The calm before the storm(s)
Last year’s Atlantic hurricane season was the most active since accurate record-keeping began in 1944. There were 27 named storms, including 15 hurricanes. The paths of 5 major hurricanes passed through the Gulf of Mexico significantly disrupting oil and natural gas production. Here are preliminary predictions for storm-related shut-in production for 2006 based on the most recent modeling.
The most severe tropical storms and hurricanes tend to strike in the late summer or early fall, as Katrina, Rita, and Wilma did last year. However, hurricane season technically begins on June 1 and runs through the end of November. So, long before Tropical Storm Alberto became the first named tropical storm of the 2006 season on June 11, analysts in both the public and private sectors have been working on forecasts, potential impact analyses, and contingency plans for this year’s hurricane season in the Atlantic basin, which includes the Caribbean Sea and the Gulf of Mexico.
A new report from the Energy Information Administration (EIA) released June 6 entitled “The Impact of Tropical Cyclones on Gulf of Mexico Crude Oil and Natural Gas Production” is now available from that agency (http://www.eia.doe.gov/emeu/steo/pub/pdf/hurricanes.pdf).
The report examines the historical impacts of tropical cyclones (including tropical depressions, tropical storms, and hurricanes) on Gulf of Mexico crude oil and natural gas production over the period 1960 through 2005, and on refinery operations over the past 20 years. Then, using the seasonal hurricane forecast published by the National Oceanic and Atmospheric Administration (NOAA) in May 2006, together with an estimated historical relationship between tropical cyclones and production impacts, EIA generates possible ranges for total shut-in production during 2006.
Shut-in production considered
The report emphasizes the uncertainty of any forecast of shut-in production, due in part to the difficulty of predicting whether Atlantic tropical cyclones will enter the Gulf of Mexico and threaten the oil and gas producing region, as well as to the extent of their potential damage.
In May of each year, the NOAA produces an outlook for the upcoming hurricane season in the Atlantic basin. As the season progresses, NOAA fine-tunes its projections. Those projections are driven primarily by their forecasts of the seasonal Accumulated Cyclone Energy (ACE) index, which measures the collective intensity and duration of all tropical named storms and hurricanes in the Atlantic.
For 2006, NOAA currently expects the seasonal Atlantic ACE index to range from 118 to 179 (135% to 205% of the normal level), corresponding to an 80% chance of an above-normal hurricane season in 2006. Although that forecast predicts a very active hurricane season, it is considerably lower than the Atlantic activity observed last year, which had an ACE index about 280% of the normal level.
In addition to the ACE projections, for the 2006 north Atlantic hurricane season, NOAA predicts 13 to16 named tropical cyclones, with 8 to10 becoming hurricanes, of which 4 to 6 could become major hurricanes (Category 3 or higher).
The Gulf of Mexico region is an important source for US production of crude oil and natural gas. In 2004, crude oil production from the federally-administered Gulf of Mexico Outer Continental Shelf (OCS) fields was about 27% of US total production, and Gulf natural gas production was about 20% of the US total.
The Gulf Coast States of Alabama, Louisiana, Mississippi, and Texas also contribute significant onshore and state-administered offshore oil and natural gas production. The Gulf is also an important refining center, with the Gulf Coast States accounting for more than 46% of US total crude oil distillation capacity.
Modeling impact of storms
Seasonal hurricane-related disruptions to oil and natural gas production are difficult to predict, primarily due to the uncertainty involved in predicting the location and intensity of future tropical cyclones. However, an analysis of historical impacts provides some insight into the range of potential effects given a seasonal hurricane forecast. EIA has developed two models using the NOAA seasonal Atlantic predictions to form expectations of the range of annual crude oil and natural gas shut-in production.
The first model is based on the forecast Atlantic basin ACE index, while the second model uses the predicted number of Atlantic tropical cyclones. The equations are estimated based on seasonal tropical cyclone activity and Gulf OCS production records from 1960 through 2005.
Those two models allow us to produce an estimate of the expected Gulf ACE and an estimate of expected impact on crude oil and natural gas production from the NOAA Atlantic ACE forecast range. However, and perhaps more importantly, those estimates are not official forecasts, but instead only analysis intended to help us better understand the correlation between hurricane activity and shut-in production.
Latest projections
Based on NOAA’s May 2006 projections for the 2006 hurricane season and the historical relationship between tropical storm activity and production disruptions between 1960 and 2005, total reductions in crude oil and natural gas production from the Gulf of Mexico OCS due to tropical storm activity in 2006 are expected to range from 0 to 35 million barrels and 0 to 206 billion cubic feet, respectively.
NOAA emphasizes that its May hurricane outlook is based on climatological conditions that are still evolving. An updated hurricane outlook will be issued in August, when conditions favorable for hurricanes are more predictable.
There is a possibility that NOAA could substantially revise its projections for seasonal hurricane activity, as in 2005, when the May outlook, projecting hurricane activity for 2005 somewhat lower than what is currently projected for 2006, was revised upward substantially in August, prior to Hurricane Katrina.
Actual storm activity in 2005 then ended up close to the upper bound of the revised range. If a similar situation occurs in 2006, EIA estimates of shut-in crude oil and natural gas production due to tropical storm activity would be significantly higher.
Impact on refineries
There is no long-term data source that tracks the impact of hurricanes and tropical storms on the refinery sector. Refinery utilization rates are generally affected by overall capacity availability relative to demand, forced outages, and seasonal maintenance and product turnaround cycles, as well as by hurricanes.
Despite the inherent difficulty of isolating the effect of storms on refineries, EIA has developed a simple index of normalized capacity utilization for refineries in the Petroleum Administration for Defense District (PADD) 3, which encompasses the Gulf Coast. The figure below displays the monthly normalized index (monthly utilization rate divided by the average January-through-June utilization rate) for PADD 3 refinery capacity for the months of July through October, when disruptions related to tropical storms and hurricanes are most likely to occur.
The index highlights the uniqueness of the refinery damage experienced in 2005. The vast difference between refinery damages due to Hurricane Ivan in 2004 and Hurricanes Katrina and Rita in 2005 highlights the importance the path of the storm can have on the impact to refineries.
Forecast limitations
Although the memories of Hurricanes Katrina and Rita last fall are still fresh, it’s important to recognize that those storms were each very unusual in terms of their impact on the oil and gas industries, and even more so because they occurred only a month apart. Also, NOAA forecasts Atlantic tropical cyclone activity, but does not attempt to predict how many of those storms will reach the Gulf of Mexico, much less where exactly they might strike the coastline.
Furthermore, EIA’s estimates of potential impacts on oil and gas production are based on statistical relationships from historical data, including last year’s record shut-ins. So US consumers (and especially Gulf Coast residents) needn’t assume the worst, but should just be aware that, even on a beautiful summer day, storm clouds might be just over the horizon.
This information was excerpted from an Energy Information Administration report released on June 7.