Given a trend of a 2%-2.5% a year decline in U.S. natural gas production and stable Canadian output, North American production overall appears “likely” to deteriorate at least 0.5-0.75 Bcf/d a year for the foreseeable future, according to a survey by Southwest Securities. Meanwhile, the latest rig counts suggest Canadian producers are getting a jump start on winter drilling.

In the latest “Weekly Energy Idea,” Southwest Securities analyst John Gerdes noted that “at best,” the U.S. decline will be offset by a growth in liquefied natural gas (LNG) imports and no growth in gas demand.

Southwest Securities surveyed 43 companies for its 3Q03 U.S. gas production survey, which account for about 75% of the trend in U.S. gas production after royalties and working interests. The 3Q03 survey indicates a 1.3% sequential decline and 2.8% decline year-over-year.

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.

Compounding the U.S. decline was what many consider long-term structural decline in Canada’s Western Sedimentary Basin, he 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.”

What may help North American gas production overall is the huge jump in the Canadian rig count, said CreditSights analysts. 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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