Consultants at Cambridge Energy Research Associates (CERA) are convinced that natural gas production in North America is poised to enter a long-term decline and that imports of liquefied natural gas (LNG) will have to make up the supply gap. But Tom Wood, gas production expert at the Energy Information Administration (EIA) isn’t buying it. Wood said the gas resource is still there, but producers simply have chosen to drill overseas in the short-term.

In its report released Thursday to clients, CERA predicted that North American natural gas productive capacity will decline in the near term and only slightly recover by mid-decade before entering a “permanent decline…through 2010 and beyond.”

“Even with natural gas prices as high as $5/Mcf this winter, drilling activity is lagging and an expected increase in drilling activity that should start later this year is not likely to produce anything more than a modest increase in production by mid-decade,” said CERA Director Robert Esser, author of the report on the outlook for Lower 48 and Canadian natural gas productive capacity. “None of this will be enough to stem the long-term decline in North American natural gas production.”

Esser said there are several constraints standing in the way of boosting production: the resource base itself, increased well decline rates, volatile gas prices and the lag time of production rate responses to increased drilling activity.

CERA said that although Canadian production will increase after 2004, it will take higher rates of drilling to offset declines in the Western Canadian Sedimentary Basin.

“Declining North American gas capacity after the middle part of the decade spotlights the importance of supplementary gas supplies to meet demand,” said Esser. “The expected jump in Canadian supplies mid-decade does not offset the projected decline in U.S. capacity, thus the requirement for increasing imports of LNG to meet demand.”

CERA predicts that LNG could supply as much as 11% of total gas demand by 2010 compared to only about 0.1% in 2001. Gas demand is expected to increase by 14% by 2010, while CERA projects that domestic gas production will be 6% lower than current levels.

Not so fast, says Tom Wood of the EIA. This theory has been stated many times before, only to be followed by an immediate increase in production, Wood noted. “I still have two similar headlines pinned to my door. One of them from Jeff Skilling at Enron saying on March, 28 2001 that ‘consumers should have plenty of time to get used to sky-high natural gas bills. I think it’s going to take three, four, maybe five years to get production up and demand down,’ [Skilling said]. Well fundamentally that had already happened.

“[Skilling] was saying that as we (EIA) were releasing our productive capacity report showing that capacity had been rapidly growing and if the drilling rates would continue we would build a comfortable surplus. That was when prices also were very high, and he was assuming that prices would always stay above $5,” Wood said.

“No, I don’t think we have an irreversible natural gas slide. In fact we will be releasing a report, maybe as soon as today, that says that supplies are moderately tight, but adequate to meet projected demand. I think the resource base is there and adequate. There are short-term trends that I assume will sort themselves out.”

Wood said the deep horizons in the shelf of the Gulf of Mexico are not being exploited as they deserve because the companies that normally would drill these deep and relatively expensive wells are putting their resources elsewhere. “It’s more of economic behavior issue with the large companies. They are drilling less in some locations. But in seven out of the last eight years we have had an increase in proved reserves of natural gas,” said Wood. “That doesn’t strike me as a prelude to the disaster of long-term decline.”

He admitted that the Gulf of Mexico is “probably bumping up against its capacity to produce as we speak” without the additional drilling required to reach the harder-to-tap resources. “But that doesn’t mean that other areas can’t pick of the slack. If the whole Rocky Mountain area was booming and better able to move gas to markets through more pipelines,” it would be a different story, said Wood.

However, CERA noted in its report that despite the record gas drilling in 2001, productive capacity grew by only 1 Bcf/d.

CERA admits that there are a host of company-specific and situational factors that have slowed drilling recently:

CERA also noted that the shift to deeper drilling in the Gulf has contributed to less activity on the shelf. There also is a limited supply of deep-drilling rigs. In addition many ultra deepwater oil discoveries contain less associated gas than their deepwater counterparts.

Despite all these apparently temporary factors hindering production currently, however, CERA still believes domestic production is poised to enter a long-term decline and LNG is the only savior.

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