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Despite More Rigs, Lehman Estimates Gas Production Down 4.4% From Year Ago

Based on a survey of 60 North American producers, Lehman Brothers estimated last week that 1Q2005 U.S. natural gas production will show a decline of 0.3% sequentially and 4.4% compared with 1Q2004. Gas supply also is estimated to fall 2.1% this year, following a 3% decline in 2004, caused mainly by an estimated U.S. production decline of 3.7%.

However, the falling production and supply contrast with a higher rig count in the United States and Canada. According to Baker Hughes' Rotary Rig Count two weeks ago, North America's on and offshore rigs number 1,502, compared with 1,276 for the same time period a year ago. There are about 1,348 domestic rigs in operation, compared with 1,146 a year ago, and in Canada, there are about 159 compared with 130. In March, the number of rigs rose to 1,306, up from 1,136 in March 2004.

In the major oil and gas-producing states, Texas' rig count was up by eight, while New Mexico gained three. Louisiana lost nine rigs, Alaska lost three, Colorado lost two and California and Oklahoma each lost one. The number of rigs operating in Wyoming remained unchanged from a year ago.

Lehman's overall gas supply estimate contrasts with the April 2005 update of the Department of Energy's Short-Term Energy Outlook, which forecasted a 1.7% increase in overall supply in 2005 compared with 2004 (see NGI, April 11).

The surveyed producers, 46 from the United States and 14 from Canada, account for about two-thirds of U.S. and Canadian natural gas production volumes, according to Lehman. According to Lehman Brothers analyst Thomas Driscoll, future declines will only be partially offset by rising Canadian and liquefied natural gas (LNG) imports, which in turn will keep prices strong.

Full-year 2005 natural gas production volumes are expected to fall 3.7% in the United States and decrease about 1.9% in Canada, Driscoll wrote. "We estimate 1Q2005 total North American natural gas production was flat sequentially and fell 2.8% from a year ago. Lower U.S. production outweighed an increase in Canadian production."

Driscoll noted that the 3% decline in supply/demand estimated in 2004 "has helped support prices this year." The major components of the estimate are the 3.7% estimated production decline in 2005, followed by 2% declines in 2006-2009. Also, imports from Canada increased 3.6% in 2005, and are projected to increase 2% in 2005, 1% in 2006 and remain flat between 2007-2008.

Because of increasing regasification capacity, Lehman is estimating that LNG imports were roughly 61% of currently available capacity in 2004, and will fall to 49% this year because of increasing capacity.

"We estimate 1Q2005 LNG imports increased about 217 MMcf/d versus 1Q2004 to about 1.88 Bcf/d (excluding Puerto Rico)," Driscoll said. "The increase is primarily due to restarting Lake Charles [LA] from a construction shutdown and increasing use of Cove Point [MD] capacity."

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