After anxiously waiting to see just how large the Energy Information Administration’s (EIA) downward production revisions for all of 2009 and January 2010 would be, the natural gas industry discovered last Thursday morning that while the previous estimates did overstate U.S. production, revision expectations turned out to be larger than reality.

The long-awaited release by the EIA of U.S. production revisions revealed that the previous report of 63.43 Bcf/d being produced from the Lower 48 during January 2010 was actually 0.9%, or 0.6 Bcf/d, too high. Under the administration’s new 914 reporting methodology, the EIA revised its previous number for January to 62.85 Bcf/d, noting that nearly all of the 0.6 Bcf/d downward revision came from the federal Gulf of Mexico (GOM), Louisiana and Texas.

The EIA said February 2010 production data for the Lower 48 of 63.85 Bcf/d grew by 1.6%, or 1 Bcf/d, over the revised January number, with the largest increase seen in Texas with roughly a 0.35 Bcf/d (1.7%) increase. The government agency found that Louisiana, sparked by the continued development of the Haynesville Shale, displayed the largest percentage increase at 5.7%, or about 0.3 Bcf/d.

After analyzing the EIA’s production revisions, Credit Suisse analyst Teri Viswanath said her team is convinced that domestic natural gas production is rising. “Surprise, U.S. natural gas production was not grossly overstated,” she said in a research note. “As we anticipated the actual downward revisions were relatively modest. The largest monthly revision for the Lower-48 occurred for December 2009, which was lowered by 0.81 Bcf/d, while the average monthly gross production for all of 2009 was lowered by just 0.34 Bcf/d. More importantly the most recent data for February 2010 actually reflects a 1 Bcf/d m-o-m [month-over-month] increase based on the newly revised data.”

Natural gas futures traders received a rare double dose of supply data last Thursday. In addition to the production revisions and fresh data for the month of February, traders were forced to digest an EIA storage report of a larger than expected 83 Bcf build for the week ending April 23. The smaller-than-expected revisions combined with the large injection teamed up to plunge June natural gas futures values below $4 on Thursday.

Heading into the 10:30 a.m. EDT storage report last Thursday, the June natural gas futures contract — in its first regular session action as the front month — was trading at $4.270. Immediately following the storage report release, the contract dropped to $4.038. After the release of the production revision, June futures reached a low of $3.967 before closing the day at $3.980, down 36.8 cents from last Wednesday’s finish.

“We had two things happen on Thursday of great interest to the natural gas markets and industry,” said Tom Saal, a broker with Hencorp Futures in Miami. “The storage figures were a little larger than expected, which makes short-term traders a little jittery. Then we got the production revisions, which were smaller than most people were expecting. I think traders were expecting a little larger of a reduction in production than what the government revealed. Those things combined on Thursday to give us a big sell-off in natural gas futures. That said, we haven’t done any real new damage. While we’ve wiped out a lot of the upward price move of the last week or so, we have not taken out the prior low at $3.810.”

Other market watchers were similarly unimpressed. “Heading into Thursday’s trade, the market was setting itself up for a volatile day due to the storage report and the EIA-914 production data revision,” said Gene McGillian, a broker at Tradition Energy. “At the end of the day, I think the plunge in prices was more attributable to the large storage injection than the production revision. The storage number dropped front-month futures values down to $4.030 and the when the production revision hit we dropped another six cents or so. No doubt there was some anxiety in the market over the revision because the EIA a month ago was talking about a ‘significant’ downward reduction.

“I think the market keyed on the fact that we pushed storage levels to basically a record level for the third week of April,” McGillian told NGI. “With an unsupportive weather picture, the market gave back its recent gains in two or three minutes of trading. Thursday’s action also confirms that $4 is a magnet level for gas, but I don’t think we can rule out a test of this year’s lows down at $3.810.”

The broker noted that Thursday’s drop highlighted the weak underlying fundamental picture that the gas market is dealing with. “It also shows that the rallies are currently not sustainable. On the other side of the coin, the window to trade below $3.810 is closing here as summer heat and the hurricane season are right around the corner. If we do manage to break that level and get to the mid-$3s, it will be short-lived.”

There has been some controversy over the agency’s production estimates in the last year with independent analysts saying EIA has consistently overestimated volumes and failed to track the production decline that has accompanied the declining prices (see NGI, April 12). While EIA’s calculations through much of 2009 showed about a 1 Bcf/d drop in production, those of outside analysts ranged as high as a 4-5 Bcf/d fall in production (see NGI, Jan. 18).

EIA started reviewing its production survey procedures about a year ago and said last month the new methodology would be unveiled with the April 29 announcement of the estimates for February (see NGI, April 5). The EIA applied the new methodology to revise previous estimates for 2009 and January 2010.

The revisions fell well within the expected range set by analysts at Tudor, Pickering, Holt & Co. Securities Inc. “We’re expecting [a] 1 Bcf/d downward revision to 2H’09/Jan’10…anything greater [is] generally bullish,” the analysts said prior to the report’s release.

Revisions to 2009 estimates for the Lower 48 were generally negative as well, ranging from minus 0.3% at the beginning of the year to minus 1.3% at year end. The EIA reported that downward revisions in Texas, Louisiana and the Federal GOM accounted for about three-quarters of the Lower 48’s growing difference from January through December 2009. This difference between the new estimates and the previous estimates grew by 0.65 Bcf/d over the year. At the end of 2009 the new estimates are roughly 0.84 Bcf/d less for the Lower 48, or about 1.3%.

“There is very little change in the estimates for Wyoming and Oklahoma [during 2009],” the EIA said. “Louisiana had the largest percent change at roughly 5% lower than the previous estimates at the end of 2009.”

The EIA-914 survey collects natural gas production volume information on a monthly basis from a sample of companies. The main change to the methodology is in the way EIA picks companies to be in the sample whose production data is extrapolated to produce the agency’s overall Lower 48 estimate.

Up to this point, EIA’s choice of companies to be in the sample was based on their rates of production between two and seven years ago. Also, the sample companies were only reevaluated and changed at the end of a year, which resulted in a number of companies being dropped or added and a large disconnect between December and January estimates.

With the new method, the companies chosen to be in the sample will be based on their production data that is between six and 18 months old. And that data will be updated monthly with corresponding monthly changes to the sample companies. In revising its 2009 calculations EIA found there were only one or two changes in the sample group of companies every month.

The sampling process uses a cutoff criterion of 20 MMcf/d by company for Lower 48 production, except for the state of Oklahoma where the cutoff is 10 MMcf/d because of the predominance of smaller operators. In explaining its new methodology, EIA said distortions of the survey occur mainly around instances of mergers or property sales where either detailed information is not known or is mishandled in reporting or processing. EIA’s survey focuses on individual monthly reports of production in Texas, Louisiana, Oklahoma, Wyoming, New Mexico and Federal GOM. All other states, except Alaska, are grouped together and subject to a different methodology that will not change.

EIA uses a simple ratio (SR) method to produce a monthly total, applying a ratio of the total production to the currents sample’s production at some point in history. This ratio is then applied to the current reported sample volume to estimate the current total production volume. The ratio is a six-month average ratio calculated at some lag time that varies by state depending on when their records are reasonably complete. Currently a six-month lag is used for Wyoming, New Mexico and Louisiana, nine months for Texas, 12 months for the federal GOM and 18 months for Oklahoma.

There currently are about 240 companies in the survey, which produce roughly 90% of gas volumes in the Lower 48. “Natural gas producers comprise a highly skewed and volatile industry, with a small number accounting for the majority of the natural gas production in the United States,” EIA said. The EIA-914 cutoff sample is selected from a sample of approximately 1,500 companies containing the top producing gas companies in the United States.

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