By the staff of the Shale Oil Information Center.
The oil and gas industry can breathe a sigh of relief as the oil analysts from several major banking institutions have determined that affects from both Hurricanes Katrina and Rita have left it on the winning side of the aftermath.
George Ball, chairman of Sanders Morris Harris, the largest investment bank in the southwestern US, was puzzled. After the havoc caused within one month's time, the common wisdom would have been that there had to be some area of the US oil and gas industry that would suffer from the dire blows to the heart of the US energy infrastructure. After checking with the major integrated oil and gas companies to the rig boat operators, its apparent that the industry is poised to profit from the storms in the medium to long term. "It's the very odd case where it's an ill wind that has blown nothing but good to all participants in a very large industry,'' Mr Ball said.
Despite the optimistic forecast, the truth remains that the industry has still suffered enormous physical damage from both major hurricanes. Industry costs will run into the billions, given significant damage to several deep water production facilities, dozens of rigs, numerous pipelines and half dozen refineries. Companies including British Petroleum said the storms had knocked $700m from third-quarter profits. Others are still tallying damage, but the prognosis is equally bad. Chevron's impact on third-quarter profits from hurricane Katrina alone was more than $350m.
Nevertheless, the industry is expected to pass along the cost to consumers; current pricing trends already indicated that end users are being charged more for liquid fuel derivatives, and analysts forecast winter heating fuel prices will double over last year. Several companies are already already seeking permission to raise rates, so the typical customer will pay 12 percent more each month until year-end. Fortunately, other companies are so well diversified that their Gulf Coast damage will be offset by earnings elsewhere; an example of this is ExxonMobil, whose Chalmette refinery was hit by Katrina. Fortunately for the energy giant, the Chalmette plant only produces two percent of its global refining capacity. Other companies will depend on higher than normal fuel prices to offset their losses.
Analysts are estimating that with the advent of a cold winter, that the likelihood of a fuel shortage is high. Despite this, some producers, including Valero, a top US refiner hit by the hurricane, will still proceed with expensive additions to its refineries. Banc of America Securities' top pick following the hurricanes is National Oilwell Varco, which benefits from the increasing needs of Gulf of Mexico and global drillers for supply and equipment. Another winner in the market include Tidewater, which ferries supplies to rigs, says demand has risen, but its boats were fully booked even before the storms.
It is also estimated, however, that companies with higher relative exposure to the deep water segment of the offshore industry, where hurricanes have disrupted drilling patterns, specifically Smith International, Weatherford International and Baker Hughes will lose 12-15 percent of its quarterly service revenues. Finally, Standard & Poor's Ratings Services says the hurricanes are expected to have a limited effect on ratings, as high commodity prices should enable most companies to repair damage and resume operations. It is expected that the entire sector will benefit from improvements that will emerge since the hurricanes have highlighted the industry's limitations.
As of October 6, most of the refineries in the areas affected by Rita were restoring power. The four major motor fuels refineries in the area are off line, which means a daily refining deficiency of 1.1 million barrels. The Valero refinery in Port Arthur is expected to come online by the end of October. Start-up dates weren't available for ExxonMobil in Beaumont, or Motiva and Total in Port Arthur.
Most chemical plants are off line or producing at reduced capacity. Although the damage to area plants could have been more severe than it was, the petroleum production slowdown will affect the national economy, although it is not expected to place it at a standstill.
It is expected that the national average for unleaded gasoline is expected to settle around $2.50 per gallon by the end of the year. Natural gas prices are expected to continue rising -- increasing gas heating bills an average of 50 to 70 percent this winter. About 70 percent of the nation's chemical plants are located on the Texas and Louisiana Gulf Coast.
High energy prices have also started to further affect other industries, including those that depend on petroleum derivatives; chemical industry leader DuPont declared a "force majeure" for all its aniline and acrylonitrile business because of damage at its Beaumont plant. That means the company isn't liable for breaching contracts because of production loss from Hurricane Rita. Aniline and acrylonitrile are used in plastics and coatings. Prices for raw materials are expected to rise as well.