Despite current crude oil and natural gas price weakness,PaineWebber believes its 1998 wellhead gas price forecast of$2.15/MMBtu is “conservative.” And PaineWebber raised its 1999 spotwellhead price forecast to $2.35 from $2.20. Although the firmacknowledges first quarter producer earnings probably will suffer asetback, over the long term “we’re very very bullish” for eightreasons, said analyst Ronald J. Barone. First of all, despite ElNino’s impact of a 10% warmer than normal winter, spot gas priceshave averaged a solid $2.04/MMBtu so far this year. If temperatureshad been normal, prices would have averaged $2.50, PaineWebbersaid. Secondly, nine of the last 11 summers that followed an ElNino winter have been warmer than normal. Normal to warmer thannormal temperatures next summer would contrast sharply with the 7%cooler than normal temperatures last summer. And warmertemperatures would have an even greater impact on prices if coupledwith near normal hydroelectric power supply – which PaineWebberalso is expecting – rather than the 150% above normal hydro supplyseen in 1997.

The third reason to be bullish is declining U.S. gasdeliverability, Barone said. Expect “pretty tight scenarios” nextwinter. The total U.S production decline rate in 1996 was 20.8%, upfrom 20.5% in 1995 and 15.8% in 1992. “Decline rates are risingsignificantly,” said Barone. “Onshore it’s not that bad. Itdecreased to 14.6% in 1996 from 15.5% in 1995. But the area of allbig new production is offshore, where the decline rate jumped to37.1% in 1996, from 33.9% in 1995 and 24.5% in 1992. We areproducing those fields out in the Gulf of Mexico in 3-4 years. Andthe fact is our ability to deliver is diminishing year after year,and I don’t think this is about to be reversed imminently.”

The fourth reason is higher rig utilization rates. “It isbecoming increasingly difficult to spud additional new gas wells asthe rig utilization rate is over 85%, Barone noted. “The number ofnatural gas wells producing has increased every year. There were91,000 wells in 1960, and in 1996 there were 304,000 wells. Thisrate of increase is going to be difficult to maintain. Yet thewells are in shallower pools and are being depleted rapidly. In1971, the average gas well in the U.S. produced 435 Mcf/d. That hasdeclined every year. In 1996, it hit an all-time low of 159 Mcf/d.Productivity is flat to down despite gas wells being up.”

With gas and oil prices down significantly from last year in thenear term, 10% and 11.2% respectively, producer cash flow will bedown in 1998 – PaineWebber’s fifth reason to be bullish. The sixthis the low U.S. reserve-to-production ratio, 8.5 years, and theseventh is limited increase in Canadian gas supply. Barone notedthe recent announcement of a one-year delay in construction of the2.3 Bcf/d Alliance Pipeline, and added he doubts Alliance can evenmake the new winter 2000 deadline.

The last, but probably the most significant, reason to bebullish, according to PaineWebber, is rising U.S. gas demand.Assuming normal weather, PaineWebber forecasts demand will grow 700Bcf in 1999 to 22.7 Tcf from a 1998 (estimate) of 22 Tcf and a 1997(estimate) of 21.9 Tcf. Canadian imports will provide 260 Bcf in1999 but the remaining 440 Bcf (over 1 Bcf/d) will have to comefrom domestic increase. With current production maxed out at 53Bcf/d, “we expect it will be difficult to achieve the full 1 Bcf/dof incremental production required.” PaineWebber said.

©Copyright 1998 Intelligence Press Inc. All rights reserved. Thepreceding news report may not be republished or redistributed, inwhole or in part, in any form, without prior written consent ofIntelligence Press,Inc.