Domestic onshore natural gas drilling is on the rise, and the U.S. supply picture should be a bright spot, with production growing slightly less than 1 Bcf/d in the next couple of years. However, the onshore drilling gains have been “largely offset” by modest weakness in offshore production, lower Canadian imports and the continuing long-term trend of increasing exports to both Canada and Mexico, according to a top energy analyst.

John J. Gerdes of SunTrust Robinson Humphrey/the Gerdes Group wrote in a note to clients, “the outlook for incremental U.S. gas supply doesn’t appear to be getting any rosier.” Underpinning the analyst’s “generally bullish” gas outlook for the past six years has been the “chronic” weakness of U.S. supply. Between 2001 and 2005, he noted, U.S. gas supply deteriorated 8%, or 4.1 Bcf/d.

“Notably, the deterioration was all related to offshore production, which declined 37%, or 5.1 Bcf/d.” Meanwhile, onshore U.S. gas output increased 3%, or 1 Bcf/d in the same period.

Most of the Gulf of Mexico (GOM) decline was attributed to a 50% (5.3 Bcf/d) drop in shallow-water production, Gerdes wrote. “Over the same period, deepwater production increased 6%, or 0.2 Bcf/d. Regrettably, the two category-five hurricanes that swept through the region last year [Katrina and Rita] only exacerbated the deterioration in GOM gas output, which averaged 8.7 Bcf/d in ’05, or 20% less than ’04.”

Because of the drilling/workover rig damage sustained from last year’s hurricanes and the operational focus to return hurricane-disrupted wells and facilities to production, shallow-water output should decline about 12.5%/year through this year versus the historical norm of about 5%/year, Gerdes wrote. His analysis of deepwater field performance data suggests the aggregate underlying decline of deepwater production is about 10%/year.

Given the recovery in disrupted GOM production to about 90% of pre-hurricane levels by June, offshore gas production this year should average 8.4 Bcf/d and account for 16% of ’06 U.S. gas supply, Gerdes wrote. Placed in context, GOM gas output constituted 26% of U.S. natural gas supply in 2001.

“Growth in deepwater gas production should essentially offset continued deterioration of less meaningful shallow-water output, resulting in fairly stable GOM gas production at +8.5 Bcf/d through ’10,” said Gerdes. “Notably, our production expectation assumes a GOM rig count of 90-95 rigs this year and 95 to 100 rigs thereafter. Currently, there are 94 rigs operating in the GOM.” The modest 2008-2009 growth in GOM gas production “is largely driven by the eastern deepwater GOM Independence Hub development, which should ramp to about 800 to 900 MMcf/d in ’08 (facility design capacity is 1,000 MMcf/d).”

Against the backdrop of a significant increase in drilling activity, the top six gas producing states in aggregate experienced a 0.6 Bcf/d increase in gas production last year, according to Gerdes’ research. “This growth is largely attributable to accelerating drilling activity in the Barnett Shale and Cotton Valley plays in Texas and continued aggressive development of the Pinedale/Jonah fields and coalbed methane in Wyoming.”

Overall, Gerdes is forecasting U.S. gas production to experience “modest” growth through 2009, partly attributed to growth in the GOM deepwater. “Notably, the analysis…reflects a 9% per annum deterioration in per rig/well productivity, which is consistent with rig/well productivity deterioration experienced in recent years and the long-term trend in gas reserves per well completion.”

Canadian gas production has grown, but exports to the Lower 48 are down. “The combination of a large majority (approaching 90%) of gas wells completed in low productivity/shallow formations and the steady deterioration in Western Canadian Sedimentary Basin (WCSB) well productivity has limited the impact of the 50% increase in Canadian gas well completions the past two years,” Gerdes wrote. The TransCanada/Alliance/Westcoast pipeline systems, which transport 90%-plus of WCSB gas production, have evidenced only 0.3 Bcf/d per year growth in field receipts in the past two years.

“In addition to the modest growth in WCSB gas production since 2000, growing Western Canadian demand for gas related to power generation and oil sands development has resulted in a fairly steady decline in the percentage of Canadian gas exported to the U.S.,” Gerdes wrote.

“Given a 7.5% per annum increase in gas well completions after ’06, an approximate 6% per annum decline in well productivity, a 30% underlying production decline and a 2.5% per annum decrease in the percentage of WCSB gas exported to the U.S., Canadian gas exports to the U.S. should decline modestly through ’10.” Gerdes said the well productivity and production decline assumptions “are largely consistent with the Canadian National Energy Board findings.”

Ziff Energy Group also is forecasting a drop in exports of Canadian gas to the Lower 48. Even though gas production is on the rise, Ziff blames consumption by growing oil sands development for a drop in exports.

According to Ziff, oil sands production is expected to reach 3.3 million bbl/d by 2015. Gas consumption by the oil sands sector over the same time period is expected to jump to 2.4 Bcf/d from its current 600 MMcf/d.

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