Asset Sales, Weather Lowered 4Q Production Rates

Fourth quarter profits are over the top but not natural gas production figures, according to a preliminary analysis of U.S. companies. Overall, the majors and the independents showed stunning monetary gains in the final quarter of last year, but the production levels for many of the larger independents were actually lower than those recorded in the third quarter.

One factor that may have contributed to some of the larger companies' fourth quarter decline could be related to asset sales and acquisitions related to the many mergers of 2000. Also cited as factors were the weather, which was colder and wetter in some production areas, as well as the natural decline in some regions.

According to a recent study by Lehman Brothers of 20 of the largest natural gas producers, which account for about 40% of domestic production, fourth quarter production was down 0.8% from the third quarter. Perhaps more significant is that production was down 3.7% from the fourth quarter of 1999. Even though some of the largest producers have yet to report, BP Amoco PLC, for instance, doesn't report until later this month, the study is significant because it shows that while natural gas demand has never been higher, production appears to not be ahead of the curve.

Many companies reported totals with flat or declining production growth into the fourth quarter, which puzzled analysts, who had expected to see higher production figures in a quarter where record profits were streaming in from higher commodity prices.

Another surprising tally is in the drilling figures. Baker Hughes Inc. reported that 879 rigs were actively drilling for natural gas in the third week of January, up 41% from the same period a year ago. However, while drilling activity is higher, the gas reserves being targeted are actually smaller in size and the decline rates are higher.

In the Lehman study, companies that produced at least 15.1 Bcf/d in the fourth quarter were about 2.6% off. "From quarter to quarter, production fell by 100 MMcf/d," said Lehman analyst Tom Driscoll. "Year-over-year production is down 3.4%." Once all of the final figures are in, the gap may be much tighter.

In some of the companies' fourth quarter reports, there are valid reasons for a slowdown in production late in the year. Anadarko Petroleum Corp., which announced its record earnings last week, said that "production from the Gulf of Mexico and Alaska fields began later than we had expected and this caused us to record slightly lower production volumes than anticipated for the fourth quarter."

Still, Anadarko's results couldn't be called shabby. Its total year-end production was actually up 124%, standing at 112 MM boe. In 1999, the total was 50 MM boe, with the increase attributed to the acquisition of Union Pacific Resources and increased production at operations in Texas, Louisiana, Kansas and Algeria.

Texaco, which saw its production decline 12% in the fourth quarter, attributed the decrease to the natural decline rate in its wells. At Kerr-McGee, fourth quarter production was down almost 13% from a year earlier, and it also reported overall lower year-end production.

However, not every company drew a loss in the fourth quarter. Some, in fact, are reporting production figures to match huge profits. Apache Corp., which reported its earnings last week, jumped its fourth quarter natural gas production 28% to 934 MMcf. Apache has followed an "acquire and exploit" policy in recent years, buying up underutilized oil and gas assets and working them harder to raise production. Last year, the Houston-based independent spent more than $1.5 billion to acquire oil and gas properties, mostly U.S. and Canadian natural gas properties.

Devon Energy, based in Oklahoma City, said last week that its domestic gas production grew 9% in the fourth quarter from a year earlier. Mitchell Energy & Development Corp. also saw its production up in the fourth all from the Barnett shale region of East Texas, and Cabot Oil & Gas also reported a slight increase in gas production in the final quarter.

Coastal Corp.'s production was up 16% in the final quarter --- it had a 42% rise over the year. And Chevron also was up for the entire year and in the fourth quarter, reporting it produced 3,571 MMcf/d in the fourth compared with 2,591 MMcf/d in 1999.

Noted in the study are dry hole expenses, and based on those figures, companies appear to be drilling wells in the same geographic areas that have been producers in the past, but those regions tend to produce less over time. The decline in dry hole expenses usually indicates that fewer exploratory wells are being drilled.

Several things have contributed to the lower production figures, say industry analysts. Among other things, because natural gas is difficult to ship, most of the gas used in the United States is produced here or imported from Canada. In the past several years, technology has helped producers to obtain more gas from older fields in the United States, Canada and offshore in the Gulf of Mexico.

However, new technology is at its peak --- for the moment anyway --- and older fields are losing reserves faster than companies can find new gas deposits.

More federal and state regulations also have restricted exploring and developing new regions, a factor that may be changed with the Bush Administration. John Sharp, vice president for federal and state affairs for the Natural Gas Supply Association, said industry is "fighting depletion of wells and we're fighting lack of access."

Though lagging in recent months, nearly all domestic producers are upping the ante in their E&P programs beginning this year, setting record capital budgets to spend more. Dallas-based Pioneer Natural Resources Corp. expects to increase its production this year only slightly, 1% to 4%. Then, in 2002, with plans firmly in place Pioneer expects to jump production between 15% and 25%. Some others are predicting accelerated results.

Apache said it will ramp up production 30% in 2001 over 2000, spending approximately $1 billion on E&P. And Anadarko also announced it would increase its first quarter 2001 daily production volumes by about 3% over fourth quarter volumes. Anadarko's projected increase in first quarter production will come from the Alpine field in Alaska, which came on stream in November. Anadarko holds a 22% stake in the field.

In the months ahead, the American Gas Association expects a complete turnaround with record production from majors and independents alike.

"As of six months ago, they (producers) were projecting a much smaller increase," said AGA vice president Roger Cooper. "So, they do see this drilling boom as bringing more gas to market. But essentially, we are in a very tight race right now. We're in a tight race between increasing demand and increasing supply. And the supply market's trying to catch up with the demand market."

The Natural Gas Supply Association also expects new supplies of natural gas to come on line in the next 12-24 months. But how much? Because so many delayed spending in the downturn in 1997, it's difficult to ramp up as quickly. Because of that, some predict that overall, U.S. gas production in 2001 will rise only 2%.

Carolyn Davis, Houston

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