Three analyst groups have concluded that quarterly U.S. natural gas production dropped between 4.9-5.3% compared with a year ago, led by a sharp decline among the majors. The quarterly figures, said Lehman Brothers’ analyst Thomas Driscoll, are “both surprising and disappointing given drilling activity,” because “industry appears unable to ‘drill its way out’ of gas market tightness.”

Lehman’s estimate of 53 U.S. gas producers reported quarterly gas production down 5.3% versus a year ago, comparable to Southwest Securities’ 43-company survey that suggested a 5.2% year-over-year decline. Jefferies & Co.’s survey of 61 gas producers showed output declined 4.9% year-over-year.

In contrast, the Energy Information Administration (EIA) latest Short-Term Energy Outlook is reporting flat gas production compared with a year ago, with total U.S. dry gas production 4.78 Tcf in Q12003 and Q12004. And, unlike the analysts, which are forecasting declines of 4-5% for 2004, EIA is forecasting gas production to rise 1.2% this year (see related story).

Driscoll said the large disparity between analysts’ figures and the EIA numbers is based partly on the fact that Lehman’s uses the Department of Energy’s (DOE) production data for 1998 as a base to “reflect the trend we have noted in company-reported data since 1998. Our estimated production data is somewhat lower than the DOE data for later years but we believe that investors should focus more on the production trends than on the absolute level of estimated production.”

In March, EIA revised its 2003 production growth estimate from a 2.3% increase to a 0.7% increase and “we expect the EIA to soon lower its estimates again,” said Driscoll. In April, “we had estimated that the DOE would reduce its U.S. gas production estimates by 3% leaving our production estimates 8% below EIA rather than 11%. We believe the EIA is in the process of updating its production estimates.”

But while EIA’s numbers are more positive across the board, the independent analysts’ reports also found some encouraging signs in the latest figures, including better-than-expected Canadian production and a surge in gas output by several of the large and mid-size independents.

“As our Q1 North American production survey winds down we observe that U.S. production is likely to disappoint while Canadian production — in contrast — is likely to surprise on the upside,” said Driscoll. Lehman estimated total Canadian output for the first quarter to be up 0.4% sequentially and flat year-over-year. Of the 14 Canadian producers Lehman surveyed, which account for about 70% of production, output was down 0.1% sequentially and 1.2% year-over-year.

According to Jefferies’ survey, the majors in Canada increased production in the quarter by 2%, but if the remaining companies in the 26 Canadian-company survey show production volumes in line with guidance, Q1 output will show aggregate declines of 0.6% year-over-year.

The majors’ numbers overall are down across North America, but Jefferies’ survey showed stronger signs from U.S. independents, especially in the Gulf of Mexico, where operators appear to have more gas production coming on line. But overall, Jefferies’ analysts found that the divestitures of North American assets by the majors has led to “tremendous declines” in that group for five years.

Still, even the numbers put together by the analysts matched only in some cases, but never across the board among companies.

Southwest Securities found that the top 10 U.S. gas producers 1Q2004 production declined 9.4% year-over-year and 1.9% sequentially. “The sharp year-over-year decline in gas production has predominately been driven by the top three U.S. gas producers — BP, ChevronTexaco and ExxonMobil,” but majors are allocating more capital from mature U.S. gas basins toward “global long-term, high impact projects such as liquefied natural gas (LNG).”

Of the majors’ surveyed by Jefferies, Unocal showed the highest gas output decline in the quarter at 26.4%; BP,16.5%; Royal Dutch/Shell Group, 13.9%; ChevronTexaco, 12.8%; Marathon Oil, 12.4%; ExxonMobil, 10.8%; and ConocoPhillips, 7.8%. Lehman’s figures were Unocal, down 36%; BP, 17%; Shell, 9%; ChevronTexaco, 13%; Marathon, 12%; ExxonMobil, 13%; and ConocoPhillips, 8%. And Southwest Securities reported Unocal with a 15.4% decline; 12.1% for BP; 2.9% Shell; 12.9% for ChevronTexaco; 13.1% for Marathon; 13.4% for ExxonMobil; and ConocoPhillips, 7.8%.

For the independents, there were positive numbers for many of the U.S.-focused producers, but several of the larger ones, including Devon Energy Corp., showed declines — Devon was off about 3% year-over-year. All three analysts showed Pioneer Natural Resources leading in the quarter, with Jefferies showing a 62.1% production increase for Pioneer. Jefferies also reported EnCana Corp. up 26.1% increase; Chesapeake Energy, 37.4%; XTO Energy, 30.4%; Westport Resources, 27.8%; and Patina Oil & Gas, 27.6%.

Lehman’s survey of independents only matched Jefferies with Pioneer’s 62% gain. In its survey, Lehman reported EnCana up 29%; Chesapeake, 17%; XTO, 22%; and Westport, 3%. Southwest Securities found Pioneer up 60.3%; EnCana, 15.5%; Chesapeake, 9.3%; XTO, 10.5%; Westport, 4%; and Patina, 4%. Lehman did not report Patina in its survey.

There are other changes within the past year, especially in the growing number of LNG imports. Driscoll noted that LNG imports rose 6% sequentially from Q32003, and “are likely to contribute 3.5% of U.S. supply this year.”

For LNG imports, Lehman reported a substantial increase across the board, both year-over-year and sequentially. Cove Point, which reported no imports in Q12003, led the way in the first quarter with 572 MMcf/d. Everett reported 513 MMcf/d in Q12004, up from 413 MMcf/d a year earlier. Lake Charles had 349 MMcf/d in the first quarter, compared with 381 MMcf/d a year ago, and Elba Island’s imports were up to 230 MMcf/d from 41 MMcf/d in Q12003.

“The overall impact on the U.S. natural gas market is that the U.S. gas market will continue to shrink as high natural gas prices force consumers to use gas more carefully — and 2004 gas demand will need to fall to a 10-year low to match the declining supply,” said Driscoll.

Lehman is forecasting “strong” natural gas prices that will be capped by competition with oil products at about 17-20% of West Texas Intermediate (WTI) oil prices, that “could be a windfall for companies that spend the cash wisely or not at all.” The Lehman gas price forecast for 2004 is that Henry Hub gas prices (using bid week prices) will average $5.25 MMBtu, or 16-17% of the $32/bbl forecast for WTI oil.

Southwest Securities noted that state production data since the peak in May 2001 “displays a similar trend in deteriorating U.S. gas production, although the magnitude of the decline in state gas production is about a third of the roughly 4 Bcf/d U.S. production decline indicated in our company survey.”

Conservatively, said Southwest Securities, U.S. gas production “should decline 4.2% year-over-year, despite our 990 average gas rig forecast.” In aggregate, mature North American gas supply and dependence on limited LNG spot cargoes through 2005 “imply at least $4.50-$5 MMBtu gas prices are required to rationalize sufficient gas demand, in line with our $4.75/MMBtu long-term price forecast.”

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