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Analyst: Sustained GOM Shut-ins Weighed on 4Q, Annual Gas Output

Sustained shut-in production in the Gulf of Mexico (GOM) in the final quarter of 2005 depressed U.S. natural gas production 1.4% sequentially and 6.5% year-over-year, according to a survey by the Gerdes Group of 42 of the largest public exploration and production (E&P) companies.

The year-over-year decline was the largest in the history of the survey, analyst John Gerdes said, "although the lesser sequential decline suggests a moderation in production deterioration as producers bring shut-in GOM production back on line." Shut-in production offshore at the beginning of 4Q2005 was more than 64%; currently, about 14% of GOM output remains offline, according to the Minerals Management Service.

The 42-company survey accounts for almost two-thirds of the trend in U.S. gas production after considering royalties and working interest, Gerdes said. However, Gerdes said the higher production decline relative to the Energy Information Administration (EIA) data "likely relates to the significantly greater exposure of the surveyed companies to the generally steeper average well declines in the GOM."

Last month, the EIA estimated domestic dry gas production in 2005 declined by 3.2% mostly because of the hurricane-induced disruptions in the GOM (see NGI, March 13).

Gerdes' survey did not include many of the smaller, privately owned E&Ps, which "tend to own on average older wells, with significantly lower decline rates." Also, rig availability has been "increasingly challenging," but many of the smaller/private producers "tend to operate strictly within cash flow, and therefore have relatively greater access to financial resources in a strong gas price environment from which to increase drilling/workover activity."

The survey of larger public U.S. gas producers "is essentially an analysis of a subset of companies with the highest propensity to experience production declines," Gerdes wrote. "This characteristic is most noticeable in the largest public companies, most of which have significant GOM exposure, and many of which have made the strategic decision to deemphasize U.S. exploration and development" and move to deepwater sites.

"Consequently, while our company production survey is a useful gauge of the trend in U.S. gas production, the EIA data appears to be a decidedly better reflection of the trend in U.S. gas production."

The two largest U.S. gas producers, Chevron Corp. and BP plc, experienced notable declines in gas output in the final quarter. Both hold considerable GOM interests, and both sustained heavy damage from last summer's hurricanes. Chevron's 4Q gas production was down 14%, while BP experienced a 4% decline. For the year, BP's gas output was down 11%; Chevron was off 22%.

Meanwhile, Chesapeake Energy Corp., with interests heavily weighted onshore, moved into fifth place among U.S. gas producers overall, with a 4% gas production gain the final quarter and an 11% gain for the year. The "standouts" in Gerdes' 4Q survey were Bill Barrett Corp., up 24%; Pogo Producing Co., up 19%; and Petrohawk, up 17%.

According to Gerdes, the top 10 U.S. gas producers last year, in order, were BP, Chevron, ExxonMobil Corp., Devon Energy Corp., Chesapeake, ConocoPhillips, EnCana Corp., Anadarko Petroleum Corp., XTO Energy Inc. and Burlington Resources Inc.

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