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EIA: January Lower 48 Production Up from Year Ago

It is clear that the widespread producer cutbacks that began last fall to combat falling prices have not yet translated into reduced natural gas supplies as production in the Lower 48 states was 63.01 Bcf/d in January, down 0.29 Bcf/d, or half of a percent from December, but up 2.7 Bcf/d, or 4.5% compared with January 2008, according to Energy Information Administration (EIA) estimates released Thursday. In longer-term projections also released last week EIA forecast rapid shale growth but a lesser role for imports of liquefied natural gas (LNG) in coming decades.

Federal offshore Gulf of Mexico (GOM) production, hit hard by hurricanes Ike and Gustav last September, was 6.36 Bcf/d in January, up 9.3% since December but still down 1.54 Bcf/d (19.5%) from January 2007. In September offshore GOM production tumbled to just 2.22 Bcf/d, EIA said.

Producers -- faced with steeply lower natural gas prices -- began laying down rigs and reducing capital budgets last fall. Chesapeake Energy Corp. CEO Aubrey McClendon said last November that falling prices and the economic recession would lead to the reduction of 300-500 active rigs during 2009 (see NGI, Nov. 3, 2008). The fact that production levels are actually up versus January 2008 levels does not come as much of a shock as it is expected to take some time to see the trickle-down results of the reduced activity.

Barclays analysts said last week that with current rig counts, sequential declines in production, if not already under way, should occur in the "very near future." Assuming the rig count finishes 2009 at 700, which would require another 150 or so rigs to fall, "domestic production could be down as much as 3.8 Bcf/d year/year by December 2009...," they said (see related story).

After front-month natural gas futures prices peaked at $13.694/MMBtu last summer, they ranged from $4.359 to $6.240/MMBtu during the month of January 2009 and are now trading at $3.782/MMBtu as of Thursday's close. During January 2008 front-month natural gas traded between $7.283 and $8.481/MMBtu.

EIA data showed that production in January was up marginally in Wyoming at 7.04 Bcf/d, compared with 6.99 Bcf/d in December and 6.49 Bcf/d in the same period last year. At the same time, production slipped in Louisiana (3.79 Bcf/d, down 2.3% from December), New Mexico (3.99 Bcf/d, down .7%), Oklahoma (5.19 Bcf/d, down 2.6%) and Texas (22.37 Bcf/d, down 1.8%).

EIA also said total consumption in January was 2,702 Bcf, up from 2,389 Bcf in December but down 22 Bcf compared with January 2008. Increases in two sectors -- commercial (512 Bcf, up 8.7% compared with January 2008) and residential (940 Bcf, up 6.7%) -- were more than offset by declines in two others: industrial consumption fell 12.3% compared with January 2008 and consumption for electric power slipped 8% to 485 Bcf.

In a report issued last month EIA said it expected total U.S. marketed natural gas production to remain flat at 58.61 Bcf/d this year and then fall by 0.8% to 58.13 Bcf/d in 2010 (see NGI, March 16). Total gas demand this year is expected to decline as well, by 1.3% to 62.64 Bcf/d from 63.49 Bcf/d in 2008, and then rise by a modest 0.4% in 2010, according to the EIA.

In its Annual Energy Outlook (AEO2009) issued last Tuesday, EIA raised its projection for domestic natural gas production and demand in the coming decades, citing the continued rapid growth in gas shale development and demand for gas by power generators. But it predicted a smaller role for imports of LNG in the years ahead.

"The larger natural gas resource [base] in the reference case results primarily from a larger estimate for natural gas shales, with some additional impact from the 2008 lifting of the executive and congressional moratoria on leasing and development of crude oil and natural gas resources in the OCS [Outer Continental Shelf]," the EIA said. The EIA reference case assumes "business as usual" and is based on the assumption that for the United States, existing laws, regulations and practices will be maintained throughout the forecast period (2007-2030), and that the world economy will recover by 2010.

The Department of Energy agency predicts that domestic gas production will increase 22% by 4.3 Tcf between 2007 and 2030, while net imports will fall by 3.1 Tcf (83%). It sees gas consumption in 2030 at 24.36 Tcf, up slightly from 23.05 Tcf in 2007.

Unconventional gas will be the largest contributor to the growth in domestic gas production over the coming decades, accounting for 56% of gas production by 2030, according to the EIA. And gas in tight sand formations will be the largest source of unconventional production during the period, making up 30% of total U.S. production in 2030.

But production from shale formations will be the fastest growing source of gas, the EIA said. With an assumed 267 Tcf of undiscovered technically recoverable resources, production of gas from shale formations is expected to increase to 4.2 Tcf in 2030, or 18% of total U.S. production, in 2030 from 1.2 Tcf in 2007, the agency noted.

Offshore production will continue to make up a significant portion of the U.S. gas supply, accounting for 15% of total domestic production in 2007 and 21% in 2030. "The increase in offshore production [will be] largely from deepwater formations and OCS areas recently released from congressional moratoria," the EIA said.

"Although average real U.S. wellhead prices for natural gas [are expected to] increase from $6.39/Mcf in 2007 to $8.40/Mcf in 2030, stimulating production from domestic resources, the prices [will not be] high enough to attract large imports of LNG," the agency said. Due to the anticipated growth in production of gas from unconventional onshore sources, combined with increased supplies from the OCS and Alaska, the EIA projects that the net import share of U.S. natural gas use will drop to 3% in 2030 from 16% in 2007.

LNG imports are expected to peak at 1.5 Tcf in 2018 before declining to 0.8 Tcf in 2030, despite projected U.S. regasification capacity of 5.2 Tcf, according to the EIA. "The near-term increase is the result of growth in world liquefaction capacity, which temporarily exceeds world demand, making LNG available to the U.S. market -- particularly in the summer to fill storage facilities. In the longer term, high LNG prices (which are tied to oil prices in many markets) and ample domestic natural gas supplies reduce U.S. demand for LNG imports."

The AEO2009 reference case assumes that an Alaska gas pipeline will be built in 2020, and that Alaska's gas production will increase by 1.6 Tcf as a result. "The no-Alaska pipeline case assumes that the pipeline will not be built, leading to higher prices in Lower 48 natural gas markets, more Lower 48 production and imports of natural gas and lower consumption." the EIA said.

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