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Hurricane Season Has Many Speculating
over Potential Oil and Natural Gas Supply Disruptions and Higher Energy
Prices
NaturalGasStocks.com Looks at how Oil and
Natural Gas Industry Participants, Chesapeake Energy, Eden Energy, Petrol
Oil and Gas and Goodrich Petroleum Prepare for the 2006 Storm Season
Ann-Marie Fleming,
www.NaturalGasStocks.com
June 2006
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With the 2006 hurricane season underway, the potential impacts of
what the National Oceanic & Atmospheric Administration (NOAA) predicts
to be a highly active season are being evaluated. “For the 2006 north
Atlantic hurricane season, NOAA is predicting 13 to 16 named storms,
with eight to 10 becoming hurricanes, of which four to six could become
'major' hurricanes of Category 3 strength or higher," described retired
Navy Vice Adm. Conrad C. Lautenbacher, Ph.D., undersecretary of commerce
for oceans and atmosphere and NOAA administrator. Although NOAA is not
forecasting a repeat of last year's season, the potential for hurricanes
striking the U.S. is high.” (See Figure 1)
With the oil and gas sector, and in particular the Gulf region, still
recovering from the devastation caused by Katrina, a damaging 2006 storm
season could escalate industry pressures through additional disruptions
and shut-ins, leading to higher energy prices. Industry participants
Chesapeake Energy (NYSE: CHK), Eden Energy Corp (OTCBB: EDNE), Petrol
Oil and Gas (OTCBB: POIG) and Goodrich Petroleum (NYSE: GDP) forge ahead
with their pursuit of increased exploration, development and production
levels, with a close eye on Gulf coast weather activities.
The risks associated with an intense summer are amplified as the Gulf
region is still recovering from the effects of last year’s storm season.
As Don Sharpe, CEO of Eden Energy Corp. (OTCBB: EDNE), an oil and gas
exploration and development company describes, “Deep Gulf of Mexico oil
production has been the only area of significant US oil production
growth during the past decade compared to Alaska, shallow Gulf
production and the lower 48 states where production has been declining.
I think almost 20% of Gulf oil production will still be shut in at the
start of the season as a result of last year's hurricane activity.”
In addition to the highly anticipated activity of storms along the
coast, the nation is also facing the challenges of hot temperatures that
accompany the summer months ahead. Paul Branagan, President of Petrol
Oil and Gas, Inc. (OTCBB: POIG) explains, “Most of the country is
already experiencing some pretty high temperatures and given that summer
is still about two weeks off this means that the utilities usage of
fossil fuels is and will probably continue at high levels throughout the
summer. That demand mixed with the potential adverse effects of the
hurricane season suggests that the oil and gas market will remain
extremely volatile and producers both big and small will have to work
hard to maintain supply.”
While there is anticipation for an active storm season due to numerous
variables, most experts do not anticipate the level of activity we saw
last year. Jon Davis, Meteorologist with Chesapeake Energy (NYSE: CHK)
explains, “Last year was an exceedingly unique situation on many
different levels and based on the significant differences in last year’s
conditions that produced a record number of storms in the Gulf, and what
we have going on right now, we do not expect the same level this year.
While Chesapeake does not have any operations in the Gulf region, from
an overall energy macro standpoint we monitor weather activity in the
tropics and risks to the Gulf of Mexico on a daily basis to assess the
potential market and supply impacts.”
The anxiety that surrounds this season has become a factor when
evaluating the potential impacts on the industry. As Ron Gist with
Purvin & Gertz, an independent energy industry consulting firm
describes, “Based on the issue of hurricanes I absolutely think that
there is going to be some strength to the prices. However, people are
immediately jumping to the conclusion that the hurricane, if one hits,
will damage production, but what happened last season was that despite
the production that was knocked out, there was also a considerable
reduction in demand. Chemical plants, refineries, power generating
plants, etc were shut down balancing the market since we lost
approximately the same amount of demand as we lost in production.”
Industry Impact
With a pull back on natural gas prices due to a mild winter, weather
once again holds the wildcard on price influence as we move forward into
the summer months. According to Jeff Mobley, Vice President, of Investor
Relations and Research for Chesapeake Energy, ”To the extent that you
would actually have a hurricane interrupt production it would have
material impact. Gas prices have fallen substantially and are well below
price parity with crude oil because of excess amount of gas on the
market. This disparity is largely caused by one the mildest if not the
mildest winter on record in the U.S. so there is a huge overhang of gas.
There is a limited amount of storage so one way or the other the market
has to work through that and at the moment it appears that it will be
doing this through lower prices. To the extent that you take production
offline in the Gulf of Mexico that would very quickly fix the short term
supply and demand imbalance and gas prices would go up materially.”
Goodrich Petroleum’s (NYSE: GDP) President, Robert Turnham,
expressed unease over this year’s predictions and the potential industry
impacts that may result if these forecasts prove accurate. “We are very
concerned with the potential effects of another active hurricane season.
The impact to the supply system for oil and gas depends on the path of
the hurricanes. If they take the same path as last year we will once
again have a tremendous amount of production shut-in and potentially
lost due to wind and storm surge damage and we could also see further
destruction of demand for natural gas as we saw last summer when many of
the gas fired processing plants and refineries were shut-in for several
months.”
According to Turnham, Goodrich Petroleum will not be drilling any wells
in South Louisiana during the hurricane season, to minimize the risk of
downtime costs.
At a time when the nation is working to build energy independence,
hurricane activity jeopardizes these efforts, however it may also create
a re-prioritization of oil and gas drilling regions. Eden’s Don Sharpe
explains, “Another year similar to last year will definitely result in
increased US dependency on imported oil, add to energy prices and
escalate the importance of onshore energy exploration. Many of the
nation's refineries are located in the Gulf so I would certainly expect
gas prices to increase.”
With this in mind, many domestic oil and gas companies are working to
increase exploration, development and production to continue to meet the
growing energy demands. “Our company continues to acquire and develop a
very high quality portfolio of large prospects in the US with the
objective of finding and developing major sources of oil and gas for
America. Our strategy will remain unchanged. I think our shareholders
recognize this and have shown an inspiring level of support,” adds
Sharpe
Coal Bed Methane producer Petrol Oil and Gas, has moved forward with
financing to accelerate development of its gas fields in eastern Kansas
in anticipation of a demand driven market this fall resulting from a hot
summer and the impact of the hurricane season on supply. Paul Branagan
describes, “Given the adversities of any new field development and the
complexities of de-watering our coal bed methane reserves production
tends to lag a bit defying our best efforts at projecting definitive
production rates. This difficulty in projecting supply appears to be
systemic in the oil and gas industry given the nature of unconventional
oil and gas and the scope and size they now play in supply”.
Are We Prepared?
There are differing opinions on the level of preparedness as we move
into the 2006 hurricane season. Some believe that with repairs and
restoration still occurring in the Gulf as a result of the 2005 season,
we have not been in a position to fully prepare for another volatile
session. Sharpe explains, “Knowing that so much production is still
offline in the Gulf, that is, not even repaired after last year's
Hurricane season, it is hard to claim that the industry is prepared for
similar weather conditions.”
However there are some that feel that last year’s damage has resulted in
a harsh lesson in securing infrastructure to better combat the
destructive powers of costal storms.
As Ron Gist describes, “The industry has learned from last year’s season
in terms of what needs to be done to help them to be better prepared
this season and are reinforcing structures through a variety of means,
therefore the damage probably wouldn’t be as bad the second time
around.”
With the level of storms seen last year, even the most prepared are
facing extreme challenges in trying to reduce the impacts of high
categorized hurricanes. Robert Turnham explains the reality of the
situation, “I believe the nation is certainly more prepared this year
due to last year's experience, however there is only so much preparation
that can be done. There is very little the industry can do to protect
against the effects of hurricanes. We cannot build an infrastructure
that can withstand category four or five winds, nor can we protect
against storm surges that can totally submerge facilities, so the
industry will always be susceptible to widespread damage.”
The Big Picture
While the final industry picture still remains to be determined, the
anxiety and the likelihood of an active hurricane season have many
speculating on higher oil and gas prices as our energy infrastructure
along the Gulf remains vulnerable. Onshore exploration, development and
production increases will help to offset potential disruptions along the
coast as the nation prepares for a volatile summer. One thing is
certain; this season will be one of the closest watched storm seasons to
date.
Figure 1
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Source: NOAA
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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 sixteen 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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