Two prominent analysts last week predicted that domestic dry gas production would decline by at least 2%/year for the foreseeable future. Both Southwest Securities and Lehman Brothers conducted surveys of top producers and found a continuing struggle to grow production despite substantial rig count increases.

Southwest surveyed 43 companies for its 3Q03 U.S. gas production survey, which account for about 75% of U.S. gas production. The survey indicates a 1.3% sequential decline in the third quarter and 2.8% decline year-over-year. The U.S. production decline actually accelerated in the third quarter “against a backdrop of a 900-plus gas rig count since June,” Gerdes said. Additionally, he noted that the survey could be understating the degree of decline at some of the larger exploration and production (E&P) companies.

“That said, two factors likely explain about half of the decline in the third quarter U.S. production: limited ethane-rejection (gas processing returned to normal levels); and a dearth of incremental deepwater gas products commencing production,” Gerdes wrote in his “Weekly Energy Idea.”

Compounding the U.S. decline was what many consider long-term structural decline in Canada’s Western Sedimentary Basin, Gerdes said. However, “modestly higher capital productivity in Canada, and the resulting extremely robust drilling activity evidenced up north should stabilize Canadian gas production at current levels.”

For the United States, however, the picture is less optimistic. “Astonishingly…assuming a 5% per annum deterioration in prospect quality and given the relationship between rig/prospect productivity and rig count over the past few years, there does not appear to be a gas rig count that stems the decline in U.S. natural gas supply next year,” Gerdes said.

Lehman Brothers analyst Thomas Driscoll surveyed 49 North American gas producers, and his statistics mirrored those of Southwest Securities, with production volumes falling 1.5-2% sequentially and 2.5-4% year-over-year. Driscoll expects to see a 2-3% North American gas production volume decline this year, which in turn “will force industrial and perhaps utility consumers to reduce gas consumption in 2003.”

Lehman’s survey, which accounts for about 71% of U.S. volumes and 69% of Canadian volumes, said U.S. volumes fell more than 2% from the second quarter, and both U.S. and Canadian production fell about 3% from last year’s third quarter levels. Canadian 3Q03 production is expected to be flat sequentially.

Those U.S. producers showing the biggest declines in the third quarter appear to be ATP Oil & Gas, off 43% from a year ago, and Amerada Hess, down 39% from 3Q02. Nuevo Energy’s production was down 28% compared with last year’s third quarter. In Canada, ConocoPhillips showed the largest decline year-over-year of 21%, followed by Canadian Natural Resources, which showed a 12% loss from 3Q02.

Not all producers’ gas volumes declined in the quarter, according to Driscoll. The largest gain was made by Pioneer Natural Resources, up 109%. Also showing gas volume gains in the quarter versus a year ago were Apache Corp., 56%; Westport Resources, 45%; and EnCana Corp. and Chesapeake Energy, both up 31%. In Canada, Burlington Resources Inc. reported a 13% jump in gas production versus 3Q02. Husky Energy gained 9% in the quarter, while Devon and EOG Resources both were up 7% from a year ago.

What may help North American gas production overall is the huge jump in the Canadian rig count, according to analysts at CreditSights. The latest Baker Hughes U.S. gas rig count decreased 11 to 932 rigs, just off year-to-date highs of 944 reached in late August 2002. Gulf of Mexico rigs were two higher from the same period a year ago, to 104. However, the North American rig count increased 84 to 1,487 mostly because of an 88 rig increase in Canada to 396 rigs.

“The Canadian rig count is now at a new five-year high for the comparable weekly period,” noted CreditSights. “The increase could presage an early start to the winter drilling season, which witnessed substantially higher-than-normal drilling in 2002.” At the very least, said CreditSights, “the rig count jump signals that E&Ps continue to drill with natural gas prices in the $4.75/Mcf range, despite high spending levels through the first three quarters of the year.”

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