Without continued increases in drilling activity, natural gas prices next year could be “high enough to do serious damage to the market and invoke the ire of regulators and legislators,” according to the June “Monthly Gas Update” by Energy and Environmental Analysis Inc. (EEA). The challenge is to determine not how much gas production has declined in recent months, but rather how much drilling has to take place to allow deliverability to grow over the next 18 months to meet demand, EEA said. Without a continued rebound in drilling, “prices could average well over $5/MMBtu next year.”

While many energy analysts were for a time focused on the steep drop in U.S. gas production from the last quarter of 2001 to the first quarter of this year, EEA analysts noted that those views have now been tempered by the “strength” of weekly storage injections. With the economy now rebounding and the growing gas use for power generation, the “consensus” opinion, said EEA analysts, is closer to their estimate that U.S. gas deliverability fell only about 1 Bcf/d from July 2001 to March 2002.

“However, all is not rosy for the next 18 months,” noted EEA. “Next year, gas production will have to satisfy the needs of a strengthening economy with more households, increased industrial output and — more important — more electricity demand to be met with gas-fired generation.” However, with normal weather, EEA predicts there will be about 900 Bcf less gas in storage at the end of the 2002-2003 heating season than there was in March.

“To meet 2003 demand and refill storage next year, U.S. gas production…will need to average 1.5 Bcf/d above the level in 2002,” said EEA. Meanwhile, “the Lower 48 U.S. deliverability in January 2004 needs to reach 54 Bcf/d, more than 2.5 Bcf/d above current levels. This is no easy task.” That type of deliverability growth would match the “most rapid increase in gas deliverability since 1984.”

Simply “poking holes in the ground in existing fields” will not be enough. Because gas drilling needs to grow substantially, EEA advised producers to explore “new resource prospects and find new, promising fields that will be more productive.” Both majors and large and small independents operating in North America will need to engage in more exploratory activity, said EEA, “reversing the trend toward focusing on ‘safe’ drilling in and near established fields.” As analysts noted, about 25 years ago, nearly 25% of the wells drilled in North America were exploratory wells; currently, only about 10% of wells drilled are exploratory.

“You need to ‘go hunting’ if you’re going to find ‘elephants,'” EEA analysts advised. “Granted, the ‘elephants’ are not what they used to be — smaller and fewer in number. But to meet the growing gas demand, new areas will need to be found and developed.” Deep wells of more than 15,000 feet “will find formations that offer better possibilities for large ultimate recovery per well. The drilling must shift to ‘high risk-high reward’ prospects, not only in the Gulf [of Mexico], but also throughout all of North America.”

As EEA analysts noted, “Whatever the reason for past reticence, the gas market is in need of immediate and aggressive E&P activity now.” However, even with aggressive activity, EEA projects Henry Hub prices will average “well over” $4/MMBtu in 2003 with normal weather.

The near-term price projection by EEA “remains firm above $3/MMBtu level for the rest of the year, reflecting a tight supply/demand balance in the U.S. gas market.” Assuming weather conditions consistent with the 1971-2000 average, EEA expects Henry Hub prices to average about $3.40/MMBtu for the rest of this year, and then move higher next year. “We expect prices in 2003 will come under additional upward pressure as the supply/demand balance further tightens,” said EEA analysts.

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