Producers' upstream capital expenditures have nearly tripled in the past four years due to increased drilling activity and a significant hike in the costs for finding and developing resources, a top official of the Natural Gas Supply Association (NGSA) said Thursday. But despite their efforts and big bucks, domestic production remains flat.

Industry upstream capital expenditures, which were pegged at $56 billion in 2003, are expected to climb to $161.7 billion this year as a result of greater competition for rigs and crews, the tougher geology being tackled, and government restrictions that are limiting producers' access to more traditional and economic resources, said NGSA Chairman Chris Conway, who is also president of gas and power for ConocoPhillips.

"Onshore, we're seeing, I think, ever increasing [production] decline rates...We're also looking at more challenging geology both in terms of tight sands, shale gas plays that are affecting our costs," he noted during a press briefing at the Canadian Embassy in Washington, DC. "Offshore, we're seeing competition for the offshore rigs. Some of those are actually moving away from the Gulf of Mexico," Conway said.

And then there's the "hidden cost" of government access restrictions, he noted. Producers are being driven to higher cost extraction as a result of government restrictions on producer access to public lands, according to NGSA.

A greenhouse gas initiative, if approved by Congress, "will probably introduce some new costs, but I think the industry is prepared to address that and continue to develop supply," Conway said.

He noted that the cost of drilling a natural gas well was more than $2.5 million last year, up by more than 80% from the nearly $1.5 million cost for a well in 2003. Moreover, the cost of finding and developing resources was more than $12/boe in 2005, up from about $5/boe in 1999.

Conway said as many as 1,400 rigs are chasing natural gas onshore. This contrasts with fewer than 1,000 rigs in 2003. And the number of seismic crews operating in the United States has almost doubled in the past three years. "Gas well completions, I think, hit [an] all-time high of 31,000 in 2006," he noted.

But despite all this activity domestic gas production remains constant at 50-54 Bcf/d, according to Conway. This is due in part to the "unprecedented hurricane recovery" efforts, he noted.

The bulk of the exploration activity taking place in the U.S. is for unconventional gas supplies, Conway said. He estimated that unconventional resources accounted for 56% of the onshore gas supply in 2005, while conventional resources represented 44% of supply. In 1990, unconventional accounted for only 22% of U.S. gas supply.

The "good news is [that] reserves are growing," said Conway, adding that they closed in on 200 Tcf in 2005.

As for liquefied natural gas' place in the U.S. market, it will "take up a growing slice of the supply picture as we go forward," he noted. Domestic gas and Canadian imports will remain vital parts of the market as well, Conway said. "I think we need all [of] these things."

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