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EIA Hikes 2011 Production Forecast

Robust gains in March underpin a significant upward revision in the Energy Information Administration (EIA) 2011 production forecast, the agency said Tuesday. Production this year is expected to increase by 4.5% (to 64.6 Bcf/d), up from the 2.3% (to 63.2 Bcf/d) forecast a month ago in the agency's previous Short-Term Energy Outlook (see Daily GPI, May 11).

"Production continues to grow at a strong pace despite a significant decline in gas-directed drilling activity," EIA said in its latest Outlook. "According to Baker Hughes, total working natural gas rigs now number 881, down 11% from the August 2010 level. However, growth in oil-directed drilling activity could lead to significant increases in associated natural gas production. EIA expects rising natural gas prices in 2012 to contribute to an increase in drilling activity."

The overall natural gas rig count may be down from a year ago, but the number of rigs targeting unconventional plays has climbed 11% from a year ago, according to NGI's Shale Daily Unconventional Rig Count. A year ago 853 rigs were targeting unconventional plays; now the number is 944. The Shale Daily rig count includes rigs targeting oil in unconventional plays as well as those seeking natural gas.

While gas prices are softer than they were last year, producers and their bullish friends can look forward to some firming next year, EIA said. Indeed, the Henry Hub spot price has been picking up pennies of late.

The Henry Hub spot price averaged $4.31/MMBtu in May, which was 6 cents higher than the April average and 11 cents higher than forecast in last month's Outlook, EIA noted. However, the agency said it expects the Henry Hub price will average $4.25/MMBtu in 2011, a decline of 13 cents from the 2010 average. But slowing growth in production will contribute to a tightening domestic market next year with the Henry Hub price averaging $4.58/MMBtu in 2012, the agency predicted.

Analysts Raymond James & Associates Inc. recently articulated a bearish view on prices for the near term. Raymond James' 2011 forecast continues to average $3.75/Mcf, even though the analysts acknowledge that prices "have remained resiliently" above their earlier predictions (see Daily GPI, June 1).

EIA said Tuesday it expects that gas consumption will grow by 1.4% to 67.1 Bcf/d in 2011. Forecast industrial and electric power consumption are expected to rise 3.1% to 18.7 Bcf/d in 2011 and 0.4% to 20.3 Bcf/d, respectively. Growth in the power sector in 2011 is somewhat moderated by expected declines in cooling demand, with forecasted cooling degree days falling 14.2% compared with last year.

Projected consumption rises slightly in 2012 to 67.2 Bcf/d. Growth continues in the industrial sector at 1.6%, as the natural gas-weighted industrial production index rises 2.7%. Consumption also increases in the power sector (2.1%). Residential and commercial consumption, however, decline by 2.8% and 2.2%, respectively, stemming from the forecast decline in heating demand for gas.

Growing domestic production has reduced reliance on imports and contributed to increased exports. EIA expects that pipeline gross imports will fall 4.2% to 8.7 Bcf/d during 2011 and by 3.7% to 8.4 Bcf/d in 2012. Increased pipeline gross exports to Mexico and Canada during the first part of 2011 have led to an upward revision for both 2011 and 2012. Pipeline gross exports are expected to average 4.1 Bcf/d in 2011 and 3.9 Bcf/d in 2012, compared with 3.1 Bcf/d in 2010.

EIA projects that U.S. imports of liquefied natural gas (LNG) will fall from an average 1.2 Bcf/d in 2010 to 1.0 Bcf/d in 2011 and 0.95 Bcf/d in 2012. Because of the earthquake in Japan and subsequent nuclear generating station outages, Japan's demand for LNG as a replacement fuel for power generation is expected to increase, lifting global LNG prices. Re-exports of LNG previously imported to the United States hit a record in January, the agency said separately (see related story).

EIA expects that natural gas storage inventories, though lower than last year, will remain robust given higher forecast production throughout the 2011 injection season. Projected inventories surpass 3.8 Tcf at the end of October 2011 as a result of high production levels and a mild summer relative to last year.

Uncertainty over prices is lower this year compared with last year at this time. Gas futures for August delivery (for the five-day period ending June 2) averaged $4.66/MMBtu, and the average implied volatility was 33%. The lower and upper bounds for the 95% confidence interval for August 2011 contracts are $3.91/MMBtu and $5.47/MMBtu. At this time last year, the August 2010 futures contract averaged $4.47/MMBtu and implied volatility averaged 47%. The corresponding lower and upper limits of the 95% confidence interval were $3.22/MMBtu and $6.20/MMBtu, EIA said.

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