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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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