The Energy Information Administration (EIA) in its Short-Term Energy Outlook for March projects that marketed natural gas production will see a drop of 3% in the current year. But the agency cautioned that this could be subject to change depending on the recovery in rig activity and production rates from shale gas wells.

Total marketed natural gas produced is expected to drop by 2.7% to 58.7 Bcf/d this year from 60.36 Bcf/d in 2009, according to the EIA outlook, which was released last Tuesday. While the number of working gas rigs has been rising in response to prices in the spot and forward markets, “EIA still anticipates a decline in 2010 production because of the lag time arising from low drilling rates last year and steep decline rates associated with newly drilled wells,” the agency said.

However, there is one caveat. “Continued recovery of drilling rig activity, increasing drilling efficiency and the potential for high production rates from shale gas wells could lead to higher-than-expected production this year and next,” the EIA noted.

The EIA further reported that natural gas inventories, which were bulging at the start of the heating season on Nov. 1, 2009, are now more in line with historical levels as a result of huge withdrawals to deal with the frigid temperatures and record snowfalls this winter. At the end of February working gas in storage was 1,737 Bcf, or 21 Bcf above the previous five-year average, and 71 Bcf below the level during the same week in 2009, the agency said.

“Persistent cold weather so far this year has taken a toll on inventories. The estimated total inventory withdrawal in January and February [was] 1,406 Bcf. The five-year average withdrawal for these two months is 1,159 Bcf,” the EIA noted. It said it expects working gas inventories to finish the first quarter at around 1,549 Bcf, or only about 3.5% above the previous five-year average.

Natural gas price activity this winter was lackluster this winter, and the EIA said it does not anticipate a sustained improvement. “Much of the subdued price action this winter is attributable to the level of, as opposed to the change in, working inventories…Prices may strengthen slightly in the coming months as demand to rebuild natural gas in storage from risk-averse distribution companies begins.

“However the potential for higher domestic production [from shale gas], increasing LNG [liquefied natural gas] supply and limited consumption growth all reduce the possibility of sustained high prices as inventories are replenished over the next several months. The Henry Hub spot price forecast averages $5.17/Mcf [this year] and $5.65 Mcf in 2011,” the EIA said.

The agency said it expects gas consumption to increase by 0.7% to 62.93 Bcf/d this year from 62.48 Bcf/d in 2009 mostly because of the cold winter weather so far. “The combination of frigid temperatures and electric space heating in the Southeast contributed not only to increases in residential and commercial sector natural gas consumption, but also to very strong natural gas consumption in the electric power sector,” the EIA noted.

“Even with the assumption of near-normal weather in March, EIA expects first quarter natural gas use in the electric power sector to increase by about 3% above the same period last year and about 17% above the previous five-year average. The increase in first quarter…electric power sector consumption has all but eliminated the…1.3% year-over-year decline in natural gas consumption for this sector” that the EIA projected last month (see NGI, Feb. 15).

The EIA said it sees LNG imports increasing by 45%, or 0.56 Bcf/d, to 1.80 Bcf/d this year. “As global LNG demand and import capacity expand next year, EIA expects U.S. LNG imports to show little year-over-year growth in 2011,” it said.

Natural gas pipeline imports, mostly from Canada, are expected to drop to 8.34 Bcf/d this year from 8.93 Bcf/d last year.

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