Inadequate reserve replacement last year should set off an alarmin the gas industry given continuing increases in gas demand,according to a new report by Arthur Andersen and John S. HeroldInc. Proved domestic gas reserves were essentially unchanged in1997 despite a 24% increase in extensions and discoveries to 10.1Tcf, the highest level of drillbit gas reserve additions in thefive-year study period, according to the study titled U.S. UpstreamPerformance Trends. The study noted, however, that negative reserverevisions of 1 Tcf, including a 623 Bcf downward revision by EEXCorp. and smaller downward revisions by Amoco, Mobil and PioneerNatural Resources, are included in the figures.

“Although annual reserve additions have improved measurably fromthe low additions that accompanied depressed wellhead gas prices in1992, Andersen and Herold remain concerned that domestic gasreserve additions may not be adequate for the industry to meetcontinuing increases in U.S. demand for natural gas,” said VictorA. Burk, managing director of Andersen’s energy industry servicesgroup. “The lack of an apparent supply response in domestic naturalgas is puzzling, especially in light of continuing natural gasprice strength at the wellhead and the active level of gas welldrilling over the past several years.”

The study looked at the top 49 publicly traded domesticexploration and production companies with domestic proved oil andgas reserves exceeding 100 MMBoe at the end of 1997. Burk saidAndersen and Herold “really were surprised” proved gas reserves forthe 49 companies didn’t change. “When it comes to natural gas, theindustry is in effect running up the down escalator,” said ArthurL. Smith, John S. Herold CEO. That’s particularly true when oneconsiders expectations for increased gas demand in the comingyears, driven mainly by gas-fired power generation. “In some waythis may explain the surprising strength we’ve seen in natural gasprices this year,” Smith said.

The consultants noted they would have expected weak oil pricesto put more downward pressure on gas prices. Burk notedfundamentals, besides the simple supply-demand picture, don’tsupport currently strong gas prices.

While much has been made of coming Canadian gas supplies, theconsultants said domestic producers aren’t trimming their E&Pplans in light of this. “I think there’s a myth that a lot of theCanadian gas reserves are very long-lived reserves,” Burk said.This is not the case, he said, as Canadian reserves being developednow have higher depletion rates than those developed during the1970s and 1980s, and there is concern on the part of some overwhether Canadian producers will be able to fill all the capacitycoming on line to the United States.

As for what’s needed to stimulate domestic gas produceractivity, Burk cited Arthur Andersen’s 1997 U.S. Oil & GasIndustry Outlook survey. Responding to a question of what theaverage gas price needs to be to “significantly increase thedomestic reserve base,” 30% of respondents said $2.50/Mcf; 32% said$2.50 to $3.50/Mcf; and 11% said $3.50/Mcf or more.

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