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How Will Hurricanes Affect Natural Gas Prices?

Hurricane activity in the natural gas-producing area of the Gulf of Mexico has had less impact on natural gas prices in recent years than previously. In 2005, Hurricane Katrina pummeled the western Gulf, sending natural gas prices to an all-time high of $1.57 per therm compared to a low of $.637 prior to hurricane season. Since then, hurricanes have had less impact on prices. When Hurricane Ike hit Texas in September 2008, prices topped out at $.807 per therm. Hurricane Ida hit in November 2009 and prices only reached $.467 per therm.

These storms were less powerful than Katrina, but there's another reason why pricing was minimally affected. The U.S. is becoming less reliant on offshore wellhead production and more reliant on onshore shale production or dry production.

Shale Production Now More Cost-effective

Projections indicate that shale gas will grow to 34% of U.S. natural gas production by 2035, compared to 17% in 2008 and 5.9% in 2006. Shale is not a new source of natural gas, but until recently, it has not been an economically feasible method of extraction.

Two new technologies that are decreasing the cost of shale gas production are hydraulic fracturing and horizontal drilling. As a result, the cost is now much lower than for offshore well production. With the current month trading at $.395 per therm, there are still significant margins to be made by shale producers.

Although shale production is less expensive now, it could become more costly if proven to have a negative impact on the environment. At the same time, costs associated with offshore wells are steadily increasing. Older wells produce less volume and newer wells are farther out in deeper water, making them more expensive to operate. New regulations for deep water drilling will also increase costs.

As you reconcile your natural gas budgets for the remainder of the year, keep an eye on hurricane activity in the gas-producing area of the Gulf. Increased activity and higher natural gas prices have been highly correlated in the past. But as we continue to drill new shale wells onshore, the relationship between the two may not be as strong in the future.

This article was written by Darren Novich, President of The Energy Link www.theenergylink.com. The Energy Link provides procurement and risk management services to multifamily management companies in deregulated gas and electric markets. The data in this article was obtained from various sources, including the Energy Information Administration.