S&P Claims 2003 Gas Situation Much Different From 2001's, Doubts Sub-$3 Gas

Comparing the current natural gas supply and pricing situation to the one experienced nearly two years ago, Standard & Poor's (S&P) said it is not likely that history will repeat itself with prices falling below $3/MMBtu like they did during the earlier time frame.

"Although Standard & Poor's assumes very conservative pricing for the remainder of 2003 because of likely falling oil prices and demand destruction that is likely to linger, Standard & Poor's could raise its assumptions as the year progresses because of the need to fill storage (which faces a current deficit to 2002 of more than 1 Tcf) in the face of an inadequate supply response to elevated natural gas prices," said S&P analyst Bruce Schwartz in a research note.

To ensure ample supply to make it through the winter of 2003/2004, S&P said an unprecedented demand of nearly 6.5 Bcf/d will have to be priced out of the market if weather conditions are normal.

In the S&P research note, Schwartz said the largest difference between then and now can be seen in drill rates. He said that although 75 rigs have been added since the start of 2002 (to 781 rigs from 706), drilling still remains "well below" levels achieved during the natural gas bull market of 2001.

According to Baker Hughes, full-year 2001 averaged 898 rigs drilling for gas. To date in 2003, there is only an average of 743 gas rigs operating.

"Standard & Poor's believes that E&P companies consumed much of their low-cost project inventory during 2001 and the remaining prospects have greater price sensitivity," Schwartz said. "While low activity bodes poorly for gas-related oilfield services companies in the very near term, it may result in an elongated drilling cycle once companies either regenerate their prospect inventories or develop greater confidence in the sustainability of current gas prices."

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