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Analysts See More Modest Decline in Gas Production in '04

Analysts See More Modest Decline in Gas Production in '04

U.S. natural gas production will continue to decline this year, but a fourth quarter survey of 43 domestic producers suggests a more modest decline compared with last year, according to Southwest Securities analysts.

Brian Kinsey and John Gerdes, who conducted a production survey, said that given a current sustained 900-plus gas rig count and incremental deepwater gas volumes, there will be an approximate 2.5% annual decline, compared with 3.0% in 2003. "The survey has a subtle bearish implication on our gas price thesis, although further supports our long-term price forecast of $4.75/MMBtu."

The analysts found that U.S. gas production showed a "more modest" sequential decline in the fourth quarter, mostly because of sustained elevated rig counts since June "that should lead to additional gas volume," as well as nearly 200 MMcf/d of deepwater gas projects that were ramped up during the period.

Deepwater Gulf of Mexico (GOM) comprises about 8% of U.S. gas production, up from 1% in 1996, noted the Southwest Securities team. "Yet, with growth in production comes a greater underlying production decline, both in absolute and relative terms." The current deepwater GOM production decline rate is about 10%/year, but they said trends suggest that "over the next couple years aggregate deepwater production declines will likely surpass 15-20% per annum as wells begin to contact reservoir boundaries."

With 2003 deepwater GOM production now at about 3.8 Bcf/d, the analysts said the current decline rate would be about a 0.2 Bcf/d decline. "As the deepwater GOM matures, it will become increasingly difficult to more than offset natural production declines."

According to its production survey, gas production from new GOM deepwater projects should grow 0.3 Bcf/d this year, in line with a previous survey that indicated 0.2 Bcf/d growth in 2003. "Significant volumes should continue to ramp [up] from projects that commenced in 4Q2003 and, combined with other new startups, should have a net positive impact vis-a-vis the production decline in 1Q2004."

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