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Analyst: Gas Depletion Has Arrived

Analyst: Gas Depletion Has Arrived

The industry rumblings of a declining gas supply are not far off base, said a report by David Pursell, an analyst for the institutional securities group Simmons & Co. Intl. Judging from weekly American Gas Association (AGA) storage data and Department of Energy (DOE) LNG production figures, the report forecast the gas decline rate could surpass 4% in the coming months when compared to last year, unless a sharp increase in gas-directed drilling takes place. Using these findings, Pursell said gas prices should stay above $2/Mcf for the near future.

According to the study, the disappearance of the storage overhang over the past five months indicates an improvement in supply and demand fundamentals. It said the average injection in June was 0.9 Bcf/day lower than June of 1998's level. At this rate, 1999 will end with a 1.2 Bcf lower gas supply than 1998.

"It seems apparent that the fundamentals are significantly improved from a year ago," Pursell said in the report. "After watching the storage overhang disappear over the last few months, it was tempting to pound the table and say that we clearly have the onset of a supply problem."

What convinced Pursell to pound the table was the DOE's LNG production report, which found that despite an economic incentive to process gas from liquids, producers did not do so. Due to unfavorable frac-spreads (the theoretical gross margin for processing liquids from the gas stream), last April was the first month where producers had an economic incentive to remove gas from liquids compared to the same period in 1998. The frac-spread in April of 1998 was .83 compared to 1.37 in April of 1999. Yet despite this incentive, LNG production declined in April from 1,859 kop/d in 1998 to 1,786 kop/d in 1999.

"The decline in April 1999 NGL production is the first solid evidence that U.S. gas production is declining at least 3.9% from prior year levels."

The $2/Mcf price forecast is projected over a flat demand environment (year-on-year). They could go even higher, Pursell said, depending on several factors including the drilling response to shortened supply, summer heat, tropical weather in the Gulf of Mexico and a strong winter.

The study noted that the most definitive indicator of supply levels is gas well production data, but due to the enormity of the task required to collect all those numbers, a significant data lag time exists. Moving forward, Pursell said storage data and LNG production will become more prominent tools to shed light on supply and demand balances.

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