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AGA Predicts Strong Reserve Growth for 2005; Unconventional Plays More Important Now

According to the American Gas Association (AGA), predictions of a declining natural gas reserve base are premature. However, the industry is working harder to replace reserves. And most notably, onshore unconventional resources are being relied upon more heavily, and that is having consequences for gas production.

The AGA said that the country's gas reserves grew by about 4 Tcf last year to 197 Tcf, hitting levels not seen since 1984. The AGA estimate is based on results reported by 30 large reserves holders, which represent about half of U.S. reserves.

"In 2005, over 27,000 gas wells were completed in the United States, which is the highest level of completions on record," said Chris McGill, AGA managing director of policy analysis and author of AGA's Preliminary Findings Concerning 2005 Natural Gas Reserves. "However, most of these wells were drilled on-shore in shales, tight sands and coal seams, which are low-yield and slow-yield resources."

Consequently the character of the U.S. gas reserve base is changing. According to the report, "the growing U.S. reserves base has only sustained production in recent years because the productive nature of gas reserves is changing. Many more low-yield and slow-yield shale and coal seam completions are being drilled onshore than the traditional high-yield reservoirs offshore of the past. The good news is that a solid long-term productive capability baseline is being established. The bad news is that it takes many more wells to sustain productive capability as more traditional production is depleted."

However, AGA countered the belief by some in the industry that production is falling rapidly. Pointing to last year, the association noted that domestic production was down about 2.7% compared to 2004. However, virtually all of the decline can be attributed to shut-ins resulting from Gulf of Mexico hurricane activity. "That does not mean, however, that some companies did not produce less. Some did and some produced more."

AGA estimates that 2005 reserve additions may have been as much as 35.7 Tcf for all U.S. domestic producers combined, while about 18.3 Tcf of gas was produced. "Therefore, replacement of gas reserves during 2005 is estimated to have been as much as 195% -- a good year for gas producers and reserves."

Twenty-five of the 30 producers examined by AGA for its report increased their reserves in 2005. These companies now hold more than 114 Tcf. Much of the increase came from new discoveries and extensions, but some resulted from purchases and positive revisions that can be partially attributed to higher wellhead prices.

Large reserves holders were strong net purchasers of gas in the ground during 2005, just as they were in the previous four years, AGA said. More than 5 Tcf of reserves (purchases net of sales) were acquired, led by significant purchases by Chesapeake Energy, Chevron, Noble Energy Inc. and XTO.

AGA found that 12 of the companies reported negative revisions to their prior reserves estimates. However, total revisions for the 30 companies were a positive 4.4 Tcf, including a 1.9 Tcf revision to ExxonMobil reserves, due mainly to recovery economics, as well as 1.7 Tcf by BP, attributed to improved recovery.

The 30 companies in the AGA study replaced 167% of production in 2005 with new gas and revisions to prior estimates, compared to 112% in 2004 and 66% in 2003. Twenty-one companies replaced 100% or more of 2005 production, compared to 18 companies in 2004 and 15 companies in 2003.

Among the large reserve holders, the median price of gas at the wellhead increased from $4.55/Mcf in 2003 to $5.19/Mcf in 2004, a 14.1% increase. Median prices rose again last year to $7.00/Mcf, a 34.9% increase. Among companies in the AGA universe, EOG Resources realized the highest price for gas last year at $7.86/Mcf, net of hedging. Dominion had the lowest price, $4.73/Mcf, net of hedging.

Based on production, the top 10 companies surveyed by AGA are: BP, 1 Tcf; ExxonMobil, 764 Bcf; Chevron, 604 Bcf; ConocoPhillips, 593 Bcf; Devon Energy, 555 Bcf; Chesapeake Energy, 422 Bcf; Shell Oil, 418 Bcf; Anadarko, 414 Bcf; EnCana, 400 Bcf; and XTO, 377 Bcf.

"Even though domestic gas production has risen about 7% since 1990, growing from 17.2 Tcf to the current estimate of 18.3 Tcf in 2005, recent domestic production has basically only held its own," AGA said. "AGA's current view of future production capability is that it will remain in the 18-19 Tcf range per annum for the foreseeable future unless significant policy decisions opening access to potential resources are made."

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