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Raymond James Eyes Production Drop

Raymond James Eyes Production Drop

Raymond James & Associates' gas analysts warned investors yesterday the latest production statistics indicate gas production is down 4-6% compared to last year. The St. Petersburg, FL-based firm highlighted several indicators, including sharply lower year-to-year storage injections, reduced E&P company production figures, a growing "balancing item" reported by the Department of Energy in its gas market statistics and a survey of three of the largest gas producing states.

The driving factor behind the production decline is the fact that drilling activity has fallen off at the same time that gas well depletion rates are accelerating, Raymond James said in its weekly report. From the peak in December 1997 to the bottom in April 1999, U.S. gas-directed drilling declined 45% (from 654 rigs to 362 rigs). Additionally, gas production decline rates increased by more than a third over the past decade, making it harder for producers to maintain existing production levels.

Lower storage injections this year suggest that production is down 4% to 5% through June, Raymond James said. And an analysis of the DOE data with its ballooning "balancing item" also suggests production could be much lower than has been previously reported.

Raymond James surveyed production statistics from Texas, Louisiana and Oklahoma (excluding federal offshore production) and discovered gas production in these three states combined was down 7.4% year-to-date through April and the downward trend seems to be accelerating each month. Gas production in Louisiana was down 1.8% to 4.3 Bcf/d through April compared to the same period last year. In Texas, production was down 5.9% to 15.1 Bcf/d and in Oklahoma production was down 17.6% to 3.8 Bcf/d. Raymond James also examined offshore Gulf of Mexico statistics and estimated production to be down 5.7%.

"The bottom line is that the effects from massive declines in U.S. natural gas-directed drilling activity over the past 18 months have only recently begun to show up in the figures posted by many government agencies. Digging through our state agency data, however, suggests that production is down much more than the DOE numbers suggest... [T]his decreasing supply picture combined with the outlook for increasing demand lead us to conclude that there is a very high probability of a gas shortage this winter. If we have a shortage, U.S. natural gas prices will likely be headed for record highs this winter." In a previous report, Raymond James predicted gas prices at the Henry Hub could peak at $10/MMBtu during high demand periods this winter and would average $3/MMbtu next year (see Daily GPI April 27).

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