Domestic natural gas production appeared to be "resilient" through October in the Energy Information Administration (EIA) monthly estimates, but energy analysts are split about whether those numbers are accurate, and whether an uptick in gas drilling will lead to a bigger supply surge in the coming months.
Gas producers "are adequately hedged and have announced plans to increase spending in the new year," wrote Barclays Capital analysts Jim Crandell, Biliana Pehlivanova and Michael Zenker in a report last week. "As such, supply additions from new drilling should rebound through 2010 and lead to a relatively flat aggregate production profile.
"Temporary factors -- namely, the completion of deferred wells and wellhead freeze-offs -- should also shape supply, roughly offsetting each other, with the first adding supply more evenly over the winter and spring and the second taking off supply sharply in December and January."
Drilling productivity also is strengthening and combined with a "gradually rising rig count" in 2010, the sequential declines in 2009 would be minimized, said the Barclays trio. "Our forecast for 2010 Lower 48 dry production suggests a drop of 2.1 Bcf/d from average annual 2009 to average annual 2010, with a relatively flat profile for the balance of the year."
However, analysts with Tudor, Pickering, Holt & Co. Securities Inc. (TPH) posited a contrary view in a report also published last week.
Dave Pursell and Brian Lively agreed that the EIA-914 data indicate that U.S. wellhead gas supply "appears stubbornly resilient and is declining much slower than expected." But the TPH team, in its review of onshore gas basins that comprise around 38% of U.S. gas supply (23 Bcf/d) "shows that actual production is very much inline" with its in-house supply model, which would indicate "a large discrepancy with the EIA-914 supply data."
The 2010 New York Mercantile Exchange gas strip of $6/Mcf "is higher than we would have expected given the data we have seen," acknowledged Pursell and Lively. And that begs the question, "What is the market telling us?"
The TPH duo examined three "views" of the U.S. gas market:
For gas bulls, there's good news because "production is declining," wrote Pursell and his colleague. "Both our model and the EIA's monthly data show supply declines...discrepancy is velocity of decline." However, the "EIA's estimate of production data is declining at a noticeably slower pace."
From December 2008 through October 2009, the TPH model "suggests a decline of 3.9 Bcf/d (7%), while the EIA is down 1 Bcf/d (2%)." The "fundamental question...is production less impacted by the dramatic drop in rig count or is the lack of a more significant decline due to 1) bad data or 2) timing (declines will happen eventually)?"
The EIA-914 monthly production survey is the "best/most timely estimate" of U.S. gas output, acknowledged Pursell and Lively. However, the data "is not perfect, and initial production estimates are subject to revision...especially when rig count and activity are rapidly changing."
The government's numbers "clearly" show output is falling, wrote the TPH team. "In our opinion, EIA data revisions are likely downward, suggesting the magnitude of production declines [is] steeper than currently shown...more inline with our production model."
One indicator worth watching is the high grading of well quality, noted Pursell and Lively. It remains an "important variable, but has not yet changed our view of the 2010 gas market." If the EIA data proves accurate, "watch out below!" they said.
In last Thursday's gas storage report, the EIA recorded a revision that boosted withdrawals by 5 Bcf for the week ending Jan. 1. Because of the resubmission of data by one or more respondents, EIA lowered working gas volumes from 3,123 Bcf to 3,118 Bcf. As a result, the implied net withdrawal for the week ending Jan. 1 changed from 153 Bcf to 158 Bcf, effectively making for an overall decline of 271 Bcf last Thursday morning.
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