As Texas recovers from Hurricane Harvey, Florida, Georgia, and the Carolinas are bracing for Hurricane Irma and its potential to disrupt the gas market’s supply and demand.
Irma was upgraded to Category 5 on September 5. As of September 6, it has become the second-strongest Atlantic hurricane by wind speed, and set a new record for sustained speeds. Current models from the National Oceanic and Atmospheric Administration (NOAA) currently predict that it will make landfall in South Florida on Saturday night before traveling through the peninsula towards Georgia and South Carolina. NOAA issued hurricane and storm surge watches for South Florida, and notes that there are increasing impacts to Georgia and the Carolinas.
On the supply side, offshore producers have begun precautionary evacuations. On September 7, BP announced it is evacuating crews from its ThunderHorse platform, which is part of the Okeanos Gathering system that has been producing roughly 300 MMcf/d of gas over the last 30 days. If we look at production around the larger Mobile Bay Offshore area, volumes have averaged approximately 800 MMcf/d in the past 30 days (most of these points were unaffected by Harvey). During Hurricane Hermine in September 2016, Mobile Bay production dropped 551 MMcf/d in the week prior, from 925 MMcf/d on August 23 to 381 MMcf/d on August 30. During the storm, receipts actually climbed 259 MMcf/d between August 30 and September 4, rising from 381 MMcf/d to 633 MMcf/d. Imports into the Southeast were down 1.28 Bcf/d between August 31 and September 3, dropping from 8.10 Bcf/d to 6.82 Bcf/d. Transco accounted for most of the drops, losing 930 MMcf/d during that time period.
On the demand side, Genscape anticipates bearish weight on gas demand, although in the immediate term there could be gains to offset nuke closures. On Wednesday, NextEra announced that it will shut two Florida nuclear plants, Turkey Point and St. Lucie, “long before” the hurricane arrives. Turkey Point, which is south of Miami, has 2,234 MW of nuclear nameplate capacity according to the NRC, but also operates two oil and gas units at 400 MW each and a combined cycle gas fired unit at 1,150 MW. St. Lucie, which is north of Jupiter, has 2,004 MW of nuclear nameplate capacity. Using June 2017 EIA generation data, Genscape estimates that it would take 661 MMcf/d of gas burns to replace the lost nuclear generation from both plants. However, as the storm approaches, it is unlikely that replacement gas burns reach that high as power demand will be lower due to the storm.
As the storm arrives Genscape anticipates gas demand destruction from cooler temperatures, evacuations and shut ins, and potential damage to infrastructure. Since a storm the magnitude of Irma has not hit the Florida/Southeast region in some time, it is difficult to estimate what Irma’s impact will be. The last Category 5 hurricane to make landfall in Florida was Hurricane Andrew in 1992. The last time a Category 3 hurricane or greater made landfall in Florida was Wilma in 2005.
That said, looking at the impact of recent, albeit less intense, storms can provide some indication of the market impact. Last year, between September 1 and 3, Hurricane Hermine crossed over North Florida from the Gulf and traveled along the coast of Georgia and the Carolinas. During Hermine, sample data shows that aggregate demand in the Southeast dropped from 8.09 Bcf/d on August 31 to 6.78 Bcf/d on September 3, a drop of 1.31 Bcf/d. Power demand accounted for 960 MMcf/d of those drops and remained depressed until September 7.
After Hermine came Hurricane Matthew. Between October 6 and 9, 2016, Hurricane Matthew skirted along the Atlantic coast of the Southeast, but was a much weaker hurricane by that time as Haiti took the brunt of the storm and it never made landfall. During Matthew, total Southeast gas demand dropped from 7.76 Bcf/d on October 5 to 6.41 Bcf/d on October 9, a drop of 1.35 Bcf/d. Power demand dropped from 5.60 Bcf/d on October 5 to 4.52 Bcf/d on October 9, a drop of 1.08 Bcf/d, but began rebounding relatively quickly in relation to degree day changes. Mobile Bay production dropped 101 MMcf/d during Matthew, although this was likely unrelated as Matthew affected the Atlantic coast, not the Gulf. Implied imports fell from 7.79 Bcf/d on October 5 to 6.45 Bcf/d on October 9, a drop of 1.34 Bcf/d. This was more evenly spread out between pipelines, with Transco dropping 620 MMcf/d. As imports constitute most of the supply to Southeast, total receipts within these states only fell 60 MMcf during Hermine (from 1.68 Bcf/d on August 31 to 1.62 Bcf/d on September 3) and 50 MMcf/d during Matthew (from 1.51 Bcf/d on October 5 to 1.46 Bcf/d on October 9).
However, Florida gas demand behaved strangely during these hurricanes. During Hermine, total demand only fell 43 MMcf/d between August 31 and September 3, and power demand was actually up 66 MMcf/d during the same time period. This is probably due to Hermine only hitting North Florida. During Matthew, power demand fell from 3.48 Bcf/d on October 5 to 3.22 Bcf/d on October 7, but rose to 3.28 Bcf/d on 10/8. This suggests that despite taking most of the storm along the highly populated Atlantic corridor and 1.1 million people losing power, Florida’s gas plants were very reliable and other power plants in the stack were mostly responsible for the outages.
According to NGI price data, there was a bearish period in FGT Z3 before Hermine and Matthew hit as traders likely anticipated demand destruction, then bullish period immediately after as that demand was recaptured. FGT Z3 Basis fell $0.12 between August 23 and August 31, then rose $0.05 from August 31 to September 2. During Matthew, it fell $0.08 between October 3 and October 6, then rose $0.07 from October 6 to October 10.
However, we must emphasize that due to the trajectory and intensity of Hurricane Irma, and the lack of precedent regarding the natural gas market, it is nearly impossible to predict the extent of its impact. Demand will likely be temporarily depressed and some might of it may be destroyed. Supply from Louisiana, the Gulf, Texas, and Midcon could be backed up if demand is significantly reduced. Genscape will continue to monitor this situation as it unfolds. To receive the latest updates and commentary as Hurricane Irma surfaces the southeast, request a free trial of Genscape’s Natural Gas Services today.