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EOG Chairman Sees 1999 Production Falling Short

April 26, 1999
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EOG Chairman Sees 1999 Production Falling Short

Storage overhang isn't enough to temper the optimism of Enron Oil &amp Gas Chairman Forrest Hoglund when it comes to the outlook for gas this year and next. With demand expected to grow and production expected to fall - 3% according to Hoglund - on soft drilling activity, the coming months are shaping up to be good ones for producers.

"We think gas demand is going to grow as the year goes ahead in 1999, so we think you're going to see some upward pressure on gas prices, and we think you're seeing it in the market already in anticipation of what is going to come," Hoglund told attendees last week at the Ziff Energy North American Gas Strategies Conference in Houston.

Hoglund pointed out dry gas production has been essentially flat since 1994: 18.8 Tcf in 1994, hitting a low of 18.6 Tcf in 1995 and a high of 19 Tcf last year. The static supply was contrary to the expectations of many who were watching rig activity climb during the period, Hoglund said. In his view the factors that support a strong price outlook include record low rig counts, high and climbing decline rates, and the fact that the late 1990s have seen no significant new domestic gas plays as were seen in 1993 and 1995, save for the deep-water-inspired Gulf of Mexico renaissance.

Production shortfalls due to declining drilling rates will be showing up in the coming months, Hoglund said. Compounding the anticipated crimp in supply will be high decline rates. For the United States overall, decline rates have grown from about 14% in 1990 to 23% in 1997. The same decline rate (23%) is estimated for 1998, 1999 and 2000, Hoglund said. Onshore alone, decline rates have grown from 12% in 1990 to 19% in 1997 and are expected to remain at 19% through 2000. The Gulf of Mexico Shelf has been hit with the highest decline rates, but other regions, such as Texas, Louisiana and Alabama, have been hit hard, too. The 1997 decline rate for the Gulf of Mexico Shelf was 41%, according to Hoglund. The deep-water figure in 1997 stood at 28%. These are up from 21% and 13%, respectively, in 1990.

"Any kind of economic studies you run show the economics have been pretty tough out there [on the Shelf]. You're just not finding the bigger reserves anymore, and I think we're going to see the Shelf continue to decline on down.

"Deep-water has come on nicely but it's got the same kind of situation that has to be overcome because we're also talking about high decline rates in the deep-water. They started out lower as the fields were really flush, 13, 14%, but now they're up in the 28% range, not as high as the Shelf, but certainly you've got to add a lot of new fields coming on just to take care of the decline each year in the existing base that you have out there. We certainly expect the deep-water to continue to grow. We're not saying we think it's going to decline in total. And I just think it's going to have to do very well just to offset what we're going to end up seeing out in the Shelf."

Further, Hoglund said production levels used to peak in the winter and drop off in the summer. The winter peaks aren't there anymore. "And they aren't there for a reason. Those wells have to be on all year long, steady, for us to be able to meet the demand. That's the only way we've been able to do it. When you do that you pull the wells harder; you get a higher decline rate." Thank technological advances for the fact the industry isn't adding that much in reserves per well but is still finding ways to deplete those reserves more quickly.

"Our estimate of what it takes to keep production flat in the United States is 577 gas rigs running. The current gas rig count is about 362, and when we look at year-end '99 deliverability we look at an average of 400 rigs running [346 onshore, 54 offshore] in this particular year, and if that happens, we think you'll see a 3 Bcf/d decline in the natural gas capability in production by year-end in 1999, which would be somewhere around 5% of the total. I've seen a lot of other forecasts in the 2% to 4% range. Most people now think with the low level of drilling it is coming down. But if you just do the numbers and play with decline rates steady, not increasing anymore, and 400 rigs, these are the kind of numbers that end up coming out: 3 Bcf/d down by the end of the year."

Joe Fisher, Houston

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