EEA Says Smaller Companies Drive 4Q Production Up

Smaller producers were the driving force behind a 1 Bcf/d increase in production during the fourth quarter of 2000 over the same period in 1999 according to Arlington, VA-based Energy and Environmental Analysis, Inc. (EEA). While many large producers reported smaller production results for the fourth quarter 2000 when compared to 1999, smaller companies were actually reporting increases.

A Lehman Brothers study released earlier this month, which only focused on larger producers, found that natural gas production was down during the fourth quarter. The Lehman study revealed that out of 20 of the largest natural gas producers, which account for about 40% of domestic levels, production for the fourth quarter 2000 was down 3.7% from the fourth quarter of 1999 (see NGI, Feb. 5).

Commenting on the Lehman study, EEA Director Kevin Petak said "Generally our conclusion here at EEA would be that it [the Lehman study] is not necessarily a representative sample of the United States as a whole. You have to look at a lot of the smaller producers such as Equitable, Houston Exploration, Mitchell, Forest Oil and Cabot, where production has in fact been growing, and they have drilled a lot of wells in the last year. That's the important thing I think you have to take a look at; there's a differentiation between what the big companies and what the small companies have been doing over the last year."

Petak said the large companies are responding as well, but it is just taking a little more time to ramp up. "While gas production for the top 10 U.S. producers, which accounts for about 30% of all U.S. production, appears to have declined from late 1999 through late 2000, on average, independents and smaller producers are showing significant increases in gas production," Petak explained. "And total year-over-year production is actually higher.

"Generally the smaller producers have been much more active in drilling - in particular onshore the shallower wells, that can be drilled more quickly, which build deliverability more quickly. Certainly some of the bigger companies with the larger overhead costs are having difficulty operating in some of the areas where smaller producers have been most active."

With production levels moving up, and about a 40% increase in drilling rigs in the ground over last year's level for the same time period, according to Baker Hughes, the EEA said that natural gas prices by early summer could drop drastically, approaching the $4 per MMBtu mark. "With continued increase in productive capacity, gas prices could decline substantially and re-couple with residual oil prices by early summer," said Petak.

In the EEA's February Monthly Gas Update, the company said the increasing productive capacity supplying price sensitive customers that had foregone gas in December was the primary reason for price moderation. However, the firm cautions that weather over the next two months will be crucial for gas prices for the remainder of the year.

"Much colder than normal weather for the remainder of this winter could push gas prices up in February and March and further deplete storage, creating the need for more storage refill that would keep prices high throughout the year. There are still two months of winter left, and U.S. gas storage is currently about 1.1 Tcf, which is uncomfortably low given the tightness of gas supply and demand," Petak said. "In any case, with continuation of high drilling activity, productive capacity will continue to rise this year."

Alex Steis

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