Despite the volatility the natural gas market has experienced over the last few weeks, Anadarko CEO Robert J. Allison, Jr. assured attendees at the tenth annual Herold Pacesetters Energy Conference in Greenwich, CT that his company has not made any major changes in its business plan. He added that just like they always do, “Gas markets will self-correct.”

“We’re doing some fine tuning, tapping the brakes in a few places, speeding up activity in some areas that make more sense at the current commodity prices,” he said. “But no major changes. Our capital spending budget is on track, but the projects in that budget are a bit different. We’re still growing — and growing profitably. We’re still exploring — and we have some very high-potential wells drilling right now around the world.”

Allison allowed that not every project works at today’s prices. He added that this is why Anadarko at the end of the second quarter made a slight shift in capital spending away from some gas exploitation projects, and toward more exploration projects and more “oil” projects. As an example, he highlighted the fact that the company has more rigs working in the Gulf of Mexico and in Canada, but fewer drilling development wells in Texas.

The chief executive said Anadarko’s overall rig count peaked at 97 company-operated rigs in July, but due to low gas prices has fallen to around 82. “I predict that more and more producers will be forced to drop rigs until costs come down or gas prices go up,” said Allison. “That should take a couple of months.”

Anadarko has also accelerated its stock repurchases that were authorized by the board last July as part of a billion-dollar stock buyback. From a shareholder’s perspective, it makes a lot of sense right now, he said. “We’ve already bought back over 2 million shares, and you may see us do more in the future,” the CEO stated. “At today’s stock prices, we’re buying reserves for about $5 per BOE — that’s a lot cheaper than some acquisition prices we’ve seen in the market lately.”

As for the natural gas commodity market, Allison said even though industrial demand may be weak right now, the economics of fuel switching look better all the time — especially with higher oil prices. “We know demand is ‘elastic,’ and the market seems to have forgotten that elastic demand works both ways,” Allison remarked.

“On the supply side, the latest data show that gas supply is not ‘elastic,’ at least on the upside. Despite an incredible increase in drilling activity that began in 1999, total U.S. gas production was up only about 1.5% at mid-year 2001. But it will be up less than that by year-end, because of steep production declines, combined with reduced drilling activity. Most producers drilled wells with flush, short-lived production and very steep decline curves.”

He said Anadarko now has data for gas wells in Texas and the Gulf of Mexico that went on line in the first quarter of 2000. After a year, the average decline rate from these wells was more than 50%, he said. Because of this fact, Allison said he is convinced that any decrease in drilling will reduce gas supply in just a matter of months. As evidence, the rig count has come down steadily from about 1,100 to 950 in the last few weeks.

Touching on the observation that it does not appear that Congress will produce an energy bill this year, Allison called it “disappointing,” because the nation needs a policy that helps promote increased development of domestic resources.

“One issue I’ve spoken about often is the lack of access to prospective acreage on federal lands, and excessive regulation that hinders access even to privately owned lands,” Allison said. “Let me footnote one thing, though — Anadarko doesn’t have an access problem. We have 18 million acres in North America, and plenty of places to explore. But as an industry, we have a big problem, and that means America has a problem.”

Noting that it is widely accepted that the Rocky Mountains states are the single best areas left in the Lower 48 to look for new supplies of natural gas, he said that there are close to 100 million acres off limits there, “And every time you turn around, that number gets bigger.”

Pointing out that the Central and Western Gulf of Mexico are the only offshore areas in the nation where regular lease sales are conducted, Allison said the company believed it had finally made some headway in the Eastern Gulf with Lease Sale 181. But the Lease Sale 181 area was “whacked by three quarters” because of the complaints over the prospect of having drilling rigs 100 miles off of Florida’s beaches.

“Of course, we aren’t hearing any squawking about the pipeline that’s going to carry natural gas from Mobile Bay to Tampa,” Allison said referring to the 753-mile, $1.6 billion Gulfstream pipeline project. “Why doesn’t that surprise me? It’s not just the Rockies; it’s not just offshore. We also need access to the coastal plain of ANWR, and we need to build a natural gas pipeline from Alaska. Most of all, we need reasonable policies and regulations that balance environmental interests with cost-benefit concerns. We need policies that recognize the reality that we have to have additional supplies of gas, if we expect to keep the economy running efficiently in this country over the long term.”

Allison said the industry is now facing several questions, such as “How do we get people to understand the problem, and more importantly, get lawmakers and regulators to act on it,” the CEO asked. “The industry needs to do a better job of reassuring voters that we can drill in these areas safely and without undue risk to the environment.”

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