The Energy Information Administration’s (EIA) projection that domestic dry gas production rose by about 2% in 2003 appears to be “overly optimistic,” a top official with Anadarko Petroleum Corp. told a Senate panel Thursday. If this turns out to be the case, it would be the second consecutive year that the agency has erred on the high side when estimating gas production in the U.S.

“While [we are] still several months from having the full picture of what our 2003 natural gas natural gas production actually was,” early indications point to a year-over-year production decrease for gas rather than the increase that was projected by EIA, said Richard J. Sharples, Anadarko’s senior vice president for strategic planning and marketing, during a hearing of the Senate Energy and Natural Resources Committee.

Initial reports from public companies that account for 70% of the gas produced in the U.S. actually reveal a decrease of 2% to 3% in drilling output from 2002 production levels, he told the committee, which was reviewing energy supply, demand and price projections.

Sharples said he believed the Department of Energy (DOE) agency over-estimated the productivity of new wells, and under-estimated the rate of decline of new wells and the unit costs.

Natural gas is destined to continue to play an “important role” in the future, but demand will exceed the ability to produce gas domestically, which will force the United States to rely more on imports of liquefied natural gas (LNG), he noted. “The irony…is America is rich in natural gas resources and should produce more at home.”

Committee Chairman Pete Domenici (R-NM) echoed the sentiment, saying that while LNG “may be a great plan,” the U.S. should look to its own turf to produce more gas.

But many of the most promising U.S. drilling prospects are off-limits to producers due to either moratoria or regulatory complexities, according to Sharples. He estimated that most of the potential 40 Tcf in the Eastern Gulf of Mexico is under a moratorium. The National Petroleum Council calculates that as much as 200 Tcf of technically recoverable gas resources in the U.S. are under federal lands where access is either denied or restrictions make drilling uneconomic, he noted.

There are some who believe that drilling in the deepwater Gulf may ease the nation’s gas supply shortfall. Sharples said he agrees that there are some “interesting discoveries” to be had in the deep Gulf, but he noted these won’t be a “panacea.” He doesn’t believe that gas produced in the deepwater Gulf will overcome the declines in the shallow Gulf.

Producers are “running harder just to keep up with the decline rate in that region,” agreed EIA Administrator Guy Caruso. As a result, the gas supply in North America “is stretched very thin,” which makes the market especially “vulnerable to surprises” that could produce price spikes.

He anticipates gas prices of “roughly” $5/Mcf will be sustained over the next two years due to the tight supply situation. The agency projects that prices will come down at the end of this decade, as alternative supplies such as LNG “put some competitive pressure on that price.” Caruso said he expects gas prices to dip below $4/Mcf around 2010.

Until then, “we are facing high and volatile” oil and gas prices, which will signal increased import dependence on both fuels, Caruso told Senate lawmakers. Jay Saunders, vice president of DeutscheBank, agreed, saying that “personally, I think we’re in for two years of pretty high prices” for oil and gas.

Both Caruso and Saunders minimized the impact that recent company reserves’ recalculations would have on available reserves. While the reserve revisions may reflect negatively on the individual companies (Shell and El Paso, for instance), they would result in a “relatively small change” to the “big picture” for overall reserves, Caruso said.

“[I] haven’t found much evidence…this is an issue that’s going to be widespread in the industry…I don’t think this should imply there’s any less oil or natural gas left in the world,” Saunders noted.

Citing growing actions by states and local authorities to block interstate gas pipelines, Paul Koonce of Dominion Energy Inc. called on Congress to “once again…assert itself in the interest of the greater public good.” The U.S. Constitution “clearly places regulation of interstate and foreign commerce into the hands of Congress,” but individual states are trying to “usurp” the authority of Congress and the federal agency that has been designated to approve interstate pipeline facilities, namely the Federal Energy Regulatory Commission, he said.

“FERC’s authority for siting natural gas pipelines must be respected by all federal and state agencies. This has not been the case of late,” Koonce informed lawmakers. States are using their authority under the Coastal Zone Management Act (CZMA) to veto pipeline projects to the “detriment of entire regions” even after they have been approved by FERC, he noted.

Arguing that they violated coastal zone laws, New York has successfully blocked two interstate pipeline projects — the proposed Millennium Pipeline and the Islander East line. Koonce said he believes it’s only a matter of time before states start to use their CZMA authority to halt the siting of LNG facilities.

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