Hurricane Ike and Energy Policy

The reactions the press and the commodities markets to the impact Hurricanes Ike and Gustav on our energy infrastructure seem to be “So what?” and “Ho-Hum”, respectively.

My company has spent the last three days trying to assess the impact of Ike on our operations and on oil and gas operations in the Gulf of Mexico in general.

A picture is just now starting to appear. It’s pretty bad. Yes, it could have been worse, but the damage we sustained will only make a tight supply picture tighter. From a policy standpoint, any thinking idiot can discern that we have too many eggs in a single, very vulnerable basket. Let’s hope our representatives in Congress can read this and comprehend the potentially horrendous impact of the Pelosi non-Energy Plan of 2008.

Speaking of pictures, I happen to have a few to illustrate my point, courtesy Rigzone.com. Read on.

This map shows the impact of Ike on the rigs and platforms in the Gulf. Pretty much a gut-shot, wouldn’t you say? If you were to superimpose a track for Gustav, approximately 90% of the platforms in the Gulf were impacted by hurricane-force winds during the last three weeks. (For a quick run-down on the difference between a rig and a platform, go here.

Rigs: Here is a table which shows that of 11 rigs impacted by the storm, 5 were completely destroyed. Note that 3 of those rigs were over 30 years old, typical of most of the mobile fleet. This is out of a working rig fleet of 47 or so in the Gulf of Mexico. Loss of 10% of the working fleet means that a very tight rig market just got tighter.

Platforms: It has been reported in the press that there are 3,800 platforms in the Gulf, with the implication that the loss of a couple of dozen or so is no big deal. Many of the 3,800 structures are either non-producing or are single-well structures in shallow water. The platforms that tend to topple are multi-well structures in deeper water. It will require a lot of men and equipment to recover the lost platforms, even if production from those particular platforms was minimal.

*Production/Reserves: *The Minerals Mangement Service reports that some 11,000 barrels per day and 84 million cubic feet of natural gas production was lost with the toppled platforms. Most of these wells/platforms will not be replaced. Round numbers, that likely amounts to a permanent loss of something like 20 million barrels of oil and 100 billion cubic feet of gas. That’s something like $2.6 billion worth of product (almost $500 million out of the Federal treasury in royalties alone). Since prices are set at the margin, these volumes will be missed in the market.

*Pipelines: *Nearly all offshore production, oil and gas, comes ashore via pipelines. The MMS says, “Early reports indicate that there is some pipeline damage. The full extent of damage will not be available until operators are able to test the systems.” After Rita, it took many months, in some cases, for pipeline repairs to be completed. The pipelines compete for the same boats and personnel that the oil companies use to repair wells and platforms. A repaired platform is of no use if the pipeline is broken. It remains to be seen how much damage the downstream infrastructure sustained, onshore as well as offshore.

Pollution: *”MMS has been conducting helicopter fly-overs to investigate reports of oil spills/sheens. While it is too early for definitive reports, there was *one reported sheen as of September 15, 2008 estimated to be nine barrels; subsequent investigations showed that the sheen had dissipated.”

Infrastructure/Logistics: Most of the energy business these days is in Houston. (Fortunately, I’m in Lafayette, LA.) Some of the Houston-based companies are reeling: plenty of homes are without power, and some offices have heavy storm damage, so a quick recovery is a challenge.

Conclusion: Oil and gas development in the Gulf of Mexico is very mature, and hence, very densely packed. The Gulf provides 25 percent of the oil and 15 percent of the natural gas produced domestically, so it is vital to our energy security. The producing infrastructure is old and vulnerable to a single event, even one like Ike, a Cat 2 storm well shy of the “perfect storm”. Offshore operators are safe, responsible and innovative. Modern technology keeps the risk of a major spill event to a minimum.

Cross-posted at The Minority Report.

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