Hurricane Katrina could continue to blow crude oil and natural gas prices higher into 2006, industry experts say.
The result could see Canadian-based energy companies frantically trying to drill as many wells - in particular gas wells - to take advantage of the current price climate, says the Canadian Association of Petroleum Producers (CAPP).
"The higher price signals the producers are receiving are causing them to go and drill stronger than they even were," says Greg Stringham, CAPP's vice-president of markets and fiscal policy.
"I think you're going to see a lot of things going on in the natural gas market to try and bring more of the short-term shallow gas that was ready to be drilled up the production curve in a faster time frame."
Vincent Lauerman, global energy analyst with the Canadian Energy Research Institute (CERI), expects oil prices to linger around $75 US per barrel this winter - due in part to Hurricane Katrina - before softening in the spring.
Longer term, CERI bets that oil prices will average $66.90 per barrel in 2006, compared to the average $60.40 it predicts for 2005. There is an outside chance the average price could reach the $90-per-barrel range, CERI adds, depending on post-Katrina recovery efforts and how geopolitical events unfold.
The decision by the International Energy Agency (IEA) to release 60 million barrels, or two million barrels per day (b/d) of crude oil and product (gasoline and heating oil) for 30 days has helped mitigate the post-Katrina oil-price surge. The agency is an energy policy adviser for 26 member countries.
The 60 million barrels included 30 million from U.S. strategic reserves to help offset shortages that resulted from the storm. And while U.S. governments are usually reluctant to tap into strategic reserves, CERI's Lauerman believes President George W. Bush will likely do what it takes to avert fuel shortages.
"Considering how quickly the IEA acted here and how quickly the Bush administration acted, I think it is a sign that they're more likely to use their strategic reserves at this point," Lauerman said in an interview following a presentation at an Economics Society of Calgary luncheon last week. "They have to use them for disruption reasons, but at the same time they can throw more at the market."
CAPP is currently assessing how Katrina will affect oil markets in the long term, but Stringham says he thinks it's not likely going to have a major impact.
"In the product market - gasoline and heating oil - most of (the refineries initially shut down) have started back up again. The oil pipelines that were restricted because they ran out of power, they seem to be back up again, too."
The CAPP official sees a greater challenge with the natural gas supply. He notes that Katrina knocked out about eight billion cubic feet a day (bcf/d) of gas processing capability in the Gulf region, and to date about three bcf/d remains out of commission because many of the facilities are located in the New Orleans area.
"Until that city starts recovering, they may not be back on," he says.
He adds while it is expected that natural gas-processing capacity will be brought back and U.S. gas storage levels will remain high, there are concerns that the lost U.S. production, coupled with diverting gas produced this fall away from storage and directly to consumers, could pose a problem this winter.
"If we have a very cold winter in North America, or in particular if there's some logistical restraints in the U.S. service areas, that's what people are starting to get concerned about now."
In the meantime, Canadian producers say they will do everything they can to bring on new gas production to take advantage of natural gas prices that have remained above $10 US per million British thermal units (BTUs) since Katrina hit, and also to make up for lost drilling in June due to flooding in much of Alberta.
"We had a relatively strong summer," Stringham says. "We set records for the amount of summer drilling we were doing. But the wet weather in June ... kind of hampered things."
Statistics published by the Canadian Association of Oilwell Drilling Contractors (CAODC) bear that out. According to the association's rig-utilization data, between the end of June and last week an average of 513 drilling rigs were active compared to 394 for the same period a year earlier.
With regards to opportunities to feed more crude supply to the U.S., Stringham says Canadian exports south of the border are running flat out.
Earlier this month, the Alberta Energy and Utilities Board (EUB) suspended its maximum rate limitation systems to allow for increased oil production of up to 31,500 b/d - about a two-per-cent increase in normal output - to help the U.S. avert an oil shortage.
CERI's Lauerman, meanwhile, says he is starting to place as much importance on how "acts of God" or geopolitical events influence energy prices, given that the two most significant disruptions in the past two years were hurricanes Katrina and Ivan, the latter of which smashed into the Gulf of Mexico last September.
"You had Ivan last year and Katrina this year, so as a sign of that, the IEA just adjusted how they factor hurricane disruptions in the Gulf into their outlook. And instead of going with a 10-year average they're now going with a five-year average because they believe that this is something that's picking up."
"What's the reason for (more destructive storms)? Certain people would say it's climate change. I don't know if that is the case, but maybe it is a factor."
(John Ludwick can be reached at firstname.lastname@example.org)