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Katrina Energy Worries: Shortage of Natural Gas Feared

Posted on: Tuesday, 20 September 2005, 09:00 CDT

A significant chunk of production remains offline in the wake of Hurricane Katrina.

The loss of natural gas production in the Gulf of Mexico has raised concerns about shortages this winter.

The gulf accounts for about 20 percent of U.S. natural gas production. More than two weeks after Hurricane Katrina swept through the gulf, over one-third of that output remains shut in, the federal Minerals Management Service says.

Unlike oil, a major loss of natural gas production cannot be offset with more imports because the market for gas is domestic, not international.

To meet winter demand, the industry must store about 3.2 trillion cubic feet of gas by Nov. 1, the start of the winter heating season. With full recovery from the hurricane still months away, reaching that mark may be a challenge.

"I think we've got a 50-50 shot, and that's if nothing else goes wrong," said Stephen Reynolds of Energy Strategies Inc., a Tulsa- based consulting firm. "If there are no more interruptions and they start bringing more of this production back on line, we should be all right."

U.S. gas supplies, at 2.67 trillion cubic feet, are 3.4 percent lower than a year ago, according to the Energy Information Administration, the statistical arm of the Department of Energy.

A spokesman for Oklahoma Natural Gas Co., the state's largest gas utility, said gas supplies will be adequate to meet the demand of ONG customers this winter.

The utility secures virtually all of its supplies from Oklahoma producers and marketers. None of it comes from the Gulf Coast, said spokesman Don Sherry.

"The supplies are already committed to us," he said.

ONG, which provides gas to 811,000 customers, is more concerned about skyrocketing prices.

About 52 percent of the utility's winter supply will be acquired at market prices. ONG hedged the rest of its winter supply at fixed prices.

Last week, the EIA estimated that Katrina's impact on gas supplies and prices could cause home heating costs in the Midwest to increase as much as 71 percent this winter.

"We're already seeing that" in the futures market, Reynolds said. "Is that realistic? Yes."

The December contract for natural gas closed Tuesday at $11.71 per 1,000 cubic feet (mcf) on the New York Mercantile Exchange. Last December, the trading range was between $6 and $7.

Gas prices have more than doubled in the past year. Gas for October delivery closed Tuesday at $10.63 per mcf, down 13 cents, on the Nymex. A year ago, the price closed at $4.92.

Prices could move higher because the hurricane season is far from over, Reynolds said.

"If storage levels are good and there is a threat of a hurricane, the price will go up regardless of storage," he said.

ONG customers have until Oct. 24 to enroll in the utility's voluntary fixed-price plan, which allows them to lock in their gas costs at a rate of $8.393 per mcf for 12 months beginning in November.

That's $2.24 below Tuesday's closing price of $10.63.

"Clearly, there's upward pressure on prices," Sherry said. "All indications are that we are going to see higher prices this winter."

Russell Ray 581-8380

russell.ray@tulsaworld.com

Source: Tulsa World

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