Onshore Natural Gas and Agriculture Producer Sensitivity to Gulf of Mexico Hurricane Risk

Chesapeake Energy is one of the nation's largest producers of natural gas with 100% of production located onshore in the continental U.S. While many factors influence natural gas prices, one of the largest drivers of price is weather induced volatility. Chesapeake established a weather department in 2003 to observe, forecast, and research weather trends that can induce natural gas price volatility through either supply disruptions (hurricane damage, severe Arctic air outbreaks, anomalously heavy rainfall) or demand fluctuations through primarily residential natural gas usage (anomalous high/low summer cooling demand and winter heating demand).

Historically, Gulf of Mexico hurricanes provide the most volatile periods of natural gas prices. The potential for supply disruptions invokes a significant amount of market fear that in turn can escalate prices significantly. Weather data from NHC, model guidance, reconnaissance flights, etc. are watched very closely by the energy markets for any potential leading indicators of hurricane track and intensity that could cause supply disruptions or damage to infrastructure. For producers, such as Chesapeake, significant escalation in natural gas prices due to “hurricane fear” results in an opportunity to hedge natural gas production into the future at higher prices in the futures and options markets.

With a substantial amount of natural gas production in the southern US, landfalling and decaying tropical cyclones also result in significant risks to daily Chesapeake operations. Strong inland winds can cause damage to drilling rigs, while heavy rainfall and lightning can impact producing wells as well as pipeline construction. Natural gas drilling rigs need a minimum of 72 hours to be moved out of the path of a landfalling hurricane. Successive landfalling tropical systems and heavy rainfall can result in prolonged delays in pipeline operations and construction – a critical link between recently completed wells and flowing natural gas into the intra/interstate pipelines. Examples of landfalling systems over the past several Atlantic hurricane seasons will be provided with Chesapeake's diagnostic tools to aid in the decision making process of our executive and emergency management teams.

Finally, the Chesapeake weather group conducts meteorological analysis through a separate entity, Chesapeake Weather Services, for agribusiness sensitive entities. Several examples of utilizing GIS technology to harness publically available data from HPC and NHC, and third party data will be highlighted for end decision making in this industry. The focus will be analyzing tropical system impacts, primarily from a heavy rainfall standpoint, to southern U.S. agriculture production during temperature/precipitation sensitive stages of crop development.