The Energy Information Administration (EIA) reported last Tuesday that domestic onshore natural gas production fell 1.1% in July, but energy analysts said the decline in drilling and production may not have come soon enough to correct the gas storage glut.

Lower 48 gross natural gas production fell 1.1% in July due largely to a drop in Wyoming production as more wells were shut in, the EIA said. Gross gas production in July was pegged at 62.55 Bcf/d in the Lower 48 states, down 0.69 Bcf/d from the 63.24 Bcf/d recorded for June and down 0.91 Bcf/d from the 63.46 Bcf/d posted in July 2008, according to the “Form EIA-914 Monthly Natural Gas Production Report.” If Alaska is included, which saw its gas production dip 6.1% in July to 7.90 Bcf/d, total U.S. gross output in July was 70.45 Bcf/d, down 1.7% from June.

Before the report’s release, analysts with Tudor, Pickering, Holt & Co. Securities Inc. (TPH) said they were expecting at least a 0.5 Bcf/d decline month-over-month, which they said “would support recent natty price strength.”

Overall gas production in the Lower 48 states in July fell “mostly because of a 9% drop in Wyoming production from shut-in wells and gas plant maintenance,” said the EIA, the statistical arm of the Department of Energy. Wyoming gas output dropped to 6.47 Bcf/d in July from 7.12 Bcf/d in June and from 6.98 Bcf/d in July 2008, the agency noted.

The two bright spots, relatively speaking, were Louisiana and the Gulf of Mexico. “Louisiana increased 3.5% as drilling in the Haynesville Shale continues and the Gulf of Mexico (GOM) federal offshore production gained 2.4% as shut-in wells were brought back on line,” the EIA noted.

Louisiana gas production rose to 4.37 Bcf/d in July from the prior-month’s 4.22 Bcf/d and from 3.86 Bcf/d a year ago, while GOM output climbed to 7.38 Bcf/d from 7.21 Bcf/d in June. Gross production in New Mexico rose slightly in July to 3.92 Bcf/d from 3.89 Bcf/d in June, but it was down from 4.23 Bcf/d a year ago, according to the EIA.

Gas production in Texas slipped 1.2% in July to 20.83 Bcf/d from 21.08 Bcf/d in June. Oklahoma output dipped 1.5% to 5.13 Bcf/d in July from 5.21 Bcf/d in June, the agency noted.

Based on EIA 914 data, actual dry gas production through June “has indeed rolled over in response to the collapse of the gas rig count, but not as promptly or as much as might have been expected given the near-vertical rig count decline,” analysts at Stephen Smith Energy Associates said. The impact on gas output may be “similar to the effect of a 150-200 Bcf hurricane. This will not fully correct the excess storage issue going into winter 2009-2010 but it’s a moderate step toward a less glutted market…We expect the production decline to continue until the second half of 2010.”

One reason that the total U.S. gas output decline was slower than the collapsing rig count was evident in GOM/Louisiana gas production numbers, the Smith analysts noted. “GOM/LA production was ramping up from September 2008 through July 2009, restoring production disabled by hurricanes Gustav/Ike (plus Haynesville-driven production gains in Louisiana). Onshore production, by itself, has been in far more evident decline than total U.S. production,” they wrote.

Gas storage levels remain “substantial,” said the Smith team, but “weekly storage builds in September were routinely weaker than weather effects and recent supply trends would have predicted. We attribute this discrepancy to some combination of three principal drivers: (1) an increasing number of storage facilities are now at capacity, (2) increasing pipeline pressures are restricting gas flows and no doubt causing some producer shut-ins, (3) even with the recent price gains some producers are electing to reduce output until the ‘storage crunch’ is past.”

TPH analysts Brian Lively and Dave Pursell agreed that the hurricane recovery has skewed the EIA production numbers. But the TPH duo is looking ahead to 2010.

“Bottom line: Production should be falling. It is. Decline should be fairly steep. It is. Month-to-month and week-to-week data points will wear you out…but they are generally confirming our thesis” that gas prices and energy stocks will be higher in 2010, the TPH duo wrote.

“Overall, the July 914 data is consistent with the degree of month/month market tightening we saw in July gas storage,” said Lively and Pursell. “Between February ’09 and July ’09, onshore supply has fallen 1.9 Bcf/d (3.3%), which directionally makes a lot of sense given the peak-to-trough rig count decline of 60%. Over the same time period, the EIA indicates offshore production has risen by 0.9 Bcf/d (which we attribute to hurricane recovery). Production is not declining everywhere…growth is driven by hurricane recovery.

“While the hurricane recovery has been robust, we don’t think there has been any meaningful wellhead capacity additions over that time frame (GOM rig count from 65 to 43). Thus, with most Ike-damaged production back on, it’s hard to see much more volume growth there, particularly given maintenance on [the] 1 Bcf/d Independence Hub platform that started August and will continue until September.”

Boosted by growing output from the Haynesville Shale, Louisiana’s gas production in July was up 0.15 Bcf/d, or 3.6%, from June and has risen 13% since February, noted Lively and Pursell. “This has the gas bears growling that we’re being flooded by Haynesville gas. We think the increase is a combination of ongoing hurricane recovery (coastal Louisiana) and Haynesville growth (North Louisiana). For reference, Louisiana Gulf Coast was producing 2.1 Bcf/d in mid-2008 but dropped to 1 Bcf/d post-Hurricane Ike (recovered to 1.7 Bcf/d by early 2009)…We think Haynesville is likely 0.5 Bcf/d from February to current and will grow by about 0.1 Bcf/d each month through year-end. More gas, but not a tsunami.”

Exploration and production (E&P) price-driven shut-ins likely lowered August production, and the output numbers should fall even more in September and October, said the TPH team, so “the 914 data for those months will be less meaningful as a true gauge of production capacity/capability. There will be some false positives until we get to ‘clean’ numbers when winter storage draws begin in November (and in theory price is strong enough that voluntary shut-ins won’t be a big issue).

“That said, the 914 data should show large production declines in coming month due to the combination of ongoing production declines, E&P shut-ins (price-driven and lack of storage capacity) and uncompleted wells (driven by producer economics). Storage data for August/September also showed noticeable month/month improvement. As such, we would be very concerned if the August, September, October data showed flattish US wellhead supply.”

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