance themselves from BP's troubles."


A similarly cautious approach could be seen with Hurricane Alex, which earlier this month took a more southerly route across the Gulf than Bonnie.

At peak, Alex triggered evacuation of 11.7 percent of manned production platforms and 15.7 percent of drilling rigs.

Production lost totalled 1.4 million barrels of oil and 3.2 bcf of gas.

By contrast, Dolly, a July 2008 hurricane, which took a similar southerly path, caused 8.6 percent of manned platforms and 6.5 percent of drilling rigs to evacuate and kept 136,790 barrels of oil and 1.4 Bcf of gas off the market.

Although this season has started slowly despite forecasts of a severe hurricane year, activity typically picks up in August and September and the season does not end until November 30. One weak hurricane and one tropical depression in July could be just the beginning for the Gulf oil patch this year.

(Additional reporting by Joshua Schneyer and Jeanine Prezioso in New York; Editing by Alden Bentley)

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