Hurricane Season Has Many Speculating over Potential Oil and Natural Gas Supply Disruptions and Higher Energy Prices by Anne-Marie Fleming

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, http://www.NaturalGasStocks.com
June 2006
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

Source: NOAA

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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About the Author

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.