Francine Poses Bearish Threat to Natural Gas Infrastructure

LNG export & power generation outages far overshadow potential production loss

Coming into the home stretch of what was forecast to be a historically busy hurricane season in the Atlantic, we have just the second storm of the season that has the potential to make waves for U.S. energy markets. Tropical Storm Francine as of Tuesday morning sits off the coast of the southern tip of Texas and is forecast to strengthen into a hurricane in the next day as it makes its way northeast, impacting a large swath of the Gulf Coast.

Traditionally, tropical activity in the Gulf of Mexico was considered bullish for natural gas, as the primary threat was to offshore production infrastructure. However, as the proportion of U.S. natural gas sourced from offshore wells has dwindled to only 2-3% of total production, the implications have become decidedly bearish. This particular storm is not expected to become a devastating major hurricane, but significant wind and storm surge will likely disrupt some percentage of Gulf Coast LNG exports and reduce power generation demand due to outages and cooler temperatures surrounding landfall. This potential reduction in exports and demand will very likely overshadow any lost production volumes due to personnel evacuations from offshore wells.

We’ve already seen reports that major producers are evacuating offshore production platforms and Freeport LNG is making preparations for a landfall. So far, we have not seen any material impact in reported supply & demand volumes, but any bullish sentiment that had built up heading into last weekend has seemingly been sapped from the marketplace ahead of Francine.

Below are the volumes that are “at risk” any time that a tropical storm or hurricane makes its way into the Gulf of Mexico. Since all of these volumes are variable throughout the year, the chart shows rough summer peaks for each sector.

Note that there is almost no scenario in which either of these demand sectors would approach zero activity, but the numbers should provide context as to where the most impactful outages can occur. Also consider that in the case of a devastating storm, it is difficult to project the long-term impact. For instance, significant damage to offshore infrastructure that causes a prolonged supply outage could end up outweighing near-term disruptions to LNG exports or generation demand.