Hurricane disruptions in the third quarter reduced domestic natural gas production about 6% sequentially from the second quarter and about 6% compared to 3Q2004, but excluding the storm losses, the trendline in U.S. output for the next few years is flat, according to energy analysts with the Gerdes Group.

The Houston-based firm analyzed a cross section of majors and independents for its 3Q2005 production survey. The 42-company survey noted a much sharper decline than recent Energy Information Administration (EIA) data, but Gerdes attributed the difference in the “significantly greater exposure” of surveyed companies to the steeper declines in the Gulf of Mexico (GOM).

Earlier this month, the EIA reported domestic dry gas production this year will likely decline by 4.2% due in large part to the major hurricane disruptions to infrastructure in the GOM (see Daily GPI, Nov. 9).

Analyst John Gerdes said Tuesday EIA’s data is essentially correct. In an interview with NGI, Gerdes disputed other analysts, who have reported in recent weeks that U.S. gas production has “fallen off the table…The reality is, the producers were impacted by turbulence in the Gulf of Mexico. We see that in BP, Chevron, ExxonMobil, Shell…anybody with significant GOM exposure shows up with steep declines” in the quarter. And those declines will continue through the fourth quarter, he added.

“We see 1.6 Bcf/d year-over-year losses,” said Gerdes. “If those hurricanes had not happened, we would have experienced something slightly plus or minus year-over-year, and sequentially, slightly up, similar to the second quarter. When you ‘x’ out the turbulence, it does appear that there is evidence of some stability in the supply picture.” Through 2010, Gerdes is now forecasting “mild deterioration, of about half a percent.”

Most of the majors are showing sharper U.S. gas declines, but many are moving bigger gas operations overseas, he said. Those picking up the slack are large independents and smaller, private producers — and many of them are showing strong U.S. gas growth. As an example, Chesapeake Energy Corp., which explores for gas only in the United States, showed a 5% sequential gas output increase, and it was up 14% from the same period a year ago. EnCana Corp., another North American-based producer, was up 4% sequentially and 15% year-over-year. XTO Energy Inc., also concentrating on domestic gas, was up 6% sequentially and 13% year-over-year.

Besides the larger independents, many smaller, mostly private companies also are showing gas gains. These companies, said Gerdes, “tend to own on average, older wells, with significantly lower decline rates.” Larger public companies tend to concentrate human resources on higher impact production opportunities. Rig availability is “increasingly challenging, especially for small companies,” but the smaller producers “tend to operate strictly within cash flow, and therefore have relatively greater access to financial resources in a strong gas price environment from which to increase drilling and workover activity.”

Consequently, said Gerdes, his survey is a “useful gauge of the trend in U.S. gas production,” but EIA’s data “is closer to the truth,” and it “appears to be a decidedly better reflection of the trend in U.S. gas production.” EIA uses a balancing item, which is the plug number that equates supply and demand, and it typically displaces a negative variance during the heating season. Residential and commercial demand is more difficult to measure and subject to greater error, Gerdes added.

The “suggestion that the EIA data more accurately reflects U.S. gas supply trends embeds the view that non-survey production grew rather meaningfully in 2003 and 2004,” said Gerdes. For the “math” to work, non-survey production would have had to grow about 3.9% in 2003 and 3.1% in 2004. “Non-survey production of this magnitude seems entirely plausible considering the limited exposure to the high decline in the Gulf of Mexico, more mature, thus lower decline producing wells of smaller and private companies, and the solid production growth experienced in the top U.S. gas producing states in 2003 and 2004.”

The EIA data is revised “meaningfully” over a period of a year and a half, and “we feel pretty good about the 2004 numbers…the government data is more right than wrong when you look at the storage numbers. They calibrate better to government data. These guys [EIA analysts] have to reconcile what happens in terms of gas storage. They have to reconcile their own storage numbers. We [analysts] don’t have to reconcile anything.”

Generally, energy analysts are “all jazzed up about the deterioration in U.S. gas supply, but we’ve been surveying a lot of these majors that have the highest propensity for a drop in production. When you go back and look at the [Minerals Management Service] data in the Gulf of Mexico and the state data, where the declines have come from is mainly in the shallow water GOM. There is some strength in spots like Colorado and Wyoming, and overall in the top six producing states.”

Gerdes analysts “do see some moderation in onshore growth” going forward, but “overall, more moderate declines in the GOM shallow water…fairly stable GOM gas production through 2008. In 2005, shallow water production should account for slightly more than 60% of GOM gas production. By 2009, shallow water production is expected to comprise only half of GOM gas production versus over 90% in 1997.”

The “moderating absolute decline in shallow water production combined with deepwater production growth should largely stabilize GOM gas production from 2006 through 2010,” as long as there are no more hurricane seasons like this one, he said. “The material impact of Hurricanes Katrina and Rita is clearly evident in the decline in GOM gas production this year and the subsequent rebound in 2006. Gulf gas production should recover to about 90% of pre-hurricane levels in early 2006, with the remaining gas production considered permanently lost..”

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