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Bentek: 5% U.S. Production Decline Jan. 10-17

January 29, 2007
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While it's difficult to pinpoint the exact cause -- wellhead freeze-offs or insufficient data -- U.S. natural gas production has dropped dramatically, to post-Katrina levels, at a time when cold weather across the country has driven demand to a peak 40% above the average, Denver-based consulting firm Bentek Energy reported Friday. The company -- one of only a few firms that is collecting gas pipeline flow data nationwide -- said data show a 5.3% decline in domestic production occurred over a one-week period between Jan. 10 and Jan. 17.

Bentek said that total domestic gas production appeared to drop from about 51 Bcf/d to 48.3 Bcf/d. "This is the lowest production level indicated by our pipeline flow database since October 2005 when the Gulf region was still recovering from Katrina and Rita," Bentek said.

"In the past week, production has recovered back to about 49 Bcf/d" as of evening-cycle pipeline nominations on Thursday for Friday's gas day. "However, this level still remains 2.6 Bcf/d below January 2006."

Meanwhile, between the first week of January and Jan. 17, Bentek said gas demand in the United States soared 40% from the mid-60s Bcf to a peak of 93 Bcf.

If the production decline is true, it would be a stunning market development given recent expectations that a bearish combination of factors would continue to put downward pressure on prices into the spring. A month ago, strong production, surplus storage inventories and mild weather were bearing down on the market, prompting analyst predictions of sub-$5/MMBtu gas prices by April. As recently as Jan. 12, working gas levels in storage were 491 Bcf, or 20%, higher than the five-year average, according to the Energy Information Administration (EIA). On Jan. 5, working gas levels were still above 3 Tcf. But then it started to get cold.

"However, a more unexpected development started to emerge on the supply side. U.S. production volume started to decline precipitously. Between Jan. 10 and Jan. 17, U.S. production dropped each day by an average of almost 0.4 Bcf..."

Bentek's data show production from the West/Rockies was down 1.2 Bcf/d on Jan. 17 from levels on Jan. 10. In the Midcontinent region production was off 1 Bcf/d by Jan. 18 from the level on Jan. 10, and in the Gulf region, production was down about 0.6 Bcf/d on Jan. 19 from levels on Jan. 10.

Bentek said because its data analysis system is only a couple years old there could be problems with its methodology. However, there also are several possible market-related explanations for the production drop.

Bentek's data warehouse collects natural gas flow and capacity data from electronic bulletin boards on the websites of interstate gas pipeline companies. "Most intrastate pipelines (those not regulated by the Federal Energy Regulatory Commission) are not required to post this data. Where intrastate and interstate pipelines connect to the same gathering and processing facilities, diversions of gas from interstate to intrastate system can appear as production declines in the data," the company said. "While we have attempted to adjust our estimates for this factor we will not have actual [state] production data for several weeks."

Nevertheless, several other fundamental factors could have contributed to production declines. The most significant impact might have come from wellhead freeze-offs. Freeze-offs occur when water vapor freezes in gathering and other systems, blocking the flow of gas. Bentek said it has received reports of freeze-offs from producers in the Rocky Mountain and Midcontinent regions.

"Although media coverage around this issue has been unusually muted, we have received reports from individual operators reporting shut-ins of over 250,000 MMBtu/d due to wellhead freeze-offs and disruption to gas plant operations," Bentek said. "We have also heard reports that San Juan Basin operators have had production impacts of up to 400,000 MMBtu/d due to weather-related problems. Similar reports are circulating for the Green River/Overthrust and Uinta-Piceance [basins]."

The consulting firm said large snowfalls in the West and environmental restrictions, particularly along big game migration corridors, also may have played a role in constraining production. Meanwhile, there also were reports of operational curtailments from several pipeline system in the Gulf, including Gulf South, Sea Robin, Southern Natural and Stingray. These operational pipeline issues may have cut production 0.3 Bcf/d during the week of Jan. 11 and the production declines in the Gulf seemed to grow as the weather got colder, according to Bentek.

"In addition to these factors, we have also heard that some Rockies operators have slowed development activities due to price uncertainty highlighted by the tendency of spot prices to gravitate below $6/MMBtu during the last half of 2006. Although the lower activity has not shown up in rig counts, it is consistent with recent production trends we have seen in the region."

If the information on these production declines is accurate, it would portend a more rapid decline of the storage surplus. Working gas levels last week fell a massive 179 Bcf, according to the EIA. Since colder weather arrived two weeks ago, about 352 Bcf has been withdrawn from storage, according to Bentek's calculations. Bentek expects a 195 Bcf withdrawal in next week's EIA storage report.

"The recent storage withdrawals have resulted in an abrupt shift in market expectations for end-of-season storage inventories. In early January, most market participants expected a large storage overhang to depress prices in the spring. The large storage withdrawals over the past two weeks have eased that expectation... If cold weather persists as projected by several of the leading weather prognosticators, an unexpectedly tight summer supply/demand balance could be in the offing."

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