Energy: Oil and Gas Prices Rise As Operators Prepare for a Battering From Gustav

Oil and gas companies are preparing for a complete shutdown of offshore drilling in the Gulf of Mexico as tropical storm Gustav gathers strength and churns ominously towards the US coast.

Shell, BP, ExxonMobil and other operators have activated contingency plans to evacuate all staff and to cease operations on offshore rigs that account for a quarter of US crude oil production and 15% of natural gas output.

The US department of energy said it would release emergency stocks from the country's strategic petroleum reserves if supplies are severely disrupted.

Energy prices rose on concerns that the storm could be the worst to hit the region since hurricanes Katrina and Rita devastated New Orleans and the Texas shore three years ago. By midday on New York's Nymex exchange, the cost of a barrel of oil was up $1.70 to $117.29.

"Until this hurricane hits, the trend has to be higher, towards the $120 level," said Jonathan Kornafel of Hudson Capital Energy. "If this turns out to be a non-event, the market could really come roaring back down."

The oil price also received some support from a newspaper report that a Russian oil company, tipped to be Lukoil, could be told to cut supplies to western Europe in response to east-west tension over Georgia. Lukoil said it had not been approached by the Russian government and exports were flowing normally.

Russia's deputy prime minister, Igor Sechin, the chairman of Russia's largest oil company, Rosneft, called the suggestion of possible cuts a "crude provocation".

"Even during the cold war, regardless of political or any other circumstances, the Soviet Union always fulfilled its contractual obligations to supply Europe with energy, and Russia, a responsible and reliable partner, adheres to the same principle," Russian state news agency RIA quoted Sechin as saying.

The dollar shrugged off the rise in the oil price and is on track to show its best monthly rise for a decade. But the reverse was true for the pound, which fell to its lowest level for almost 12 years against a basket of currencies. Dealers blamed the weakness of the UK economy amid worries it could be heading into recession.

Shell's vice-president for production in the Americas, Frank Glaviano, said the operations threatened by Gustav could be shut for "four, five, six days or more" as the industry battens down hatches. Shell operates 20 platforms in the area and is moving 1,400 offshore employees.

Forecasters say Gustav, which hammered Jamaica yesterday, could gather intensity to a category-three hurricane by the time it is projected to reach the US coast in the early hours of Tuesday.

BP said it was ready to evacuate all its staff by midday on Saturday if Gustav remains on its expected path.

Hurricane Katrina extensively damaged rigs in 2005, causing one Shell platform to remain shut for nine months. But since then oil companies have modified platforms to make them more robust.