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EIA Reports Fourth Consecutive Drop in Monthly Onshore Production

Total domestic natural gas production levels rose in June despite depressed prices and a decline in drilling activity, but onshore output saw a decline -- albeit slight -- for the fourth consecutive month, according to the latest production data released by the Energy Information Administration (EIA) Thursday.

Production in the Lower 48 and the Gulf of Mexico combined rose 0.5% to 63.28 Bcf/d in June, the latest month for which production statistics are available, from 62.96 Bcf/d in May, according to the EIA-914 monthly natural gas production report. Onshore production fell to 56.09 Bcf in June from 56.2 Bcf/d in May, while the Gulf of Mexico (GOM) rose to 7.2 Bcf/d from the 6.71 Bcf/d output level in May.

The "falling rig count is impacting production. Onshore production has declined four consecutive months and is down 1 Bcf/d (2%) from February [2009] levels," said Houston-based energy analysts Tudor Pickering Holt & Co. Securities Inc. (TPH).

But the "magnitude of the decline is disappointing. We predicted June onshore production at 55.6 Bcf/d and the EIA onshore was 56.1 Bcf. Even though onshore production has declined 1 Bcf/d from the 57.1 Bcf/d February peak, it is not as steep as the 1.5 Bcf/d we were looking for," TPH said. Using an extensive basin-by-basin modeling system, TPH had predicted wellhead supply declining by 5 Bcf/d, or 8%, at the end of 2009 from year-end 2008 (see related story).

The firm believes several factors contributed to the hike in June supply, including the 1% rise in Wyoming production to 7.10 Bcf/d. This "could be related to seasonable completions as there are often winter/spring restrictions to completing wells. Historically we have seen increased production volumes as more completions occur in the middle part of the year followed by production declines over the next nine months," TPH said.

In addition, it suspects that Chesapeake Energy may have "brought back some volumes from shut-ins and deferred completions offset by [EnCana] curtailing 0.1 Bcf/d of U.S. gas. Also it is possible that some companies stretched operations in June to 'make/beat' the second quarter production forecasts."

And producers may be well high-grading -- focusing on their best wells, TPH said. "As gas price and rig count have fallen, you would naturally expect E&P companies to hunker down and drill only their best wells (and therefore potentially have production better than 'average' type curves). While we don't think it will, if gas supply stays stubbornly high, high-grading is likely to be the best macro explanation," the firm noted.

As for the GOM, TPH sees production there nearing the pre-hurricane levels of 7.5 Bcf/d. "We don't think there were any big fields coming online. Deepwater Thunder Horse is ramping [up], Geauxpher was possibly 0.1 Bcf/d, but there are also ongoing natural declines," it said.

There are "lots of moving parts on a monthly basis and this is going to continue. Looking forward, we expect more choppiness as Fayetteville [shale] volumes were intermittently down 0.2 Bcf/d in July, Independence Hub is down 0.2 Bcf/d in August for maintenance and the Fayetteville will be curtailed again in September for repairs. Newfield [Exploration Co.] has shut in 60-70 MMcf/d in late August/September [in] response to low gas prices" (see related story).

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