Small Oil Producers Hit by Hurricanes

September 22, 2008

For the second time in three years, Tim Washington and hundreds of other small oil and natural gas producers are literally picking up the pieces after back-to-back hurricanes in the Gulf of Mexico.

Even though most people typically associate U.S. oil and gas production with Exxon Mobil Corp., ConocoPhillips and other well-known behemoths, the majority of crude and natural gas is supplied by smaller, independent companies like Washington’s Alpine Exploration Cos. Most have fewer than 20 employees.

As the industry continues to assess damage from hurricanes Ike and Gustav, many of those mom-and-pop shops appear to have taken a beating. Of the 49 platforms destroyed last weekend by Ike, 44 produced less than 1,000 barrels of oil a day, according to assessments from the U.S. Minerals Management Service.

“Anytime a hurricane comes through, we average a minimum of two weeks getting back on line, and that’s on a best-case basis,” said Washington, whose Dallas-based outfit operates several production facilities along the Louisiana coast. Most produce 100 to 300 barrels a day.

That’s just a sliver of the Gulf’s total daily offshore production of 1.3 million barrels. But combined, the nation’s roughly 5,000 independent operators account for 68 percent of oil and 82 percent of the natural gas produced in the U.S., according to the Independent Petroleum Association of America.

Independents concentrate solely on exploration and production, forgoing refining and marketing operations. They include large publicly traded companies such as Anadarko Petroleum Corp., but most are much smaller operations that may drill only a few wells each year.

“It’s tough. It’s expensive. But we’re the backbone of the industry,” Washington said. “We ushered it in, and we’ll usher it out.”

Oil companies, rig and pipeline owners and others are still calculating damage to the industry caused by Gustav and Ike, but some risk experts say the energy sector’s insured losses for Ike alone could rise to near $2 billion.

The good news is that Ike and Gustav caused far less damage than Katrina and Rita in 2005, a one-two punch that destroyed 108 production platforms, damaged hundreds of others and shut down production for months, in some cases, in a region that accounts for 25 percent of domestic oil production and 15 percent of natural gas output.

Fear of gasoline shortages caused prices to spike above $5 a gallon in some parts of the country in the past week, but the most recent storms otherwise have had little impact on energy prices.

Crude prices have mostly tumbled in the past two months and analysts say oil is unlikely to resume its upward climb, in part because of the economic downturn that has sharply curtailed U.S. energy consumption.

Still, companies large and small are scrambling to repair equipment and restart production throughout the Gulf of Mexico and upper Gulf Coast. They include majors like BP PLC and Royal Dutch Shell PLC, whose massive platforms are located in thousands of feet of water and can produce tens of thousands of barrels of oil a day.

There’s also Bill Guidry, a former school teacher who got into the business 25 years ago. He was hustling in recent days to get repair crews to his handful of production sites along the Louisiana coast before the bigger companies swallow up most of those resources for their own, larger platforms.

For operators like Guidry, whose Key Operating Co. in Lafayette, La., produces about 100 barrels of oil a day as well as some natural gas, a production facility often amounts to a 100-foot barge anchored in coastal marshland with oil storage tanks and other equipment aboard. When storms approach, the surge can inundate the barges and equipment or push them miles from their previous sites.

Guidry, 55, said repairs from Rita three years ago cost him about $800,000, though much of that was covered by insurance. This time around he figures he’s facing about $200,000 worth of damage — a lot less than Rita but still a hefty blow for a small business.

Guidry estimates it’ll take about a month before he’s back up to full production.

“Had we gotten hit really hard again, I know some of my partners would have said, ‘I’ve had enough. Let’s put it up for sale. Let’s get out,”‘ Guidry said. “But you live and you learn, and we were better prepared this time.”

Washington, 49, said he’s probably facing a similar bill — about $200,000 — for repairs from Gustav and Ike, though he noted that storms create expenses beyond replacing and fixing equipment. Lost production has a big impact, particularly when oil prices remain relatively high.

“We also have a (drilling) rig that’s working right now, and we’ve had to physically move it off the well twice,” he said. “That costs us hundreds of thousands of dollars, and we don’t get that back.”

Yet Guidry, Washington and most others will make their repairs, resume production and, of course, hope for a less active hurricane season in 2009. That’s the way of the oil patch.

Some small operators stand to make millions of dollars in profits when oil prices are high, but it’s a cyclical business.

“While $100 oil is nice, it hasn’t been that way for much of the last several decades. The ’80s and ’90s in particular were pretty tough. But the resilient ones figure out how to do it and survive,” said Bruce Vincent, president of Houston-based Swift Energy Co. and vice chairman of the Independent Petroleum Association of America. “Independents are an incredibly tenacious, scrappy bunch.”

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