Anadarko, EOG: Near-Term Production Rise Limited

Gas production can ramp up to deliver between 1 and 1.5 Bcf/d more supply over the next four years by increasing drilling in conventional areas before any of the proposed long distance imports come on line, leaders of the two most active drilling companies in the United States told a GasMart/Power audience in Tampa, FL, last Wednesday.

Mark G. Papa, chairman of EOG Resources, said however, it would "take a pretty maximum effort" to maintain the additional supply during this near-term "window." After 2005 there should be "substantially larger imports," from Alaska, from the Canadian East Coast and from liquefied natural gas.

Until then, Papa acknowledged there won't be enough gas supplies to serve all the newly-expanded demand. "Something's got to give. It's going to drive something out of the market long term, whether it's ammonia or methanol or something else. Any industry that needs $2 gas to survive in North America" will be out of luck. "That world is over."

Richard Sharples, vice president of marketing and planning for Anadarko Petroleum, agreed "some demand is going to be priced out of the market." He pointed to a "step change in gas prices. The world needs to get used to $5 gas. It was $2 gas that shrunk the industry."

Papa said he wasn't sure where the price would settle out. "I don't think it's $5 and I don't think it's $2. It's somewhere in between there. My guess it's somewhere around $3.50 to $3.75." At that level "markets will go to a balance; there won't be a gas supply glut."

The rig count has been increasing dramatically in the United States, but the targets are smaller, both producers said. The largest reserve discoveries in the conventional areas have been exploited. Much of what is being done involves going back into old areas with horizontal drilling, which is economical with the higher prices. The most promising areas are the deepwater Gulf, Wyoming, Louisiana and Alberta.

Papa said the industry turned the corner in the first quarter of this year. "If you add up all the public companies, which represent over 50% of the nation's gas production, that production was up close to 2% compared to the first quarter of 2000. That's a major change." Papa said EOG was estimating production would be up overall in 2001 over 2000 by about 1.5%.

To maintain increasing production the industry is looking for a better balance between energy and the environment from the Bush Administration.

"We just don't have a lot of good prospects to drill," Sharples said. There are still promising areas in the Lower 48, but they are in areas where drilling has been restricted, such as federal lands in the Rockies, with an estimated 137 Tcf of possible reserves, and in the Gulf of Mexico off Florida, where there could be 24 Tcf. Sharples questioned why Florida has been so opposed to drilling off its coast on environmental grounds, when much of the state's power comes from dirty coal plants and the burning of heavy Venezuelan crude.

Additionally, there is a shortage of qualified employees in the drilling industry, which went from 725,000 employees to 100,000 in 2001. That work force needs to be built back up to at least 300,000, Sharples said.

Commenting on Shell's recent unsuccessful bid for Barrett Resources, both Sharples and Papa said the "majors missed the North American gas story. They were exiting the U.S. at the time the gas market here was becoming real exciting" And "there are structural limitations to a comeback," Sharples said, advising that was the reason Shell tried to buy Barrett.

Because of their downsizing "they don't have the people" to do it on their own. "It takes a tremendous number of land people, drilling engineers, accountants, geologists --- the majors don't have that. It will take them awhile."

Questioned as to whether the majors might try to buy EOG or Anadarko, Papa said there were "huge cultural issues." EOG is mostly going after wells with reserves of a Bcf or half a Bcf, which is "below the threshold of what they allow their own people to do in North America." But the two independent executives agreed they expected to see other attempts by the majors to buy their way back into the U.S. scene.

"It's not the Exxon Mobils, it's not the BP Amocos, it's not the Shells. It's people like us that are really making things happen in North America," Papa added. Sharples said Anadarko was in the top four or five in terms of reserves and production in North America. EOG currently has 40 rigs running and Anadarko has 89 running and is operating between 110 and 112.

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