Very little gas changed hands on Friday as many traders were displaced by the hurricane, while others stood by watching and waiting for some news about the impact on Gulf production and operations. Most business was done on Thursday for a four-day period (Friday-Monday). There was some choppy intraday business, and, aside from high quotes in the Northeast and Gulf Coast, prices generally reflected the weakness of the futures market on Friday. Near month futures fell 46.6 cents to end the day at $12.324.
“My feeling is that this sell-off on Nymex is just people taking profits because the storm has turned a little north and weakened and they are thinking we may not have the facility damage that many expected from a stronger hit near Galveston,” said a Midwest marketer. “But in reality it is still going to hit the production area really hard. My expectation is that Nymex will have to go higher, whether that is the October contract or the November-to-March contracts, we’ll have to wait and see.
“The big questions remain: how long before this production returns and what happens to processing and liquids, which also will impact natural gas supply,” he said. “The cumulative production losses already are quite high. But storage is continuing to rise. The answers to these questions could be the difference between $10 and $20 gas this winter. If we decide it is a short-term problem with still a lot of pain, we are probably looking at $10. If we decide that some facilities will be down for a long period, I don’t know where the price top is.”
The Minerals Management Service (MMS) reported that 7.2 Bcf/d of offshore Gulf of Mexico natural gas production and 1.49 million bbl of oil production was shut in as of Friday morning and 634 manned platforms and 90 manned rigs were evacuated. The evacuations amounted to about 77% of the total Gulf platforms and 67% of the rigs. But, it’s hard to imagine that anyone would remain offshore during a hurricane of Rita’s magnitude.
Golden-CO-based consulting firm Bentek Energy, which tracks gas flow nominations into the nation’s pipelines, said total Gulf production shut-ins, including flows onshore and offshore Texas and Louisiana, reached 10.2 Bcf/d on Friday up from about 9.9 Bcf/d on Thursday. Gas production flows into Gulf pipelines on Aug. 26, prior to Katrina, totaled 13.8 Bcf/d.
Only 3.64 Bcf/d of gas was scheduled to flow in the Gulf Coast region on Friday, Bentek said. As expected, gas production flows were down sharply on all the major pipeline systems.
Cumulative production shut-ins since Katrina now stand at 143 Bcf, Bentek reported. Bentek Energy President Porter Bennett noted that when cumulative shut-ins reach more than 180 Bcf, and that could happen within a couple more weeks, that would equal about “half of the total output of the Powder River Basin [in Wyoming] for an entire year. That’s a lot of gas.”
Despite the continuing shut-ins, however, the industry appears to be maintaining relatively high storage injections. “As long as storage injections can continue to keep pace and this production comes back online in the short term, prices may not be that bad this winter,” Bennett said. The winter strip (November-March) remained near $13.50 on Friday.
According to RigLogix, there are 534 unmanned platforms and 215 manned platforms in Rita’s projected path. Overall, those rigs, pre-Rita and pre-Katrina, have a crew capacity of 3,876 personnel (see related story). The West Cameron, south of Lake Charles, LA, “is likely to be one of the areas hardest hit by Rita and will most likely see some of the worst damage to its offshore installations,” the rig data services company said. “This area is one of the most actively producing and explored areas in the Gulf of Mexico. It has the third highest number of unmanned offshore platforms and the fifth highest number of manned platforms of any area in the GOM, with a total of 292 unmanned and 88 manned platforms.”
“This is an area that hasn’t been hit by a major hurricane in a while and there could be significant damage,” a Northeast utility buyer said. “The hurricane also could weakened significantly and spare us the market turmoil. We won’t know probably until early next week.”
There was no daily natural gas cash trading on ICE Friday and very little cash trading elsewhere. Prices were down about 25 cents at AECO in Alberta on the Natural Gas Exchange. “We’re just doing a few small forward transactions,” said a Chicago trader. “We are entering bidweek on Monday and that could be very ugly. There will be a lot of ambiguity. I think prices will continue to be very volatile and I think trading will be quite thin. It’s very difficult to assess how we are going to trade through the week right now given the shut-ins. I would not be surprised if we open up Monday a dollar on either side of where we are now on Nymex.”
One, perhaps unforeseen, side affect of the Gulf Coast shut-downs was the impact on liquids flows and the ripple affect on gas processing and natural gas supply. Liquids were backed up significantly on Friday. Gulf Coast refiners and other liquids handlers were shut down. Duke Energy Field Services (DEFS) said Thursday that it would shut down its natural gas gathering and processing facilities in Mobile Bay, Houston and in South Texas because they were in the projected path of the hurricane. Many other processors also were shut down.
Duke’s other gas gathering and processing facilities in West and Central Texas, and southeastern New Mexico also closed because refineries and fractionators along the Gulf Coast affected by the hurricane discontinued operations, resulting in a lack of natural gas liquids takeaway capacity.
One of the results was that gas was entering the pipeline grid with much higher hydrocarbon dew points, causing problems for distribution companies and pipelines.
“Public Service Co. of New Mexico has told some shippers that they can’t bring their gas into the system because it has too high a hydrocarbon dew point,” said a Rockies producer. “Some folks in West Texas are essentially getting shut in. Duke has a liquids line that goes to Mount Belview, TX, and that has been shut down. Duke also has shut down a lot of processing.
“We’ve seen some problems with production in the Permian Basin because of this liquids back up. Probably the worst is yet to come,” he said. “Some of the liquids lines that feed into Texas may have to reverse flows to the Midwest for a few days. That’s supposed to have an impact on refining. The ripple effect from this hurricane is pretty startling.”
Williams Field Services released a notice Friday saying that its midstream operations have contingency plans that will include altering the operations of their processing plants to minimize recovery of ethane and propane, maximizing fractionated liquids storage and takeaway capacities at all plants and seeking higher hydrocarbon dew point limits from interstate pipelines. El Paso also said that its pipeline systems would attempt to accommodate some higher hydrocarbon gas, but operations would not allow much variation.
“If everyone kind of bends the rules a little bit here, then who knows, we could be okay,” the Rockies producer said. “But this could have quite a ripple effect. Hopefully it will clear up quickly. Of course we won’t know until next week.”
A Florida buyer said most utilities and other end-users bought gas Thursday for four days and were nervous about it actually showing up. “We’ve had about one-third of our flows cut,” she said. “It’s humid, but not too hot — low-80s and probably with a high of 90 today, but we’re getting some cloud cover and a little rain. FGT is flowing as much as possible, but we have had lots of cuts. It’s manageable so far because we padded for about what we’re seeing. We were looking for some more serious cuts and those could still happen.
“We haven’t had to switch to oil yet, but I don’t know what will happen tomorrow,” she said. “Our only option would be oil if we can get it. Not all of our plants burn oil. We may take the penalty if we have to and just burn the gas.”
Bentek reported the following shut-ins totals on Friday: Florida Gas (175), Sonat (952 MMcf/d), Transco (1,519 MMcf/d in Louisiana and 736 MMcf/d in Texas), Tennessee (1,881 MMcf/d in Louisiana and 27 MMcf/d in Texas), Destin (784 MMcf/d), Sea Robin (331), Trunkline (553 in Louisiana and 64 MMcf/d in Texas), Tetco (402 MMcf/d in Louisiana and 23 MMcf/d in Texas), Mississippi Canyon (511), Columbia Gulf (168 MMcf/d in Louisiana and 8 MMcf/d in Texas), Garden Banks (421), High Island (270 MMcf/d in Louisiana and 377 MMcf/d offshore Texas), Gulf South (120 MMcf/d Louisiana, 36 MMcf/d in Texas), Texas Gas (79), Stingray (183), Nautilus (131), Chandeleur (120), Gulfstream (39), Tetco’s Venice Lateral (219), NGPL (95) and Northern Natural MOPS (78).
Bentek said based on delivery point nominations in the South there appeared to be sufficient demand losses Friday due to evacuations and business closures to offset the Gulf supply shut ins, and with the much higher prices during the week further demand could be reduced.
Consultant Ron Denhardt said Friday that based on his estimates about 1.1 Bcf/d of fuel switching capability to distillate fuel oil and 1 Bcf/d of fuel switching capability to liquefied petroleum gases could be available if gas prices stay at these levels.
“During the heating season distillate fuel switching capability is 0.6 Bcf/d. Thus with natural gas prices close to distillate fuel oil and LPG (currently $13 to $14 per MMBtu), up to 2.7 Bcf/d (400 Bcf over the heating season) of gas consumption could be lost because of fuel switching,” Denhardt said. “Actual switching is likely to be less than this because of logistics, environmental restrictions and other considerations. However, there would also be demand reductions due to conservation, plant shut-downs, and process adjustments.
“Thus, it seems likely that, when gas prices reach the level of LPG and distillate fuel oil, the market would reduce demand enough to have adequate gas in storage at the end of the heating season. However, extremely cold weather could cause prices well above these levels.” The hurricane season also lasts through October, he noted.
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