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Gas Supply Remains Ample Despite Continued Rig Reduction

Despite the fact that the number of rigs currently searching for natural gas in the United States continues to decline as prices continue to hover under $4/MMBtu, supply continues to remain healthy for the time being. According to a Baker Hughes report Friday, another 17 gas rigs were laid down during the week ending May 22.

The oil and gas drilling services firm said there are now 711 rigs actively exploring for gas in the United States, which is down 56% from the 1,606 rigs that were operating during the week ending Sept. 12, 2008 and 52% lower than the 1,493 rigs that were searching for gas one year ago.

The steep drop in the rig count can be directly related to the even steeper drop in prices. After recording a $13.694/MMBtu high in early July last year, front-month natural gas futures values plummeted 77% to reach a low of $3.155 on April 27. The steep drop in prices along with the weak global economy has forced producers to cut back operations and capital expenditure budgets.

Despite the fact that more than half of the rigs that had been searching for gas within the country are no longer doing so, there has been a significant lag in seeing the effects on production levels.

"The near-term storage outlook remains bearish for natural gas, with an established uptrend in the year-on-five-year average surplus still intact," said Tim Evans, an analyst with Citi Futures Perspective in New York. "The 103 Bcf injection for [the week ending May 15] pushed the year-on-five-year average storage surplus up to 387 Bcf and we currently see that as likely to grow further to 442 Bcf by May 29."

Evans said he sees injection of 115 Bcf and 125 Bcf for the weeks ending May 22 and May 29, respectively, outclassing the 91 Bcf and 94 Bcf five-year average builds for those years.

Pointing to the latest data from Baker Hughes, Evans said the rig count declines essentially promise that there will be reduced gas production in the months ahead. "A tighter market is coming; it just isn't here yet," he said.

Speaking to GasMart 2009 attendees in Chicago last week, PA Consulting's Ron Norman said that while the current U.S. rig count has dropped more than 50% from its high of last year, the market remains oversupplied (see Daily GPI, May 22). "The thing we have to remember is the rig counts we saw last year were driving substantial production growth, so it is going to take a substantial reduction in the rig count to get back to level ground in terms of production," especially when considering the drastic reduction in industrial demand, he said. "I do think production will be meaningfully falling off later this year."

Breaking down 2008 U.S. and Canadian gas reserve replacement rates, Ziff Energy Group in a new report found that U.S. Lower 48 replacement was down a third from 2007 to 130%, which is still "strong." However, the 91% replacement rate in Canada -- while creeping slightly higher than during 2007 -- was still less than 100% of annual production.

"Ziff Energy noted a slowdown in U.S. gas drilling activity since September 2008 and this is likely to continue through the following year," said Simon Mauger, director of Gas Services for Ziff Energy. "In [the] meantime, the sharp decline in drilling in Canada continues, [which is] shifting operators' focus outside of Western Canada."

The Ziff Energy study analyzed data from the top 30 producing public companies in the Lower 48 and the 25 largest public gas producers in Canada. Zuzana Jurickova, analyst for Ziff Energy, said. "Comparing to last year, the reserve life for the U.S. dropped slightly to 12.5 years, while reserve life in Canada slightly increased to 8.7 years."

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