Smaller producers were the driving force behind a 1 Bcf/dincrease in production during the fourth quarter of 2000 over thesame period in 1999 according to Arlington, VA-based Energy andEnvironmental Analysis, Inc. (EEA). While many large producersreported smaller production results for the fourth quarter 2000when compared to 1999, smaller companies were actually reportingincreases.

A Lehman Brothers study released last week, which only focusedon larger producers, found that natural gas production was downduring the fourth quarter. The Lehman study revealed that out of 20of the largest natural gas producers, which account for about 40%of domestic levels, production for the fourth quarter 2000 was down3.7% from the fourth quarter of 1999 (see Daily GPI, Feb. 2).

Commenting on the Lehman study, EEA Director Kevin Petak said”Generally our conclusion here at EEA would be that it [the Lehmanstudy] is not necessarily a representative sample of the UnitedStates as a whole. You have to look at a lot of the smallerproducers such as Equitable, Houston Exploration, Mitchell, ForestOil and Cabot, where production has in fact been growing, and theyhave drilled a lot of wells in the last year. That’s the importantthing I think you have to take a look at; there’s a differentiationbetween what the big companies and what the small companies havebeen doing over the last year.”

Petak said the large companies are responding as well, but it isjust taking a little more time to ramp up. “While gas productionfor the top 10 U.S. producers, which accounts for about 30% of allU.S. production, appears to have declined from late 1999 throughlate 2000, on average, independents and smaller producers areshowing significant increases in gas production,” Petak explained.”And total year-over-year production is actually higher.

“Generally the smaller producers have been much more active indrilling — in particular onshore the shallower wells, that can bedrilled more quickly, which build deliverability more quickly.Certainly some of the bigger companies with the larger overheadcosts are having difficulty operating in some of the areas wheresmaller producers have been most active.”

With production levels moving up, and about a 40% increase indrilling rigs in the ground over last year’s level for the sametime period, according to Baker Hughes, the EEA said that naturalgas prices by early summer could drop drastically, approaching the$4 per MMBtu mark. “With continued increase in productive capacity,gas prices could decline substantially and re-couple with residualoil prices by early summer,” said Petak.

In the EEA’s February Monthly Gas Update, the company said theincreasing productive capacity supplying price sensitive customersthat had foregone gas in December was the primary reason for pricemoderation. However, the firm cautions that weather over the nexttwo months will be crucial for gas prices for the remainder of theyear.

“Much colder than normal weather for the remainder of thiswinter could push gas prices up in February and March and furtherdeplete storage, creating the need for more storage refill thatwould keep prices high throughout the year. There are still twomonths of winter left, and U.S. gas storage is currently about 1.1Tcf, which is uncomfortably low given the tightness of gas supplyand demand,” Petak said. “In any case, with continuation of highdrilling activity, productive capacity will continue to rise thisyear.”

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