Analyst: Gas Depletion Has Arrived
The industry rumblings of a declining gas supply are not far off
base, said a report by David Pursell, an analyst for the
institutional securities group Simmons & Co. Intl. Judging from
weekly American Gas Association (AGA) storage data and Department
of Energy (DOE) LNG production figures, the report forecast the gas
decline rate could surpass 4% in the coming months when compared to
last year, unless a sharp increase in gas-directed drilling takes
place. Using these findings, Pursell said gas prices should stay
above $2/Mcf for the near future.
According to the study, the disappearance of the storage
overhang over the past five months indicates an improvement in
supply and demand fundamentals. It said the average injection in
June was 0.9 Bcf/day lower than June of 1998's level. At this rate,
1999 will end with a 1.2 Bcf lower gas supply than 1998.
"It seems apparent that the fundamentals are significantly
improved from a year ago," Pursell said in the report. "After
watching the storage overhang disappear over the last few months,
it was tempting to pound the table and say that we clearly have the
onset of a supply problem."
What convinced Pursell to pound the table was the DOE's LNG
production report, which found that despite an economic incentive
to process gas from liquids, producers did not do so. Due to
unfavorable frac-spreads (the theoretical gross margin for
processing liquids from the gas stream), last April was the first
month where producers had an economic incentive to remove gas from
liquids compared to the same period in 1998. The frac-spread in
April of 1998 was .83 compared to 1.37 in April of 1999. Yet
despite this incentive, LNG production declined in April from 1,859
kop/d in 1998 to 1,786 kop/d in 1999.
"The decline in April 1999 NGL production is the first solid
evidence that U.S. gas production is declining at least 3.9% from
prior year levels."
The $2/Mcf price forecast is projected over a flat demand
environment (year-on-year). They could go even higher, Pursell
said, depending on several factors including the drilling response
to shortened supply, summer heat, tropical weather in the Gulf of
Mexico and a strong winter.
The study noted that the most definitive indicator of supply
levels is gas well production data, but due to the enormity of the
task required to collect all those numbers, a significant data lag
time exists. Moving forward, Pursell said storage data and LNG
production will become more prominent tools to shed light on supply
and demand balances.
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