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EOG's Papa Thinks EIA Data 'Consistently Overstating' Gas Production

EOG Resources Inc. is holding to its belief that the Energy Information Administration (EIA) 914 data is "consistently overstating" U.S. natural gas production and has modeled a decline in gas output of 3 Bcf/d by the end of this year, CEO Mark Papa said Wednesday.

Based on EOG's internal models, gas prices should recover by the second half of this year to "something like a $6.75 [per Mcf] price for full-year 2010," Papa told financial analysts during a conference call.

"We look at the 914 data and we try and tie that back to the IHS data," Papa said, referring to the private energy consultant that tracks, among other things, 98% of U.S. gas production, "and we really can't tie that [together]. It looks to us like the 914 data is just consistently overstating, particularly in the 'other states' category.

"The second item we look at in the 914 data is...the balancing item and the balancing item seems to have grown over time, So, we have tied our internal models to the IHS data and even though the gas rig count has gone up considerably over the last four to five months, what it tells us is that the production is still going to be down to the tune of about 3 Bcf a day relative to December '08 throughout all of 2010, and only in 2011 is when you start to see the reversal due to the rig count."

Papa said "probably the clearest data point" that the EIA 914 data may be overstated is "if you look at how much storage draw down has occurred in December and January, how many Bcf have been pulled out of storage, and relate that to degree days compared to last year. It's a pretty good prima facie case that we must be tighter than we were a year ago, considerably on supply or demand . So it's either got to be less supply or more demand, and we kind of believe it's probably less supply."

The gas market in North America is tightening, he said, and "prices will recover about mid-year." For full-year 2010 EOG is forecasting gas prices will average $6.75/Mcf.

To take some of the volatility out of its earnings, EOG for the past two years has been slowly restructuring its production mix to bulk up on oil and natural gas liquids (NGL) by adding more oily growth in the Barnett Shale and buying acreage in the promising Bakken Shale.

The Houston-based independent delivered 6.5% total company production growth in 2009 over 2008, with total liquids production in North America up 30%, comprised of 23% gains in crude oil and condensate and 48% in NGLs.

"Over the last several years, we have channeled a greater amount of EOG's capital expenditure program toward crude oil and liquids-rich opportunities," said Papa. "The resulting increase in our liquids volumes, which is significant, reflects EOG's progress in shifting toward a more balanced mix in our North American production portfolio."

However, EOG is still weighted more than 80% to gas, and Papa said the company "won't be neglecting" its natural gas projects.

Until EOG completes more tests and secures more property, the management team will hold some of its results from emerging North American plays close to the vest. However, the company has uncovered what may be a remarkable addition to its East Texas and North Louisiana gas holdings.

In an area where EOG had previously focused on the Haynesville, the company reported strong production results from its first Bossier Sands natural gas test. The Sustainable Forest 5 No. 2 Alt, in which EOG holds a full stake, was drilled to a vertical depth of 11,400 feet in the Trenton prospect area in DeSoto Parish, LA. Initial production was 13 MMcf/d.

The well may hold more than 8 Bcf , but more important, the well results appear to indicate that the Bossier Sands, which top the Haynesville Shale, may rival Haynesville's gas output, said Papa (see related story). EOG currently is operating five rigs in the Trenton prospect where it is drilling and developing both the Bossier and Haynesville reservoirs concurrently.

This year EOG's North American gas output is expected to increase 2% over 2009. Besides the Haynesville and Bossier drilling, the Marcellus Shale also will see an uptick in drilling, while in British Columbia's Horn River Basin, EOG plans an "active" drilling program in the first half of 2010, with a goal of completing and turning wells to sales in the last six months.

EOG is targeting 13% total company organic growth this year from 2009, with a 47% jump in total liquids production. The liquids growth is to be driven by expanded operations in the North Dakota Bakken where EOG plans to execute an active drilling program in the Bakken Shale and Three Forks Formation. Also fueling the liquids growth will be an increased level of drilling activity in the Barnett "Combo" play, which targets gas, oil and NGLs, and the Waskada Field in Manitoba.

At the end of 2009 EOG's total proved reserves were 10.8 Tcfe, up 24% from 2008. EOG used the revised Securities and Exchange Commission (SEC) rules to calculate proved natural gas and crude oil reserves. Based on the SEC revisions, EOG said it added "significant" proved undeveloped reserves in the Haynesville, Horn River, Barnett Combo and Marcellus Shale plays "at precisely mapped locations, which have been tied back to a plan that is executable within the next five years."

In the United States EOG's total reserve replacement from all sources was 431% at a reserve replacement cost of $1.21/Mcfe. Price-related revisions were negative 786 Bcfe. Excluding the impact of price-related revisions, EOG said the total reserve replacement was 464% at a reserve replacement cost of 93 cents/Mcfe.

EOG's net income in 4Q2009 was $400.4 million ($1.58/share), down from net profits reported in 4Q2008 of $461.5 million ($1.84). The year/year results included a noncash gain on a property exchange in the Rocky Mountains, a gain on the sale of assets and a noncash net gain on hedges.

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