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NGSA Chairman Sees Flat Production Volumes Without More Access

Natural gas producers are responding "very aggressively" to the price signals in the market by stepping up production activity, but production volumes are expected to remain flat at best without access to new resources, said the chairman of a major gas producer group last Tuesday.

"We're developing mature resources, but we're not getting as much bang for the buck in production for each new well drilled," said Chris Conway, chairman of the Natural Gas Supply Association (NGSA) and president of gas and power for ConocoPhillips, at a joint press briefing with the Canadian Association of Petroleum Producers (CAPP) at the Canadian Embassy in Washington, DC.

"We really need more access to new resources... Without access to new resources, we are going to continue to have hard work keeping that [production] line just flat, and we want to see that line go up on production," he told reporters. "We're looking everywhere we can, at least everywhere we're allowed to look to find new resources."

Conway said he was "hopeful" that Congress in the current session would make more acreage in the gas-rich Lease Sale 181 in the eastern Gulf of Mexico available to producers, but he did not sound particularly optimistic.

The twin hurricanes along the Gulf Coast took their toll on U.S. gas production last year, with the Interior Department's Minerals Management Service estimating last week that as much as 748 Bcf of natural gas production has been lost as a result of Katrina and Rita, which is more than 20% of the annual gas production in the Gulf of Mexico.

Conway remained less than optimistic about domestic production output even though the recovery efforts in the Gulf have exceeded forecasts. Many believed that about 3 Bcf/d of Gulf production still would be shut in during the first half of the year, but industry efforts have managed to shave that figure by more than half -- to 1.295 Bcf/d.

Reflecting the higher rig costs and the stepped-up search for new supplies, he reported that upstream investment and development expenditures have reached "unprecedented levels," with the industry expected to spend $107 billion this year, up significantly from the $22 billion outlay in 1999. Conway said that some producers "are actually investing more than they're earning."

Current drilling statistics are quite impressive, but they belie the true picture. Gas-directed drilling activity is nearing 1,400 active rigs this year, according to the NGSA. Onshore rig activity has hit record levels. Gas well completions rose to about 2,500 in January, the group said. "We're seeing quite an increase in completions of wells, but we're somewhat on [a] treadmill" with respect to realizing more production volumes, Conway said.

He noted that dry gas reserves, which were 184 Tcf in 2004, are expected to grow in the future, "yet underlying production volumes [will be] flat."

To offset dwindling domestic production, Conway expects the industry to invest about $80 billion through 2015 to build terminals, ships, liquefaction and upstream facilities to import liquefied natural gas (LNG) into the United States. He projects that the facilities will result in incremental LNG supplies of 12.7 Bcf/d during this period.

Natural gas drilling also is occurring at a feverish pace in Canada, said Kathy Sendall, chairwoman of CAPP and senior vice president of North America gas for PetroCanada. During the first quarter, she reported that producers set a new record by drilling more than 1,000 gas wells in Canada, with production up by 500 MMcf/d. Following the Gulf Coast hurricanes, Sendall said Canadian producers drilled at full throttle to increase imports to the U.S. As a result of their efforts, production was 1 Bcf/d higher in January of this year compared to January 2005.

CAPP forecasts that Canadian gas production will slightly exceed 20 Bcf/d beginning in 2011 and will remain at the level until 2015, at which point it will begin to gradually decline.

The decade of the 1990s saw a doubling of Canadian gas imports to the U.S., but Sendall predicts there will be a "more stable outlook going forward" for gas imports across the border. Canada currently supplies about 10 Bcf/d of natural gas to the U.S., or 17% of domestic demand.

She expects coalbed methane (CBM) production to play a major role in the years ahead. CBM is expected to represent about 10%-plus of future Canadian gas production, Sendall said. Much of Canada's CBM potential is in Alberta. It's estimated that the country's recoverable CBM reserves are 167 Tcf, more than the conventional gas resources remaining in the Western Canadian Sedimentary Basin (145 Tcf).

CAPP predicts that Canadian producers will drill close to 6,000 CBM wells in 2010, resulting in production of just below 1.8 Bcf/d. This compares to CBM production of about 0.1 Bcf in 2004.

The Canadian producer group also expects the C$7 billion, 1.2 Bcf/d Mackenzie Valley Pipeline in western Canadian to come online in 2010-2011, and to be followed by an Alaska gas pipeline in 2012-2015. Canada is making inroads in the LNG business as well, Sendall said. Eight terminal projects have been proposed, two of which are under construction, she noted. Acquiring supply contracts will be the "next big step" for the Canadian projects.

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