Hurricane Season Could Be a Non-Event In NatGas Pits
Despite forecasts for a rougher-than-normal hurricane season, industry experts expect little impact on natural gas prices.
“I see little hurricane premium,” says Art Berman, founder of natural gas consulting firm Labyrinth Consulting. “The last few hurricanes, post-Rita and Katrina, made little difference in gas supply, although [they made] an impressive dip in demand as large parts of the South had no power for a few weeks.”
While both NOAA’s and Colorado State University’s hurricane season forecasts called for an “above-average” storm season this year, with up to five storms above Category 3 on the Saffir-Simpson scale of 1 to 5, similar predictions in past years have failed to live up to expectations.
But analysts say the industry isn’t banking on forecasting accuracy.
Instead, they point to onshore gas supplies replacing much of the demand once reliant on Gulf of Mexico production that could be shuttered during a storm.
The Rockies Express Pipeline, REX — a 1,679-mile, 1.8 billion cubic feet pipeline from northwestern Colorado to eastern Ohio which became fully operational in November 2009 — will go a long way to provide alternative supply in case of a storm.
“As major pipelines go, it’s very real and very big,” says John White, vice president at energy investment firm Triple Double Advisors LLC. “It’s one very large project that mitigates some of the risk of hurricane interruption.”
A joint venture of Kinder Morgan Management , Sempra Energy and ConocoPhillips , the pipeline can provide 11 percent of the nation’s gas supply.
Contrast that with the 16 percent of supply taken offline by the hurricanes Katrina and Rita in 2005, and the impact of REX is obvious, says one Houston-based energy hedge fund trader.
She adds the economic situation in the summer of 2005, when natural gas prices were already being pressured higher, was “clearly different” than today.
“That happened during a time of tight gas markets and that shut down a lot of production,” agrees White, referring to the one-two punch of hurricanes Katrina and Rita on the Gulf Coast in 2005.
Natural gas prices spiked from $6/MMBtu to $14/MMBtu after Hurricane Katrina’s landfall in September 2005, and stayed above $10/MMBtu for five months.
Another issue has been historic lows in gas storage in the critical eastern and western markets, prompting speculation of any drop in supply causing a price spike by moving the risk from the production node to storage.
According to US Department of Energy’s Energy Information Administration, or EIA, in 2005, there was about 3.9 trillion cubic feet of storage capacity in the U.S.
As of year-end 2009, this had increased to 4.3 Tcf, an increase of 11 percent, but the amount of storage capacity, or even the amount of stored gas on hand, is less relevant in today’s domestic gas market, says Berman of Labyrinth Consulting.
New shale gas production will also put a damper on those storage concerns, he says.
“I don't see gas storage as a factor of note,” he says. “Better pipeline infrastructure has lowered natural gas differentials.”
He adds that projects like REX meant that “lot of the construction was aimed at providing Rocky Mountain gas to the Northeast” but now, with Marcellus development coming online “this seems like an error, and construction is underway to route this gas to the west coast.”
He points to El Paso Corporation’s 680-mile Ruby Pipeline — opening this summer to take mountain-state gas to Oregon and onward — as one example of this redirected building effort that should take pressure off gas storage needs to cover supply disruption.
The industry’s focus on developing shale-gas fields has brought an inflection point between onshore and offshore production.
According to EIA, onshore production jumped from 1.1 tcf annually in 2007 to 3.1 tcf in 2010, while offshore production dropped from 3.5tcf to 3.1 tcf in the same period.
“The offshore has declined as a critical source of gas and will continue that pattern,” says Berman.
Better regional pipeline infrastructure in hurricane-prone regions should also help smooth any local disruptions, bringing further calm to gas markets.
Southern Union’s Panhandle Energy recently completed 483 miles of extra pipeline capacity in Florida, Alabama and Mississippi.
But even if price and supply risks seem to be tamped down, Triple Double Advisors’ White says the industry will, as always from the June-to-November hurricane season, keep an eye on the forecasts.
While expectations for bigger storm seasons may not have materialized last year, all it takes is a couple of big storms in the right place.
“I don’t think you’re going to see any price reaction,” says White. “Until a named storm enters the Gulf.”