U.S. natural gas production in 2004 did not fall as much as some analysts contend nor did it grow as much as federal officials report, a top consultant with Energy and Environmental Analysis Inc. (EEA) said Friday. Kevin Petak, who directs EEA's energy modeling and forecasting, said the "right" answer is probably somewhere in the middle.
Lehman Brothers estimates that total 2004 U.S. gas production declined 5% (4.25-4.5% excluding Hurricane Ivan) and forecasts another decline of 1% in 2005. Meanwhile, the Department of Energy's Energy Information Administration reports 2004 gas production was flat, but it will grow 1.6% this year (see related story).
"The true answer is in between," said Petak. "This shows how spurious the information in the gas market is right now. It's an issue we've been following closely, and for the past two or three years, both sides have been right. But it surely is one of the reasons for continuing price volatility."
The EEA consultant said, "Lehman is being far too pessimistic. On the flip side, the EIA is too optimistic about what is happening. We believe that in 2004, actual production versus 2003 was down about 1-to-1.5%."
If there was an overall 5% decline in gas output last year as Lehman's analysis suggests, "that's a heroic decline," said Petak. "Putting that in perspective, U.S. production is 51-52 Bcf/d. Lehman's forecast would say that under that scenario, U.S. production is down 2-3 Bcf/d. That is a heroic decline year-over-year. In our analysis, if it was that big of a decline, gas prices would be under even more pressure than what they actually were. I'm hard pressed to see how analysts concluded this. The refill last summer was pretty robust."
Until Hurricane Ivan disrupted offshore production last September, gas production capacity was full, Petak noted. "Ivan probably dropped production between 2003 and 2004 by 0.05% and that would put year-over-year declines at 1%," he said.
The Arlington, VA-based consultant said that EEA is forecasting 2005 production will be up about 1% versus 2004. "About three quarters of that rise is due to Hurricane Ivan... We expect all of the lost production to be back in the first quarter, or at least certainly the economic portions of the production."
Analysts' forecasts of gas production will continue to have a huge impact on the gas market, he said. "Our view is that even with a slight increase in productive capacity, you still need a rather substantial increase in imports for the market to be able to be balanced at reasonable gas prices. To me, I think to maintain a $6 price, which we've seen for some time, is to see substantial increases in imports."
Without an increase in imports, "prices could go much higher. On the flip side, a lot of things can happen. March could come in much warmer than normal. Summer could be cool. There could be lots of price volatility in the marketplace, and there is a lot of spurious price information creating a lot of that volatility.
"But I don't want to lose my important point. Imports have to rise substantially or we will see higher prices." LNG imports, said Petak, are "very important to balance the marketplace. If there is to be any real growth in gas supply, it will come primarily from LNG. That's the wild card... Then the real wild card is in 2008, 2009 and 2010, when the new LNG import facilities are ready. That's critical."
EEA is forecasting $6/Mcf gas prices this year, which is "certainly in lock-step with a lot of analysts," said Petak. "We think the $6 prices are here to stay. Prices are tough to call... There's lots of volatility here, and little movements and things can actually move prices around a good bit. Our advice to buyers and sellers is that hedging is very important in this environment."
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