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Moving Forward Towards
Recovery – The Outlook for Natural Gas in the Wake of Katrina
Price Pressure and
Supply Strain Continue as Industry Compensates for Damage in
Louisiana
By
Ann-Marie Fleming,
www.NaturalGasStocks.com,
www.OilandGasStockNews.com
September 2005
As the State of
Louisiana and the world as a whole begin the long journey towards recovery
in the aftermath of Hurricane Katrina, many uncertainties still remain. The
Gulf coast is a highly productive and relied upon oil and gas mainstay,
therefore in an environment of considerably high prices, shortages in supply
and a growing demand, the industry as a whole has felt the shockwave of this
disaster.
Initial reductions in natural gas supplies as a result
of Hurricane Katrina were estimated to be 8.8 billion cubic feet per day (bcfd)
due to shut-ins and direct damage, according to the Minerals Management
Service. This level as of September 8th is estimated at 4.0 bcfd. According
to Purvin & Gertz Inc., “this represents about 40% of the natural gas
production from the Gulf of Mexico and about 7.5% of the United State’s
total domestic gas production.”
The disruption in supply
in this region is further complicated by the lack of alternative gas
supplies. Additional supply from
Canada
and Liquefied Natural Gas (LNG) sources are limited, a problem that may
escalate if the situation continues into the heating season.
Bontan Corporation, Inc., an oil and gas exploration company with operations
in the area was fortunate to have been spared Katrina’s wrath. As Bontan’s
CEO, Kam Shah discusses, “the extent of devastation caused to human lives by
the Hurricane Katrina is only now being realized and our prayers go to those
who have been affected. The effect of the hurricane on businesses is likely
to be far-reaching. The effect of the damage to oil rigs and refineries in
the gulf is the greatest uncertainty. The infrastructure problem will likely
affect mostly the off-shore operations, much of which is New Orleans based.
Bontan's gas project is an on-shore project located in Calcasieu
Parish, North West of Louisiana and fortunately, was out of the path of
Katrina. No infrastructure problem was reported and drilling on the site
continues as planned."
While uncertainty continues, predictions regarding Katrina’s full effect is
difficult, however the Energy Information Administration has outlined three
possible recovery scenarios (see Figure 1), projected over the next five
months. In all three scenarios a return to normal oil and gas production and
distribution levels is anticipated to occur around December 2005.
Short-term Energy Outlook, September
2005 
As the
industry works to minimize the disruptions from Katrina, production levels
will need to be accelerated to help compensate for current shortages.
Paul Branagan, CEO of
Petrol Oil and Gas, Inc.
stated, “The
assessment of Gulf Coast damage is still not fully understood and although
somewhat vague, the impact on this year’s winter heating requirements are
already being defined by increased pricing in the marketplace. Thus it’s
incumbent on the on-shore natural gas producers to step up their production
activities to ensure that supply meets demand and that the current
anticipated production shortfalls, defined by the enclosed EIA graph, does
not extend into the winter months when our neighbors will need protection
from cold weather. Since US on-shore natural gas does not depend on enhanced
refining or other complex processing, natural gas goes essentially from a
new production well, into the interstate pipeline system and directly to
people’s homes.”
Long Term Expectations:
With considerable uncertainty surrounding the long term impacts of the
hurricane on Louisiana and on the natural gas arena as a whole, many are
speculating as to the overall implications.
While there are physical constraints, it is believed that gas producers and
processors will be able to compensate somewhat through clever problem
solving and the movement of gas around to some of the plants that are not
currently fully loaded to help minimize the impacts from Katrina. “The large
number of pipeline inter-connections between offshore pipelines will likely
allow the gas processing industry to re-route much of the gas to other
processing plants that have spare capacity and were not significantly
impacted by the storm,” explains Purvin & Gertz.
Many
industry insiders anticipate price pressures to continue as natural gas
supplies become increasingly strained.
“In general, the
long-term affects from Katrina are still unknown. Short-term we have seen a
huge jump in natural gas prices, which have finally achieved parity to oil
prices on a 6 to 1 basis. It is our belief that an already tight rig and
drilling service environment will slow recovery efforts to return
production. This should lead to higher oil and gas prices, but in particular
will keep the natural gas market on edge as storage levels are suspect going
into the peak demand season of winter. We have accordingly raised our 2006
natural gas price deck to $8.00 and believe a trading range between $8 and
$10 could develop,” predicts Philip McPherson, Director of Research, C.K.
Cooper & Company
As
Michael Myers, CEO of Running Fox Resource Corp describes, “the long term
impact will be stronger prices for natural gas in North American markets as
the market will forward price the fact that the physical supply transport
infrastructure has not kept up in pace with market demand. This has already
happened in other major markets (Europe, India etc) where natural gas prices
are much higher. The effects of this will be exacerbated by the traditional
exploration to production time lag, which will be more pronounced as the
major gas basins are becoming depleted. We are expecting N.A. imports of
LNG to increase to keep up with rising natural gas demand and rising average
prices. The timing for increased gas demand is excellent for Running Fox as
we and partners are expecting up to 35 million cubic feet per day of natural
gas from our deep Alberta gas well being drilled now, and for
which pipelines are in place. We also have numerous development drilling
targets identified on the 17,400 acres all within the Pincher Creek Gas
Field. This first giant gas well will have a major impact on our small cap
company."
Oil
and gas producer Petrol Oil and Gas, Inc. is responding to this disruptive
supply situation by accelerating its fall drilling program to get new wells
in place, starting this week, according to Mr. Branagan. “Our accelerated
drilling program has been redesigned to increase Petrol’s natural gas
production by 8% before winter sets in and demand becomes significant. The
oil and gas industry must now show the nation its capacity to attend to the
immediate energy needs of its citizens, friends and neighbors.”
Industry Assistance:
As
the costs and damage associated with hurricane Katrina are becoming
apparent, the need for assistance is being answered by various industry
participants. BP Foundation has contributed a total of $10 million towards
relief efforts, spreading this amount across a variety of programs including
the American Red Cross, Houston relief programs and various local community
efforts.
Anadarko Petroleum has pledged $1 million in aid to assist the victims of
Hurricane Katrina through the American Red Cross disaster relief fund, and
the United Way Katrina Relief Fund. Both companies have implemented employee
donation matching programs for contributions to the Red Cross.
“The Gulf Coast area has been hit hard by this storm and we are seeing the
needs increase everyday as residents from New Orleans and neighboring states
try to rebuild their lives. We want to do what we can to help and we believe
this corporate donation coupled with our matching dollars for employee
contributions, will help bring immediate relief to the agencies and
volunteers who are providing vital services to those needs,”
stated Jim Hackett,
Anadarko President and CEO, in a company news release.
Chesapeake Energy Corporation, which has a connection with many in the area
due to past operations in
Southern Louisiana, has
contributed $3 million to the American Red Cross and various other relief
organizations. The two co-founders, Aubrey McClendon and Tom Ward,
personally donated $1 million each, with the Company donating the remaining
$1 million.
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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