Hurricane Isaac continues to build strength in the warm waters of the Gulf of Mexico and is now moving west, toward the heart of U.S. oil and gas production.
Hurricane Isaac already has forced several energy giants to shut down major Gulf oil and gas projects until the storm passes. That's going to spell higher gas prices for U.S. consumers.
The emergency response will be the largest challenge to the U.S. energy sector since 2008, when Hurricane Gustav and Ike struck the region. Both hurricanes caused month-long disruptions at offshore facilities and damaged a number of midstream operations in processing, pipeline, and storage along the coast.
By Monday, the U.S. Bureau of Safety and Environmental Enforcement reported that daily oil production in the Gulf was down 78% and natural gas production down 48%. Energy producers including Royal Dutch Shell Plc (NYSE ADR: RDS.A, RDS.B), Chevron Corp. (NYSE: CVX) and British Petroleum (NYSE ADR: BP) have evacuated more than 346 platforms and 41 rigs.
More shutdowns are expected on Monday and Tuesday as the storm gains strength.
"There's panic right now that this could stage a direct hit on New Orleans or the Chevron refinery in Pascagoula [Mississippi]," Tom Kloza, chief oil analyst for the Oil Price Information Service, told ABC 15 News in Arizona. "The refineries, once they're within 24 hours of either tropical storm or hurricane force winds, they have to start a shutdown.
British Petroleum shut down four oil and gas platforms in the Gulf of Mexico on Sunday and evacuated all of its workers. The shutdown includes the evacuation of Thunder Horse, the world's largest production semi-submersible with a production capacity of 250,000 barrels of oil a day and 200 million cubic feet a day of natural gas.
The company is still under obvious scrutiny of its offshore projects given the Deepwater Horizon spill in 2010, which killed 11 workers and gushed millions of gallons of oil into the Gulf.
Hurricane Isaac Jolts Gas Prices
Current computer models project that Hurricane Isaac will hit land on Wednesday on the Louisiana coast, threatening the heart of U.S. oil and gas refining capacity. Roughly 19% of U.S. refining operations are in Louisiana and Mississippi.
Gasoline prices are expected to advance in the coming days as the storm approaches the critical Southeastern refining network. Gas prices already jumped on Monday in part because of a fire that shut down Venezuela's Amuay plant, the second-largest refinery in the country.
Marathon Petroleum (NYSE: MPC) has already reported it will shutter its Garyville refinery.
The plant processes nearly 500,000 barrels a day.
In addition, Phillips 66 (NYSE: PSX) will suspend operations at its Alliance refinery, which processes nearly 250,000 barrels a day.
Gas prices will likely increase as supply risks accelerate. Any shutdown of a U.S. refinery in the coming days would precipitate a drop in U.S. inventory levels just a few days ahead of Labor Day, a heavy travel weekend in the United States.
James Baldwin
Money Morning
