Despite the fact that producers are continuing to scale back natural gas drilling activity in response to lower prices while the economy strengthens, Arlington, VA-based Energy and Environmental Analysis Inc. (EEA) said that the balance for gas supply and demand will continue to remain relatively loose throughout most of 2002. The consulting firm cited working gas in storage as the main reason.

Because of the much warmer than normal winter, EEA said it expects to enter the injection season with working gas levels at about 1.6 Tcf versus last year’s level of 742 Bcf. “With more than double the amount of working gas over the prior year, demand for storage refill is expected to exert minimal pressure on gas supply throughout the upcoming injection season,” the group said in its Monthly Gas Update for March.

Based on the analysis of numerous weather scenarios, EEA expects that storage injections will be between 1 and 3 Bcf/d less than last year’s injections. This should continue to keep the supply-demand balance loose throughout the injection season, and should continue to relieve upward price pressure caused by declining productive capacity and rising gas demand.

Looking further ahead, EEA said that by 2003 the supply-demand balance should be much tighter as a result of “continued economic recovery” and the “sustained decline in productive capacity resulting from lower drilling activity.”

EEA also undertook a review of U.S. gas completion and reserve additions in 2001, with the objective of determining how successful industry has been in increasing U.S. gas productive capacity. Using all currently available monthly production data from commercial sources and state agencies, as well as EEA’s analysis of dry marketed production in each area, the group found that the United States experienced a high level of drilling activity in late 2000 and 2001.

The group reported that annual gas completions in 2001 were estimated at 17,500 (extrapolating from API quarterly data), compared to 14,400 in 2000 and 10,900 in 1999. In addition, the total rig count in 2001 peaked at 1,278 in July 2001, with gas rig activity reaching a level of 1,059 rigs that same month. For comparison, EEA said the average gas rig count in the late 1990s averaged only about 500.

“This surge of activity did result in an increase in gas production, but EEA concludes that U.S. gas production and productive capacity did not increase as much as previously thought,” the group said in its report. “Our current analysis indicates that during the two-year period from January 2000 through January 2002 overall Lower-48 dry gas productive capacity was up about 1.4 Bcf/d from a starting point in January 2000 of 51.4 Bcf/d. This equates to an average annual increase of 700 MMcf/d, or 1.4%. Our initial analysis indicated that this level of drilling might have resulted in an increase of about 2.4 Bcf/d.”

EEA allowed that there are “many difficulties” in evaluating recent historical U.S. gas productive capacity. The lag time in reporting raw gas production in some states or areas leads to the need for corrections in some instances.

“Because of our current estimation that reserve additions and production in 2000 and 2001 were lower than previously expected, our forecast wellhead prices are now moderately higher than those of our previous forecast,” EEA said.

The group said that Henry Hub prices in 2002 are now expected to range from $2.14 to $2.60/MMBtu with an average of $2.30/MMBtu, marking an 18-cent increase over its previous forecast. Henry Hub prices in 2003 are now expected to average $3.50/MMBtu, a 30-cent hike over the previous estimate.

EEA said that the combination of lower than expected deliverability increases, higher gas demand, and higher wellhead prices will eventually result in a turnaround in U.S. rig activity. The group said it believes overall rig activity will trough at approximately 809 rigs in July of 2002, and will then climb to a level of 850 to 900 rigs by next winter with continued increases thereafter.

For more information on EEA’s Monthly Gas Update, contact Firas Barazi at (703)-528-1900, or e-mail fbarazi@eea-inc.com.

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