Hurricanes and Natural Gas Production in the Gulf of Mexico



Author: Velocity Suite Natural Gas Analyst

Overview:
The 2014 Atlantic Basin hurricane season is almost upon us, and residents along the Atlantic Coast and the Gulf of Mexico won’t be the only ones keeping a close eye on the weather. Hurricanes present a stately challenge for natural gas producers in the Gulf of Mexico. According to the latest report from the Bureau of Safety and Environmental Enforcement (BSEE), there are currently 2,570 offshore natural gas rigs and oil platforms active in the Gulf of Mexico. In addition to these facilities, there is also a high concentration of natural gas processing plants and interconnects located in the gulf. Because of the large amount of infrastructure present, the potential for disruption to production is very likely whenever a tropical storm makes its way up the Gulf.

GoM Shut in by Year2
Figure 1 – Source: EV Fuels Gulf of Mexico Oil and Gas Shut-Ins

Recent History:
A good indicator of a storm’s impact on production is the amount of shut-in oil and gas that occurs as a result of producers evacuating personnel and shutting down facilities when facing potentially dangerous weather. Operators are required to report this data whenever such a situation occurs; this data is available on a daily basis in the EV Fuels product of the Velocity Suite.

Figure 1 is a chart depicting yearly shut-in gas totals since 2002. Notice that both years in which shut-in was very high, the Gulf of Mexico saw two major hurricanes make landfall in a relatively short period of time: Katrina and Rita in 2005 and Gustav and Ike in 2008. However, shut-in oil and gas was not the only negative effect of these storms on the natural gas market. In the wake of Katrina and Rita in 2005, several processing facilities were closed down. According to an EIA report, these facilities had an aggregated capacity of 5.25 Bcf/day and an average total scheduled quantity of 3.26 Bcf/day. Many of the afflicted plants remained offline until as late as February of 2006 – six months after the storms made landfall. Natural gas prices after Rita and Katrina hit record highs (almost $16/Mcf). According to Dr. Ehud Ronn of McCombs School of Business, these price increases were a direct effect of the decrease in production (based on the traditional economic principle that a decrease in supply will lead to higher prices). The price for natural gas rose dramatically after the 2005 hurricane season and did not return to its pre-hurricane level until February of 2006.

Hurricane_map2
Figure 2 – Source: EV Energy Map

By utilizing the available historical data, it is possible to see patterns of how location and intensity impact hydrocarbon production. Figure 2 depicts five historical hurricanes: Katrina, Rita, Gustav, Ike, and Isaac. These five storms represent the largest impacts to natural gas production over the last 20 years based on shut-in totals. Atlantic storm track data for these storms shows three similarities: All five paths took the epicenter of the storm through areas of highly concentrated oil and natural gas infrastructure, all five storms achieved at least a Category 1 hurricane designation, and all five storms made landfall.

Daily GoM Production2
Figure 3 – Source: EV Fuels Daily Natural Gas Production

The effects of these storms can easily be visualized. Figure 3 is a chart depicting daily production volumes from the Gulf of Mexico over the last ten years created using the “Daily Natural Gas Production dataset in the Velocity Suite. Decreases in production around serious storm events such as these can be both significant and prolonged. Notice that after both the 2005 and 2008 hurricane seasons, production levels never fully rebounded to their pre-storm totals.

Forecasting this year’s Impact:
Dr. William Gray and Dr. Philip Klotzback of Colorado State University have recently released their annual April forecast for the 2014 Atlantic basin hurricane season. Due to the expected development of an El Niño this year (an anomalous warming of ocean temperatures), the forecast predicts a very low intensity season. They estimate three hurricanes and only one major hurricane, giving this forecast the lowest projected storm totals in the last twelve years. The forecast estimates a 19% chance of a hurricane making landfall on the Gulf Coast which is well below the 30% mark which has been the average over the last century.

CSU April Storm Forecasts2
Figure 4 – Source: Klotzbach, P., & Gray, W. (2014). Extended Range Forecast of Atlantic Seasonal Hurricane Activity and Landfall Strike Probability for 2014. Fort Collins, Colorado: Colorado State University Press.

Forecasting a storm season is difficult, and forecasting how a storm season will impact the production of natural gas and oil is even more difficult. For example, in 2005 and 2008, CSU predicted moderate hurricane seasons in the Atlantic basin. The actual impact of the storms during these seasons was much greater than anticipated. The forecasted number of storms in the Atlantic this season is low, but it only takes one storm to make an impact on production.

Yearly production by Region2
Figure 5 – Source: EV Fuels Operationally Available Capacity Enhanced

It is however, highly unlikely that any disruption to production caused by hurricanes will reach the levels seen in 2005 and 2008. There are two main reasons for this. First, there has been a major shift in where production is taking place. As seen in Figure 5, the total production of natural gas in the United States has risen dramatically in the last ten years, while production from the Gulf of Mexico has declined. According to the EIA, production in the Gulf of Mexico accounted for 26% of US natural gas production in 1997, but by 2012 the gulf was accounting for less than 6% of US production. Because of this shift to inland sources of production, the impact that a storm can have on the natural gas market is reduced, even if the storm forces Gulf of Mexico operators to evacuate rigs and platforms. The second reason storms will influence natural gas production less now than they have in the past is due to advancements in technology and preparation. The infrastructure put in place after Katrina and Rita in 2005 is “much more resilient” to severe tropical weather. Industry leaders and government officials have also been working together to improve hurricane preparations and response plans. If a storm were to force evacuations, the infrastructure would be much better equipped to handle such a problem. The hope is that both the quantities of shut-in gas and the length that the gas remains shut-in will be reduced because of these advancements.

Nothing is certain when it comes to Mother Nature and one storm is all it takes to have an impact on the natural gas market. The importance of preparation and vigilance cannot be overstated. No one knows for certain what the 2014 hurricane season will bring, but everyone in the natural gas industry will be paying close attention to the weather this summer.

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