Compensating for Disruptions in the Oil and Gas Industry
Hurricane Damage, Shut-Ins and High Energy Demands Put Pressure
on Oil and Gas Supplies
By Ann-Marie Fleming, www.NaturalGasStocks.com,
www.OilandGasStockNews.com October 2005
The domestic oil and natural gas sectors, as they work to
compensate for the disruptions caused by Hurricane Katrina and
Rita, are facing a variety of factors that will continue to
constrain supply. On the oil side, refineries are believed to be
playing a significant role in the industry's inability to meet
demand. While importing crude oil may help in raising supply
levels, it still has to be refined before it reaches the market.
With the Gulf Cost area representing almost half of the United
State's refining capacity, and pre-disaster refining levels
already under serving demand even at almost maximum capacity,
supply constraints have escalated as a result of the damage and
shut-ins caused by the hurricanes.
The nation's constraints on its current refining capacity have
some anticipating an upward pressure on price levels despite
recent declines. According to Philip McPherson, Director of
Research, C.K. Cooper & Company, Global oil demand is still
strong, and I believe this recent sell off is a buying
opportunity for investors. We still believe oil prices will stay
well above $50 per barrel, and our 2006 price deck is $57.50.
The production levels in the Gulf Coast area have experienced
heavy disruptions that continue to plague the region. The
Minerals Management Service (MMS) reported that the level of
lost production as a result of Hurricane Katrina and Rita from
August 28th to September 28th totaled 37.9 million bbl of crude
and 180.6 bcf of natural gas.
In a discussion of the effects that the Hurricanes have had on
energy supply, President George Bush stressed the need for
additional refining capacity. The storms have shown how fragile
the balance is between supply and demand in America. I've often
said one of the worst problems we have is that we're dependent
on foreign sources of crude oil, and we are. But it's clear, as
well, that we're also really dependent on the capacity of our
country to refine product, and we need more refining capacity,
stated the President.
Natural Gas Market
There has been an upward impact on the cost of gas supplies that
have to be purchased post Katrina, as described by Mr. Jon
Stoltz, Senior Vice President of Gas Supply and Regulatory
Affairs for Cascade Natural Gas Corporation, a distributor of
natural gas to residential, commercial, and industrial customers
in Washington and Oregon. However, as Stoltz explains, By
locking in a large amount of supplies prior to the disasters,
Cascade has been able to shield itself somewhat from the rise in
prices that has taken place in the aftermath of the hurricanes.
Kam Shah, CEO of Bontan Corporation, a natural resource company
operating in the Louisiana area, anticipates a short-term
shortage in the supply of natural gas as a result of the
hurricanes as revealed by damage reports indicating numerous
rigs that were either missing or destroyed, in addition to
impacted drilling and completion operations for several
companies suffering serious damage. Bontan was fortunate in that
their drilling site was unaffected by both Katrina and Rita.
Drilling for the Company resumed within 48 hours of the storms
passing. We continue to monitor the situation and are confident
that the situation in Southern Louisiana remains dynamic,
states Shah.
It is going to take a while for the industry to know the full
amount of damage caused by the Hurricanes; we still don't know
how bad underwater pipelines were damaged. The tight supply of
rigs and boats and personnel in general pre storms, is only
making it worse, states McPherson.
However as Paul Branagan, CEO of Petrol Oil and Gas, an oil and
gas producer focused primarily on coal bed methane describes,
Americans are well adept at rising to a national challenge and
the oil and gas industry has time and again demonstrated its
creativity and ability to overcome significant difficulties
imposed by all sort of disasters.
Winter's Impact:
As we move into the colder months, with winter fast approaching,
there are concerns regarding the additional price pressures that
will be realized as demand for natural gas moves even higher.
The Natural Gas Supply Association describes weather as the most
prominent factor in determining the nation's ability to meet
natural gas supply; unfortunately it is also the most
unpredictable variable, an input further complicated by the
anticipation of a colder winter than last year as predicated by
the National Oceanographic and Atmospheric Administration.
It is believed by industry insiders such as Chesapeake Energy,
the nation's third largest independent producer of natural gas
in the United States, that the market is currently experiencing
a false sense of security, which is common in September and
October as these are typically months with low demand for
natural gas. As Aubrey McClendon, CEO of Chesapeake Energy
explains, There is no physical shortage today since we are just
putting gas in storage. However, we are going to go into
wintertime with our lowest amount of storage in three years.
Offsetting that you have very high gas prices right now and the
question the market is searching for is - have we forced enough
conservation to offset the supply losses? Our view is that we
have likely not done this, and now we are all in the hands of
Mother Nature.
This damage may create a short-term shortage in gas supply at a
time when demand is likely to peak due to the onset of winter,
which may push gas prices further upward, explains Shah.
In terms of how high natural gas prices can reach, the debate
continues. Weather is the variable that can make all of the
difference in future gas prices. When you have a market that is
perfectly balanced between supply and demand, a mild winter and
a mild summer helps gas consumers and a cold winter and a hot
summer helps gas producers. Whether or not gas goes to $20 this
winter or whether it falls back to $10 is a function of what
kind of winter we have and a function of how fast supply comes
back online, describes McClendon.
Working towards Recovery
Natural Gas Supply:
Given the EIA statistical data that indicates shut-in totals of
Gulf natural gas supply for early October at approximately
7.5Bcfd, a reduction of about 72% of its normal capacity,
on-shore producers will need to boost current production by
about 17% to offset the shortfall of Gulf production, according
to Paul Branagan.
Petrol like most American independent oil and gas producers
appreciates the need to do its part to increase supply and
understands the urgency of the situation. Since Petrol's CBM gas
reserves are known and relatively shallow we are able to bring
new gas into the pipeline within weeks. Our field operations
teams will be hard pressed to meet a 17% production increase,
but we nevertheless intend to meet that challenge though an
accelerated drilling program inspired by the needs of the
country, states Branagan.
As the nation works towards meeting the continuous rise in
demand for natural gas, further pressurized as a result of the
recent disasters, the ability to increase supply in part rests
on the pursuit of additional and diversified sources of gas. It
is our hope that in the wake of what will certainly go down as
the most significant hurricane season ever to impact the natural
gas industry, the nation will come to see the value of further
diversifying natural gal supplies. America's appetite for
clean-burning natural gas is not shrinking. Without these
additional sources of supply, the market will continue to be at
risk for disruptions such as Katrina and Rita, and the higher
costs that inevitable result, explains Joseph A. Blount, NGSA
Chairman.
Conservation:
In looking to ways to help alleviate price pressures and supply
constraints that have been accelerated since the disasters,
companies such as Cascade are looking to conservation efforts.
Energy efficiency and conservation are the most viable
near-term tactics to influence current natural gas prices as
well as a vital strategy for stabilizing the cost of gas over
the long term. We are very pro-conservation and are pursuing
de-coupling mechanisms for both Washington and Oregon that help
in the recovery of fixed costs regardless of volumes, therefore
creating a much better position to be able to promote
conservation, states Stoltz.
President Bush has called for all Americans to consider energy
conservation as we head into what some consider to be an
impending cold winter season, nevertheless as described by Mr.
Branagan, circumstances dictate that this is also a time by
which the non-effected natural gas producers are now challenged
to boost production to augment that lost Gulf supply.
Ann-Marie Fleming
Ann-Marie Fleming completed her MBA in the United States, where
she attended Webster University. She also holds an Honors B.A
from the University of Toronto. She has over fifteen years of
experience within the financial industry to include retail
banking and brokerage, investment banking, and mortgage
brokerage within the United States and Canada, with a firm
background in corporate research.
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