Analysts say fear of gas shortages this winter is misguided, but there are some concerns about managing natural gas deliveries in light of the extensive damage caused by Hurricane Katrina on El Paso Corp.’s eastern pipelines, several Gulf Coast gas processing plants and production facilities.

Energy Secretary Samuel Bodman and Interior Secretary Gail Norton, touring the Gulf Coast region on Tuesday, told reporters that gas shortages are possible because of the slow recovery to damaged production and related facilities both on and offshore.

“‘Shortage’ is a term that economists tend not to use,” said energy consultant Ron Denhardt of Strategic Energy and Economic Research. “It’s really a question of what price is required to balance the market.

“The price will be higher and will destroy some demand so there won’t be a shortage. Some people will be priced out of the market.”

That’s already happening, he noted. The futures market, which basically represent the best guess of everyone in the market, currently has put prices near $12 for January. Prices at that level will prevent some industries from making a profit and others from staying in business. If prices reach the level of distillate, said Denhardt, another 2.5 Bcf/d of demand destruction could occur.

“Let’s say we lost 2 Bcf/d of production and we had to destroy that much [demand]; what would it take? Well, we would have to get prices above distillate, and you could kill about 1 Bcf/d for fuel switching in the industrial sector and probably at least 0.5 Bcf/d in the electric power sector during the heating season,” he said. “That’s 1.5 Bcf/d that you could make up, and LPG prices (propane, butane) aren’t that different than distillate right now, so there’s another 1 Bcf/d of switching there.” Distillate is around $14.50/MMBtu.

“That doesn’t even take into account what response you are going to get from people shutting back thermostats or even being driven into bankruptcy or not getting enough credit to buy gas.” He said many companies are facing credit issues because prices have almost doubled. “We are going to have a huge amount of demand destruction at these prices.”

In fact, Denhardt believes that it is likely that the market already has overshot the mark for January. He expects prices at some point this winter to fall below where the market is currently.

“Prices tend to overreact to situations until they figure out what is going to happen. Unless shut ins are a real surprising amount or we get a real cold winter, what is likely to happen is that we will destroy enough demand that when we get into the latter part of winter the market will look kind of soft relative to what the current forward market looks like,” he said. “But there are just so many ‘ifs’ right now. It is hard to say exactly what is going to happen.”

Last year by mid December there was still about 600 MMcf/d of gas shut in from damage due to Hurricane Ivan. Many believe the damage from Katrina is more severe. Denhardt predicts there will be more than 1 Bcf/d shut in or curtailed through the end of the year. The Minerals Management reported Wednesday that 3,518.14 MMcf/d of gas production remained shut in (see related story).

Dynegy already has said that two processing plants that had throughput of 2,340 MMcf/d last year will be out of service for three to six months. Some of the gas production behind those plants undoubtedly will be rerouted to other processors in the region but it is not clear how much. “It’s worth a huge amount to know the answer to that question,” Denhardt noted. “It looks to me like it can’t be more than 2 Bcf/d. But is it more than 1 Bcf/d? I don’t know.”

The other big uncertainties involve the two El Paso pipelines, Southern Natural (Sonat) and Tennessee Gas, which have suffered extensive damage. “Someone told me that one of the damaged Tennessee lines was moved 1,500 feet,” said Denhardt. “Last year it was Sonat that was pulverized, and the same general area got it again this year. Sonat’s damage last year was a big piece of what was shut in through the end of December.”

Tennessee Gas Pipeline Update

In a letter on Wednesday to shippers, Larry Smith, Tennessee’s vice president of commercial operations and Jay Dickerson, vice president of marketing, development and asset optimization, provided a comprehensive summary of pipeline damage assessment, repair schedules and other information.

“We have accounted for everyone in the Gulf Coast area and have established temporary housing for them and their families. Despite their personal circumstances, our team is working very long hours under difficult conditions to assess damage and to recommence service on our affected facilities as quickly as possible,” they said.

“Due to extraordinary efforts by many parties, we are getting a better picture of exactly which and to what extent our facilities were impaired and what repairs are required before the approximately 700,000 Dth/d of currently shut-in gas flows. As you would expect under these circumstances, our efforts to assess damage and begin repairs have been effected by the requirements of relief agencies such as FEMA, high water levels, road access and downed power lines.”

To date, they said Tennessee knows the following:

They also said Tennessee is working with Dynegy on the Yscloskey processing plant, which is on Tennessee’s 500 line. “We are working closely with the plant operator and others to consider short term processing alternatives for the 500 line.

“Many customers have accessed supplies on our 100 and 800 lines which collectively have nearly twice the capacity which had been flowing on our 500 line pre-Katrina.”

Southern Natural warned shippers on Wednesday that available pipeline capacity in North Louisiana is being limited by its efforts to ensure there is enough gas in the storage fields on its system to maintain deliveries this winter. It also told Bear Creek Storage holders (Bienville, LA, interconnect) that they may be called on to provide firm storage withdrawals during the winter to maintain pipeline deliveries.

Southern still has 550 MMcf/d of gas officially shut in upstream of the Toca Compressor Station. It recently discovered damage to pipe supports at levee crossings north of Toca.

“At this time, we believe that those repairs can be completed without impacting flows,” the company told shippers Wednesday. “On Saturday, our personnel were able to access the Toca Compressor Station for the first time since the hurricane. Based on a visual inspection, compressor units, liquids handling facilities and other equipment at the station did experience damage due to flooding. However, the full extent of the damage will not be known until initial assessments and detailed assessments can be completed. The initial assessments are expected to be this weekend.”

Assessments of Southern’s offshore facilities are still being completed. Damage was discovered at the Main Pass 298 junction platform last week. A survey boat is on site conducting an underwater survey of the risers and structure, which is expected to be completed later this week, the notice to shippers said Wednesday. Some structural damage already has been identified. Detailed assessments of other above water offshore facilities is expected to be completed by the end of the week.

“Based on the information that we have currently, we still are not yet aware of any significant damage to our offshore pipelines other than the riser damage posted previously,” Southern said. “However, resumption of flows upstream of Toca to pre-hurricane levels will be impacted not only by the condition of our facilities, but also could be affected by damage to facilities owned by third parties, including producers and processors.”

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