Rita Watch 6 - Andrew Weissman Interview

MediaRitawatch 6: Natural Gas Expert, Andrew Weissman

David Room Interviews Andrew Weissman

Rita Watch 6

David Room: This is David Room, for Global Public Media. On the Rita Watch. Interviewing Andrew Weissman, fouunder and Chairman of Energy Business Watch. September 23, 2005. Before Hurricane Katrina, what was your assessment of natural gas conditions this winter?

Andrew Weissman: My belief was; that we were likely to be experiencing record high prices, this winter. That we had already experienced a severe, natural gas price spike this Summer, for the first time ever. We ended the Summer, with significantly less natural gas in storage, than last Summer. Production in the United States is declining, compared to last year. And so, before we had any significant hurricane damage this year; all of the conditions were present, for extremely high prices this Winter.

David Room: To what extent, is the impact of Katrina on natural gas markets understood?

Andrew Weissman: My belief is that even though natural gas prices have gone to all time highs, that the market is still underestimating the severity of the problem we face. And, the level which prices are likely to rise, before this Winter is over.

David Room: What was the impact of Hurricane Katrina, on the United States' natural gas infrastructure?

Andrew Weissman: Well, it's been a pretty severe impact. And, it's a multi-level impact. Hurricane Ivan, last year; at the time, was by and far away, the most destructive Hurricane ever. It caused the loss of natural gas production, of about 178 billion cubic feet. Which at the time; was by far, the largest loss ever. Hurricane Katrina, has already caused a loss, which is beginning to approach that level this year. And, it's clear that the losses from Hurricane Katrina, have just begun. Over the next several months, there are likely to be continuing losses from Hurricane Katrina. That'll bring the total losses from Hurricane Katrina, to at least one and a half or perhaps two times the total losses from Hurricane Ivan, than last year. So, we are already in a pretty deep hole, than before Hurricane Rita began approaching the Gulf of Mexico.

David Room: Going back to Hurricane Ivan, to what extent had the loss production been brought back online?

Andrew Weissman: In the case of Ivan; the direct loss of production, was relatively limited. The primary effect of Hurricane Ivan, was to cause damage to the pipelines that bring gas from the offshore platforms onshore. And essentially, by the Summer; most of the platforms that had been damaged, had been repaired. And, most of the pipelines that had been damaged, had been fixed. At least with temporary patches.

David Room: Speaking about Hurricane Katrina. What is the extent of damage to platforms in the Gulf? And, to the pipeline system that brings natural gas to shore?

Andrew Weissman: Well, there really three different categories of damage from Hurricane Katrina. And, there's extensive damage, in all three categories. There have been approximately 57 or 58 platforms, that have either been lost or seriously damaged. And, there are major losses of production, that are associated with those platforms. Secondly, there's significant damage to the pipelines. And thirdly, there also has been significant damage to some of the onshore natural gas processing plants. And, just to comment on the second and third categories. With respect to the pipelines; we don't really know for sure yet, how extensive the damage might be to the pipelines.

There's a Director of Mining and Mineral Services, who's commented; that he doesn't believe that it's been as extensive, as the damaged caused during Hurricane Ivan. But, quite frankly, I'm not sure we really know yet for sure, the process of inspecting the pipelines in the areas that have suffered the heaviest damage. It really has just begun. And, at least anecdotally; there have been quite a number of reports that are fairly troubling. That suggest, that the damage to the pipeline system in the Mississippi Canyon, and South Pass and Main Pass areas, may be fairly extensive. And, until there have been detailed inspections; I'm not sure we'll really know for sure, how extensive that damage is.

Some of those inspections had been scheduled to start this week. But, because of Hurricane Rita; they've now been pushed back. And, with respect to the processing plants; that's also very serious problems there. There are three processing plants, that have suffered significant damage, as a result of Hurricane Katrina. These are plants that are needed to basically remove all of the impurities from raw, natural gas; before it's injected into the interstate pipeline system. And, at least two of those, potentially could be out of service for many, many months.

Thers's some possibility that there's a work-around, that could be developed; to substitute for some of the processing plants, that have been damaged, on a temporary basis. But, even if that works; we probably are going to be missing one to one and a half BCF of processing capability, for quite possibly four to six months. And, there's some real possibility, that one of both of the most severely damaged plants, may be complete losses. So, that there very extensive damage - kind of all three segments of the chain, that were affected by Hurricane Katrina.

David Room: Based on Hurricane Rita's current trajectory; what can you tell me about the threat to diesel refineries. And, to the U.S. natural gas infrastructure?

Andrew Weissman: Well, it's very, very troubling. With respect to refineries; the market has been breathing a sigh of relief, over the last couple of days. Because, every indication is that the Houston shipping canal is not going to suffer a direct hit, as a result of Rita. And, that's definitely good news, but only in relative terms. Because, even with the shift in direction that seems to have occurred in the last 24 or 30 hours or so; Rita is still on a path, where it could cause potential damage to refineries with more than a million barrels a day of refining capacity.

And, that's potentially - just a near disaster. It's really one of the most serious problems that we face. Really before Katrina even hit, we were facing a very serious problem. That, at least in my judgment, was being significantly underestimated by the market. We really had reached a point by late this Spring, where essentially demand for refined products in the United States, was outstripping the total production capacity of U.S. refineries. And, what we were seeing is; that the refiners were trying to respond to the shortage of diesel fuel and heating oil, by tilting production in that direction. And, to some degree, they were able to succeed in rebuilding inventories of diesel fuel and heating oil. But, only at the cost of not producing anywhere remotely near sufficient amounts of gasoline. And so, even before Katrina struck; gasoline inventories declined about 30 million barrels, between early March and the end of August.

Which is just an astounding decline. We've never experienced anything nearly remotely like that; at any time previously. And, essentially what we were seeing is; we just did not have enough total refining capacity, to simultaneously produce all the gasoline, diesel fuel, heating oil, and jet fuel. We needed to satisfy all four of those markets at once. And so, we couldn't afford to lost any existing refining capacity, for a very extended time period.

If you want to think about in terms of days of lost refining capacity. We've already lost the equivalent of all refineries in the U.S. being shut down for five or six days, due to Katrina. And, by the end of the year; we probably will have lost something like the equivalent of every refinery in the U.S. being shut down, for ten or eleven or twelve days. And now, we have this new Hurricane coming along. That has the potential to have just as much impact; even though, it's no longer aimed at Houston shipping channel. If it hit the Houston shipping channel - I don't even want to think about how severe the problem might have been. But, even with the current trajectory, we could easily lose another five or seven or ten days equivalent of total U.S. refining capacity. And again, we just had no margin to spare. And so, where we're at; is really two fold.

One, with that kind of loss of refining capacity; we're likely to see severe increases in gasoline prices, there's been a release of gasoline from European reserves. That's been helpful. That's helped to keep prices down in the short term. But, the amount's that's available from European reserves, is very limited. And, that's really only going to hold us over for a short period of time. And so, at this point, it seems a very high likelihood that gasoline prices are going to go much higher.

And, secondly; what that's going to do in term is, that the refiners are going to have to tilt their production heavily towards gasoline. Which virtually guarantees that heating oil prices are going to go way up. Which in turn, is going to have an effect in the natural gas market. And, in terms of natural gas - while the shift in Rita took it away from the Houston shipping channel; it moved it right towards the heart of the natural gas producing region in the United States. And, so clearly, there is a potential at this point, for really severe - almost catastrophic damage to the remaining natural gas production capability in the Gulf of Mexico. And, frankly at this point, all we can really do is cross our fingers, and hope for the best.

Because, there is a great deal of production capability, that has been right dead center in the eye of the storm today. And, even more that's in the area - just to the 30 to 70 miles to the immediate East to the eye of the storm today. To which is where, in it's highest waves is located. And, we can't afford to lose any significant portion of production capability. And, there's no question that it is as severely as it is today. We won't know - probably until next week; how extensive the damage may have been. But, there's a real potential - that, in the last 24 hours; that there has been a devastating blow to the remaining off shore production in the United States. It's a very sobering time. And, the risk to the natural gas and energy supplies to the United States, are really quite severe.

David Room: Can you describe where Hurricane Rita is headed. And, how that corresponds to natural gas production facilities?

Andrew Weissman: Hurricane Rita is shifting back and forth in directions a number of times, over the course of the last several days. And, it's not at all uncommon - when you look at the size of the storm, is really so huge, that really what we're talking about is that the eye of the storm has shifted by 50, 75, 100 miles. Which, is really within the broad contours in the storm itself. And essentially, at a certain point; it was aimed directly at Houston and the Houston shipping canal. Directly at Galveston. Which lies South of Houston. Sort of is in front of Houston, right on the Gulf of Mexico. And, if it is hit there - if it had followed that trajectory; there are a huge number of refineries there.

There's almost a quarter of the total of refining capacity of the United States, is clustered in that area. And, there are a large number of chemical plants. And, there are a large number of power plants. And so, there was just an enormous portion of the country's refining capacity, that potentially was exposed. But, if it had followed that path; it would have been a little bit South of where the natural gas and oil production platforms were clustered.

There may have been a few oil and natural gas platforms, that would have been in the direct path of the Hurricane. But, for the most part; it really would have been, to some substantial degree - it would have been bypassing them. And, what's happened instead now, is that the Hurricane is aimed much closer at the Texas, Louisiana border. Towards towns like Beaumont, Texas. Or, Port Arthur. And still, there are major refineries in that area, as well. They're just not as many. They're almost as many refineries there, as there were around New Orleans. They're just not as many as there were around Houston.

And, so the risk, in terms of potential losses in refinery production, are still huge. But, what the shift also means, is that the Hurricane is now going right through the Central to Eastern portion of where all the offshore platforms are clustered. So, it's really - it's sort of taking dead aim at perhaps as many clusters; which includes as many as 25 to 35 percent of all the platforms in the United States. And, just as significantly as we're seeing so vividly with Hurricane Katrina; the area that suffered the most really devastating damage, was not as much New Orleans. Even though the devastating damage there was severe. The damage there in New Orleans, was mainly because the levees broke. Rather than from the wind, per se.

The areas that have the most severe damage from the wind, was the area which was to the West - the area that's essentially hit by the Northwest quadrant to the Hurricane. To the West of where the eye is. And, in this instance; that area is sort of at the absolute heart of where the largest numbers of offshore platforms are clustered. It's mainly offshore Louisiana. But, that's just an incredibly important area. Where a lot of the U.S. natural gas production is located. There is a significant risk, that we'll have a significant portion of our offshore production permanently destroyed. At certainly even greater risk, that will suffer several BCF per day loss of supply; that will go on for months.

David Room: What would you say, is a best case, post Rita scenario; with respect to natural gas. What do we know about it's likelihood?

Andrew Weissman: Well, I think really - honestly, that there's no way to know for sure, until after the storm has passed through. How severe the damage is going to be. I think the most optimistic scenario would say, essentially; if you look at what happened with Ivan, and look at what happened with Katrina. Ivan, really only caused significant damage to about four or five platforms. And, with Katrina; total number of platforms that were either lost entirely or significantly damaged, was much larger. And, the total lost production, due to platform damage is much, much greater than for Ivan. But, in the end, an awful lot of that lost production, is because of damage to a few specific platforms. And, the Shell platforms, in particular. And, if you look at all that, you could say; well, they're certainly some very high risks.

But, maybe, maybe, maybe; this time we'll be lucky. And, none of the really big platforms, will suffer serious damage. And, if that happened, then maybe, maybe; this time around. What cost the worst damages with Ivan - well, some of the underwater mudslides would have not occured. And, just like avalanches in the mountains. And, they could occur or not occur, for quirky reasons. So, maybe we could get lucky there, too. And so, if we get really, really lucky. This is a huge and very powerful storm. But, we could get very, very - and, it's heading through some of the worst areas. But, we could still get very, very lucky. And, if we do; then maybe all that we'd lose, is half a BCF or 1 BCF a day in production, for a period of a few months. And, I think that's the best case scenario, that we could hope for. That's at least plausible. Frankly, even if that's all that happens; we're in such a deep hole right now, I think we have a very serious problem. But, I think that's at least plausible; that the damage could be limited to that level.

David Room: If we don't get lucky, as you say; what's another plausible scenario?

Andrew Weissman: I think the worst case scenario, involves a combination of two factors. All the focus right now, is on the Hurricanes, in my opinion. Because, the market isn't that well understood. Because, in the final analysis; well, these Hurricanes are very, very major events. In the end, the question of what the weather is like this Fall. And, the weather is like this Winter; is even more important. If it swings between a very mild Winter and a very cold Winter; are even greater, than the damage caused by Katrina. And, the damage that would occur from Katrina and Rita, combined. Unless, Rita is really, really devastating. So, the worst case scenario is not just Rita alone. It's Katrina, plus Rita, plus a relatively cold Winter. And, a normal, or colder than normal Fall.

David Room: What would the economic impact of such a scenario be? And, which industries would be most impacted?

Andrew Weissman: I don't think there's anyone in this country today, that's prepared for what would happen, if we have that scenario. And, I think that scenario has a very plausible chance of occurring. Maybe, a one in four chance in occurring. I think that there's a 1 in 4 chance in occurring; that will have at least as much lost production in Rita, as we had from Katrina. And, the Fall, will be sort of normal. And, the Winter, will be at least normal. Or, colder than normal. And, if that happens; I don't think that there's a person in the United States today, that's prepared for the severity of what we'll encounter. Let's say if that happens. What it will mean is; we won't cheat just be a little bit short. We'll be severely short of having remotely enough fuel, to able to simultaneously keep people warm this Winter. And, keep our economy running, in anything like the normal level.

Your question, is exactly the right question. I don't think anyone knows the answer to that question. I think if we're in that kind of scenario. That we would have no choice; other than to institute extreme emergency measures, in order to severely reduce natural gas consumption and heating oil consumption in the United States. That would undoubtedly include strong public pleas for conservation. And hopefully, those would have an effect.

It probably would include things like only keeping schools open four days a week. In every area of the country, that has a significant space heating load. It probably would include something like; only operating any heavy manufacturing industry, only on a three or four day schedule. And, all of that; probably still wouldn't be enough. We would potentially be facing an energy shortage, of the type that we've never previously experienced n the United States. And, even if we instituted measures of that nature; we'd still probably would have extremely high prices. And, it still would probably not be enough.

The fundamental problem we have is, that we have a market in which even before any of this happened; we did not have adequate natural gas supply, to supply the needs of the U.S. market. In 2004, we had extremely mild weather, during most of the year. And, as a result of that; prices were still averaged more in 2004, than in any other prior year. But, that's only because we had extremely mild weather, all year long. This year, even before the Hurricanes hit; U.S. supplies were again - U.S. production was again down significantly. We've now had these two severe Hurricanes. And, if Rita causes significant losses. And, we have a cold Winter; we'll have a problem, like we haven't experienced before. At this point frankly, the damage to a large degree; has already either happened or not happened. And, to the extent that that's not true at this moment in time; it'll be true, within the next 12 to 18 hours or so. It'll just take another couple of days after that, before we know whether it's occurred or not. And, at this point primarily; all we can do is cross our fingers and hope. Because, there is a real possibility that we've suffered a blow to our energy supplies. And therefore, a blow to our economy; like we've never experienced previously.

David Room: What sectors of the economy, are the largest consumers of natural gas?

Andrew Weissman: The single largest consumer is the chemical industry. The refining industry consumes huge amounts of gas. Steel, coal - other heavy mining industries. Cement - they're all heavy consumers of natural gas. Part of the problem we have - part of the tension we're going to have, over the next several months, almost under any scenario; ordinarily, what you would expect to happen, is that higher energy prices would induce the recession. And, a recession would reduce energy consumption. That's part of what would help the market balance.

In this instance, because of the damage already caused by Katrina. And, potentially the additional damage, resulting from Rita; we're going to have - we've already had a commitment to a couple of hundred million dollars in expenditures to help restore New Orleans. And, other areas damaged, severely by Hurricane Katrina. The likelihood that at least somewhat similar programs might be required with respect to Rita; those programs - alot of that money is going to be spent on rebuilding damaged facilities.

That is going to require alot of physical construction work. Which is going to require demand for building materials, iron, steel, plywood. Fuel to move building materials. And, those are all things that are very energy - and, natural gas, in particular intensive. And so, the slow down in manufacturing consumption in natural gas, that would otherwise occur when energy prices start going up; may not occur in the same way this year, this time around. Because, we may not have the huge program of government spending, that may cause demand to increase for some of the most natural gas intensive industries. And, that of course, is absolutely essential in human terms; because, they're large - they're very important regions of the country, that have suffered huge damage. And, people who desperately need to have help in having their lives rebuilt. But, in terms of what it means in terms of the market; it makes the problem of balancing supply with damand. And, keeping prices in check, even more difficult.

David Room: With respect to natural gas - are there any geographic areas, other than Louisiana, Mississippi, and now Texas, that are going to be specifically vulnerable?

Andrew Weissman: No, I don't believe so. Not with respect to natural gas. One of the other problems though, is tha the areas that have been affected by both Hurricanes; are areas through which alot of coal is shipped. And so, there probably have been, and will continue to be significant disruptions to coal deliveries. And, they're coming at a time, when coal supplies to a lot of the coal fired plants, were at an extremely low levels. And, so you may very well see some coal fired plants, in different parts of the country; unable to fire up at normal levels. And, when that happens, often the only way to make up for the lost availability for coal fired capacity, is to use natural gas fired units more heavily. So, you have that kind of problem.

David Room: One last question; in your estimation, has natural gas peaked in North America?

Andrew Weissman: Natural gas supply?

David Room: Yes.

Andrew Weissman: Yes. I think we have two things going on now. And, I think it's going to take a while for the dust to settle, to see how all of this really sorts out. It's certainly been my general assessment, for some time now; that we've probably seen a peak in natural gas supply. But, I think that there are now two major changes that are occurring. And, it's going to take a while to see how they both sort out.

One is; that I think that to be realistic about it. I think that one has to expect that having two devastating Hurricanes like this, is going to have a major, major impact on future production in the Gulf of Mexico. Part of that is; if you look at the projections from last quarter of this year and 2006, and 2007. They all assumed very significant increases in deep water production in the Gulf of Mexico, in both oil and natural gas, would offset some of it's clients elsewhere. And, at this point; almost all of the projects that were scheduled to come on line, will ultimately be completed. Because, they're probably so far advanced, the developers are certainly at some point, going to finish them.

But, given all of the disruption that's occurred; the completion date of those projects, may be delayed for quite a long time period. Because, there's going to be priority given to repairing damage in existing facilities. And, in addition; there's also been a significant amount of existing production, that's been permanently destroyed. The increases that we were hoping for in the deep water area, probably won't even be sufficiently enough to replace the production that's been permanently destroyed. And, are going to be long in coming. After those projects that are already underway are brought on line; you really have to wonder, what the willingness is going to be to continue to make major investments in the Gulf of Mexico.

'Cause, what we've seen is, that there's been a lot of talk in the last couple of years, about a terror premium. And, a risk of terrorist events, disrupting world oil supplies. But, if you look to what's really happened; the real risk to world energy supplies, has turned out to be Hurricanes hitting the Gulf of Mexico. They've caused losses of supply; that far exceeded any other events that have disrupted world oil supplies, in the modern era. So, in that sense; there's kind of a new element - new negative element in North American natural gas supply. That none of us, to the best of my knowledge; certainly that I never really thought, would evolve in this sort of way. On the flip side; I think that markets do respond. And, to some degree - and, I don't think any of us anticipated thirteen dollar natural gas. And frankly, I think anyone who pays thirteen dollar natural gas this soon - I expect it to occur, not this quickly. And frankly, I don't think thirteen dollar natural gas, is going to be the peak price. Or, anywhere close to it. And, I think that this may bring about an explosion in drilling, in some of the areas in the Western United States.

That at some point, may bear greater fruit. And, at some point; may at least help to bring natural gas production. At least help to slow down the decline.

End of Interview
MediaRitawatch 6: Natural Gas Expert, Andrew Weissman