Even as the natural gas storage situation in the United States remains quite healthy, UBS Warburg analyst Ron Barone said he expects gas prices to go up and demand to go unsupplied in the not so distant future, due to dwindling reserves and a decline in drill rig utilization.

“Despite the fact that the United States had virtually every rig drilling for natural gas this past year, production increased by only one-tenth of a percent in the first quarter, 2.3% in the second quarter and one-tenth of a percent in the third quarter,” Barone said at the Global Energy and Utilities Conference in New York City on Tuesday. “Production is already declining. Looks like it is going to be down about six-tenths of a percent for the fourth quarter [2001].”

Taking into account the six-month lag between the rig count and production figures, Barone said, “I expect you are going to sequentially see declines in U.S. production capacity for the next several quarters.”

The analyst said the problem the United States is facing is a “very, very steep [well] decline rate.” For example, Barone said, “We may have as much as a 45-50% decline from a well within a two-year period: the problem [is] the Gulf of Mexico (GOM),” which accounts for almost 25% of U.S. production. There is a large decline curve for the wells on the shelf of the GOM.

Despite the fact that Texas and Louisiana are ranked one and two as the highest onshore gas production states in the country, Barone said there are still concerns going forward. “You gotta admit, when you consider that we had an all-time record amount of rigs drilling for natural gas this past year, production in Texas really has not done much…and Louisiana does not look much better.”

As for reserve contribution from the deepwater GOM, Barone said only 20% of the reserves are natural gas, while the remaining 80% are oil.

“I think things are going to be very volatile and very tight as far as the gas future is concerned,” Barone said. The analyst added that a $2.70 national composite spot average wellhead price is “probably a good number” for 2002, but there will probably be “dramatic swings to the downside as well as the upside.”

As for looking to Canada as a savior, Barone said it is unlikely because the north country’s reserves have declined as well. “I expect increased imports from Canada, but the growth is not going to be at the rate that it has been growing over the last several years,” he said. “It’s slowing down. The Canadian situation is very similar to the U.S. situation.

“In the near term, we are very cautious on gas prices, simply because we’ve got this big surplus in storage to work off. Gas prices are going to remain depressed over the next several months. However, drilling activity is going to continue to decline. We think the rig count is going to bottom out at 600 for natural gas (it’s at 693 today). We think that is going to result in a further decline in deliverability.

“So when the U.S. economy comes back and when we can return to something of more normal weather conditions, demand is going to be there. But we do not believe supplies are going to be there. Therefore we do expect the dramatic uptick in gas prices.”

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