On Monday, Aug. 29, Hurricane Katrina slammed into the energy heart of America. Twenty-nine percent of the nation's oil and 20 percent of its natural gas is produced in the Gulf of Mexico. Fifty-foot waves and winds of up to 175 miles per hour sank or severely damaged at least 58 production platforms and drilling rigs.
It is feared that sea anchors attached to free-floating platforms are dragging across the bottom of the sea, causing extensive damage to undersea pipelines. As oil and gas is produced, it is pumped on shore for processing and refining. Last summer Ivan, a less intense Category 3 hurricane, caused undersea landslides that severely damaged collection and distribution pipelines. The damage took almost a year to repair. At this point, the extent of the destruction wrought by Katrina and the time needed to repair it remains unknown.
Natural GasThirty-four percent of the Gulf's natural gas production is currently "shut in." This lost production significantly reduces the amount of natural gas that can be stored to meet peak winter demand. Storage is a natural gas prices shock absorber. When storage is high, prices tend to stay moderate, even during cold winters. When storage is low, prices could spike during the first cold snap of the year.
Unlike natural gas produced on-shore, gas from the Gulf must be cleaned before it reaches consumers. The U.S. Energy Information Administration (EIA) revealed that two major natural gas processing plants will be off-line for repairs for up to six months. The inability to properly process gas limits the amount added to storage.
Unlike oil, we have no strategic natural gas reserves to tap during a crisis to keep supply and demand in check. The EIA projects the wellhead price of natural gas will reach $11.05 per 1,000 cubic feet sometime in the fourth quarter of 2005, up from $5.92 (59 cents/therm) during the same time last year. The EIA also warned that an extremely cold winter could drive prices much higher.
Even before Katrina, natural gas production from existing wells was declining 30 percent per year. In 2001 production peaked and demand out-paced supply. Today the average new gas well is reported to only produce one-third as much gas as in 1973. From here on, no matter how many wells are drilled, production will not likely keep up with demand.
Heating Oil PressureForty-seven percent of the nation's oil is refined in the states surrounding the Gulf. Four refineries with the capacity of producing 880,000 barrels of oil per day are so severely damaged it will take months before they are back on line. Most refineries shut down for weeks to do much needed annual maintenance each fall. However with 5 percent of the industry's re-fining capacity down, some refiners may decide to defer maintenance. Refineries that go off-line for maintenance or fail, due to the lack of it, could cause immediate heating oil and gasoline price increases.
Even before Katrina, U.S. refiners could only meet 88 percent of this country's refined oil demand. Since the last oil refinery was built in 1976, an additional 50 million cars have started rolling on U.S. highways. Even if crude oil supply was not a problem, limited refining capacity creates a bottleneck that magnifies any increase in demand or reduction in supply.
The EIA projects the price of retail home heating oil to reach $2.46 this heating season, up from $1.80 last winter. Last year's price was 34 percent higher than some consumers paid in the winter of 2003-2004.
Hedging WoesMany companies that supply natural gas and heating oil to residential consumers use price hedges. Hedging allows the supplier to buy a quantity of natural gas or oil for a fixed price for future delivery. Because of unstable fuel prices this year, some firms wanted to wait until demand subsided this fall before they locked in prices.
Katrina couldn't have come at a worse time for consumers whose energy supplier didn't already have hedges in place. This winter prices could vary widely in the same region depending on percentage and price of the energy hedged.
Katrina: A Wake-Up CallIf one thing positive could come from this terrible disaster it is: Energy now has this country's full attention. HVAC contractors are not only in the ultimate position to help consumers lower their home heating-cooling bills, they also have the privilege and obligation to help America conserve its remaining energy resources.
Steve Howard is the founder of The ACT Group. He can be reached at either 800-515-0034 or firstname.lastname@example.org.
Publication date: 09/26/2005