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Investigating Freeze-offs: The Cold Hard Truth

Written by FactSet Insight | Oct 23, 2018

As winter nears, BTU Analytics keeps our eyes on the freeze-off horizon, keeping close watch on natural gas production and flows across the country to spot the tell-tale signs of a freeze-off. This year we enter the withdrawal season with historically low storage levels, leading us to wonder what impact freezing winter temperatures could have on natural gas production and pricing this winter. As production increases in states vulnerable to freeze-offs, we could see increased market impacts in the colder months.

Estimating the Odds of a Freeze-Off

The chart below presents the results of a model that estimates the likelihood of a freeze-off based on a 1°F decrease in temperature below freezing. Based on this model, in Texas (holding all else constant) a 1°F decrease in temperature increases the odds of a freeze-off by a daunting 30%. The states sampled for this model account for 75% of total U.S. production as of July 2018. The states with a likelihood increase of more than 15% account for nearly 50% of total U.S. production.

Concentrated production in states with high likelihood impacts based on temperature, means that below freezing temperatures are likely to cause market disruptions. See our commentary from January 2018 for more analysis of the potential impact of extreme temperatures.

States with warmer temperatures, on average, are more susceptible to freeze-offs as temperatures drop below freezing. Based on our model, if the temperature were to drop to a chilly 15°F in Shreveport, Louisiana, the probability of a freeze-off is 0.73. In Midland, Texas at that same temperature the probability of a freeze-off is 0.94. However, in Colorado and Wyoming if the temperature is 15°F in Denver and Cheyenne, the probability of a freeze-off is only 0.28 and 0.19, respectively.

Wet Gas Production Vs. Dry Gas Production

To add to the potential for freeze-offs this winter, increased wet gas production has a higher likelihood of freeze-offs than dry gas production. To present a granular example of this difference, BTU analyzed West Virginia’s wet and dry production likelihood for freeze-offs. Based on BTU’s freeze-off model, West Virginia wet gas production had 23 freeze-off days from 2015 to present, whereas dry gas production had only 10 freeze-off days. The map below shows GPMs across West Virginia where wet gas has higher GPMs (above 2.5) than dry gas.

In West Virginia, 1°F decrease in temperature increases the odds of a wet gas freeze-off by 15.48%, whereas a 1°F decrease in temperature only increases the odds of a dry gas freeze-off by 6.32%. This analysis quantifies that wet gas production is over two times more sensitive to decreases in temperature than dry gas production. If the country has a bitterly cold winter, we could see freeze-offs across wet gas regions, impacting production, flows, and pricing.

Conclusion

What will cold temperatures in the coming months and low storage levels mean for natural gas prices? How will freeze-offs impact production, flows, and exports? Request a copy of BTU’s Upstream Outlook.

This article was originally published on the BTU Analytics web site.

This blog post is for informational purposes only. The information contained in this blog post is not legal, tax, or investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.