Rising production in Canada — pushed by the Ladyfern discovery in Western Canada — could exacerbate a “temporary” natural gas oversupply situation in the United States, which in turn could lead to falling North American natural gas prices, lower earnings and declining cash flow estimates for 2002, according to Lehman Brothers analysts Thomas Driscoll and Phil Skolnick in a research note released Thursday. This gas surge, said the analysts, could send gas prices falling to the $2.25-2.50/MMBtu range for a “sustained period of time” — meaning months, not weeks.

By year’s end, the analysts expect U.S. production to be up 1.5-2.0 Bcf/d — in the 3-4% range. However, Canadian production was up about 9%, or 1.3 Bcf/d in July compared to a year ago, which includes an estimated 0.1 Bcf/d from Eastern Canada. The wild card will be “future production gains at Ladyfern,” which they said “could yield an overall production increase in Canada” of more than 1.5 Bcf/d by the end of the year.

The Ladyfern gas discovery alone contributed nearly 40% of the July increase, they noted. “Current announced expansion plans by Murphy/Apache and Canadian Natural Gas Resources at Ladyfern could add an additional 230 MMcf/d of natural gas into the market by December. In addition, we believe Alberta Energy Co.(AEC) is likely to add to its Ladyfern production.” Using pro-forma June 2001 results for the announced plans to add 230 MMcf/d, year-over-year production increases would total 1.4 Bcf/d, or 11%.

In April, AEC increased its 2001 gas sales forecast by an average of 75 MMcf/d for the entire year. AEC said its daily production from Ladyfern would average 100-150 MMcf/d during the last half of 2001 (see Daily GPI, April 18). Ladyfern was only put in play late last year, but so far, producers there have recorded outstanding results (see Daily GPI, Feb. 12; Feb. 18).

Another factor is Eastern Canadian production, which rose 130 MMcf/d to 505 MMcf/d in June, said the analysts — and the July numbers have not been released.

“Assuming the majority of the Canadian production increase is destined for the U.S. market, [it] would lead us to conclude that supply available to U.S. consumers will show a year-over-year increase of 3.0-3.5%+ Bcf/d by year end,” said the analysts. “This is a 5-6% increase in overall supply (U.S. demand in round numbers averages about 60 Bcf/d). In addition to this increase in supply, we could be looking at 600-800 Bcf overhang in inventory by year end.”

The Lehman analysts said they “continue to use a $4/MMBtu long-term natural gas price,” but believe that “intermediate-term natural gas price performance will disappoint investors and lead to a difficult environment for exploration and production stocks.”

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