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NatGas Output Falls but 'Doesn't Mean Anything'

Lower 48 natural gas production fell by about 2%, or 1.39 Bcf/d, in September from August due to a combination of plant maintenance, repairs and shut-ins brought on by depressed gas prices, according to the Energy Information Administration's (EIA) 914-data released last Monday. On the demand side, the power generation sector offered about the only bright spot for gas.

Gross production from the Lower 48 states in September was 61.83 Bcf/d, down 2.2% from 63.22 Bcf/d in August. The drop "doesn't mean anything from a fundamental perspective, as essentially 100% of that decline was due to shut-ins and maintenance," a private equity investor told Tudor, Pickering, Holt & Co. Securities Inc. (TPH).

"Louisiana reported the only increase in [onshore] production as drilling in the Haynesville Shale play continued," the EIA said. Louisiana's production was pegged at 4.73 Bcf/d, up 3.5% from 4.57 Bcf/d in August and from 2.96 Bcf/d in September 2008.

Total U.S. gas production, which includes the federal Gulf of Mexico (GOM) and Alaska, rose 0.3% to 70.46 Bcf/d in September from 70.27 Bcf/d in August, according to the agency. Gas output in the GOM in September fell 2.3% to 6.87 Bcf/d from 7.03 Bcf/d in August, while Alaskan gas production jumped to 8.63 Bcf/d from 7.05 Bcf/d in August. A year ago total domestic production stood at 64.31 Bcf/d.

Wyoming saw the single biggest decrease among gas-producing states, falling 3.2% to 6.61 Bcf/d in September from 6.83 Bcf/d in August, the EIA said. It was followed by New Mexico production, which fell 2.7% to 3.91 Bcf/d in September; Oklahoma output, which declined 2.5% to 5.01 Bcf/d in September; and Texas production, which dipped 1.5% to 20.45 Bcf/d in September.

The EIA reported that gas production from other states fell 4.1% to 14.25 Bcf/d in September from 14.86 Bcf/d in August.

"According to interstate pipeline flow data, which has a very good correlation to EIA-914s historically, October will show an increase of at least 0.5 Bcf/d from September and November looks like [it will be] up another 0.2 Bcf or so, to a number that's actually above November 2008 production," the private equity investor said.

"Essentially the only thing that's saved the market from a horrendously oversupplied state and an early full storage scenario is a big increase in natural gas used for power generation, surprising strength in industrial gas demand, a collapse in Canadian imports, and the fact that LNG [liquefied natural gas] continues to be missing in action.

"All of these factors are likely to be less important going forward. LNG in particular could add 1 Bcf/d of incremental supply or more in early 2010 given additions to global capacity if new Asian and European demand doesn't materialize. Bottom line: storage levels at the end of the withdrawal period are likely to be 500 [Bcf] to 700 Bcf above historical norms, setting us up for sub-$3/Mcf pricing near term and further weakening in long-term futures potentially to $5/Mcf or below."

Coal took something of a beating from natural gas in the power generation arena this year, but coal's displacement by gas wasn't strictly due to exceptionally low gas prices, according to analysts at Barclays Capital. Coal producers can curse cheap gas if they want, but other factors were at play, too.

Reduced demand for power from industrial consumers, which was driven by the economic recession, had a greater effect on coal-fired plants than on their gas-fired cousins, the analysts wrote. This is because industrial power demand, which tends to be steady around the clock, is served primarily by baseload coal plants, while gas-fired plants meet peaking demand. So a reduction in power demand from industrials across the United States impacted coal plants more than gas plants.

The pullback in industrial power demand changed the load shape. Coal plants cannot ramp down at night the way that gas-fired plants can. So generators relied more heavily on gas plants to follow demand that was off more sharply at night.

Gas-fired units also ran more often to balance the intermittency of wind power. "Older coal units do not offer the same fast-ramping capability, forcing the use of gas-fired plants, even if the operating cost of gas is more than coal," the analysts noted. "Wind capacity is growing, suggesting this factor will remain and even expand."

Gas didn't beat coal everywhere, the Barclays team noted in its note last Tuesday. "As cheap as gas prices were at times in 2009, they were not low enough to displace coal in ERCOT [Electric Reliability Council of Texas] or the West," the analysts wrote. "Powder River Basin coal and lignite remained cheaper than gas."

Appalachian coal however, enjoyed a price run-up in 2008 on the strength of international coal demand. Term contracts signed in 2008 for 2009 reflected some of this strength, the analysts noted.

"Taken together, these factors tell us that the displacement of coal was regional and not entirely price-related," the analysts wrote. In eastern regions gas simply stole market share from gas, they noted. "...[I]n the West, Midwest and Texas gas and coal output fell as lower loads pressured output from both fuels lower. That is, gas did not meaningfully displace coal in these regions.

"The coal displacement by gas story is prominent in just three power regions -- the Southeast, the East South Central region and the PJM power market area (Middle Atlantic), where coal output was down but gas demand was up."

With the exception of the power generation market, "I don't see a lot to get excited about" when it comes to natural gas demand, TPH Managing Director David Pursell told NGI last week. Total U.S. gas demand in September was approximately 1,557 Bcf, up 98 Bcf from 1,459 Bcf in September 2008, thanks in large part to power generation gas demand.

"Industrial demand continues to languish year to year," while the "electricity side continues to be strong," said Pursell. The power generation market for natural gas "continues to show year-to-year improvement even though the economy is still weak."

While natural gas has gained a bigger share of the generation market this year due to lower gas prices, Pursell is concerned that gas will lose ground in the coming year when gas prices increase.

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