Natural Gas Onshore Eases Hurricane Threat: Energy Market

05 16, 2013 by Bloomberg

U.S. natural gas prices, pushed to a record high after hurricanes Katrina and Rita barreled through the Gulf of Mexico eight years ago, are now more vulnerable to winter freezes than tropical storms after production moved onshore with the growth of drilling in shale formations.

The two storms that struck within a month of each other in 2005 cut Gulf gas output to as little as 4.52 billion cubic feet per day from 10 billion, sending futures to $15.378 per million British thermal units. By the time Hurricane Isaac went ashore in Louisiana seven years later, daily Gulf production was 4.09 billion, according to the Energy Information Administration.

Companies have reduced offshore work to concentrate on safer shale, from the Marcellus formation in the Northeast to the Barnett in Texas. Federal Gulf waters accounted for 6 percent of U.S. marketed gas production in 2012, compared with 24.4 percent in 2001, data from the EIA, the Energy Department’s statistical arm, show.

“Gulf of Mexico production is actually lower now than the worst production month following Katrina and Rita,” Teri Viswanath, director of commodities strategy at BNP Paribas SA in New York, said in a telephone interview. “The severity and costs of these storms started the flight to onshore safe acreage, but it was really the shale development in the Barnett that culminated in attracting operators away from the Gulf.”

Natural gas for June delivery gained 3.8 cents, or 0.9 percent, to $4.062 per million Btu at 1:34 p.m. on the New York Mercantile Exchange. That’s down 74 percent from the post-Katrina high.

Marketed Output

Marketed gas output will rise to a record 69.9 billion cubic feet a day in 2013 from 69.18 billion last year, the EIA said May 7 in its Short-Term Energy Outlook.

Viswanath once watched every year for the first major forecast for the Atlantic hurricane season, a tip to how storms might affect Gulf gas production. When Colorado State University researchers released their prediction April 10, she was studying what wintery cold had done to gas wells on land.

“I used to have this date circled on my calendar,” Viswanath said in a telephone interview. “Now, so much of our supply is onshore, it’s not the hurricane risk, it’s the well freeze-offs that matter.”

Platform shutdowns during Isaac lowered U.S. natural gas output to 3.64 billion cubic feet a day, down 450 million. Twice as much production was lost onshore from November through December alone as gross output dropped to 72.8 billion cubic feet from 73.8, according to the EIA. Almost all of that was because of temperatures falling below 32 degrees Fahrenheit (zero Celsius), freezing wells, Viswanath said.

Rig Counts

In 2001, there were as many as 176 gas rigs in the Gulf, compared with more than 1,000 nationwide, counts from Baker Hughes Inc. (BHI) in Houston show. There were 811 in the U.S. at the start of 2012, 41 of them in the Gulf.

“It was a big deal back then,” said James Williams, president of energy research firm WTRG Economics in London, Arkansas. “The gas production in the Gulf of Mexico was about as much as out of the entire state of Texas.”

A combination of horizontal drilling and hydraulic fracturing, or fracking, has unlocked supplies trapped in shale formations in states including North Dakota, Oklahoma and Texas. The liquids involved are often susceptible to freezing.

“A small amount of water is produced alongside natural gas, and when the temperatures dip below freezing, the water crystallizes inside the pipelines, cutting off the supply of gas flowing at the wellhead,” Viswanath said.

Operators then wait for the weather to warm, apply heat or pump methanol through the pipes, she said.

Watching Cold

Cold weather also must be monitored “because weather drives almost all the month-to-month variation in prices,” Williams said.

Natural gas futures fell to a 10-year low in April 2012 as stockpiles grew because the fourth-warmest U.S. winter on record cut demand. This April, prices rose to the highest level in 21 months because of persistent cold snaps that lowered inventories.

Gas wells are concentrated from New York to Wisconsin and Kentucky, across the south from Alabama to New Mexico, and in the Rockies to North Dakota, Montana and Wyoming, according to the EIA.

The coldest parts of the U.S. by heating degree days this past winter were the upper Great Plains from North Dakota to Kansas and then east into the Great Lakes and Ohio Valley. All parts of the South were colder this year than last, according to the U.S. Climate Prediction Center.

Production Record

Record output from shale deposits led gas production to an all-time high of 28.5 trillion cubic feet in 2011, the EIA said Jan. 7. Shale accounted for 30 percent of total production in 2011, up from 22 percent the previous year.

The boom in oil and natural gas production helped the U.S. cut its reliance on imported fuel. The U.S. produced 84 percent of its own energy in 2012, the most since 1991, EIA data show. The measure of self-sufficiency rose to 88 percent in December, the highest level since February 1987.

While Gulf output has dropped, processing in the region has increased, with Texas and Louisiana accounting for almost half the total U.S. capacity last year, the EIA said.

“This concentration means that the industry will remain vulnerable to hurricane disruptions even though an increasing amount of production has come onshore,” Viswanath said