After months of criticism that it had been underestimating the decline of domestic natural gas production in 2002 by a considerable amount, the Energy Information Administration (EIA) came forward in its February Short Term Energy Outlook with revised production statistics based on data collected from another government agency, the Minerals Management Service. However, a large discrepancy in its statistics remains, leaving open the possibility of further large revisions in the future.

In last month’s outlook, EIA estimated that 2002 dry gas production was about 19.42 Tcf, or less than 1% down from the 19.45 Tcf produced in 2001. The EIA is now saying 2002 production was only 18.86 Tcf and 2001 production totaled 19.37 Tcf, for a decline of about 2.3%. While significant, the change won’t be enough for many analysts and consultants who believe domestic gas production last year was down 4-6%.

“New data provided to EIA by the [MMS] on natural gas production in the Federal Offshore Area of the Gulf of Mexico has resulted in a revised view of total domestic natural gas production for 2002,” EIA explained. “We now estimate that U.S. dry natural gas production fell by 450 Bcf, or 2.3%, in 2002 from the 2001 total.” It said some of the production decline was due to hurricane outages in the Gulf in September and October.

And despite the revised production estimates, a large 1.5 Tcf discrepancy remains between EIA’s supply and demand statistics, meaning the agency still could be significantly underestimating the production decline. “Much of this remaining imbalance relates, we believe, to underestimated demand, most likely in the industrial sector,” EIA said. “While we have provided no ad-hoc adjustments to the most recent data, we have anticipated some ultimate upward adjustment in the projections. Thus, the 2003 demand growth shown here is probably overstated.”

Total gas demand in 2002, based on data reported through September, declined by 1.4% from the 2001 level, EIA said. However, solid growth in demand is likely in 2003, especially if the industrial sector as a whole expands significantly as expected. In 2004, natural gas demand is projected to rise by an additional 2.4% as industrial demand continues its recovery from its 2002 lows.

Natural gas demand this winter is expected to be about 8% above last winter’s demand, largely due to the cold weather. Consumption-weighted heating degree-days for the heating season (Q4 2002 and Q1 2003) will be 11% above year ago levels, provided February and March post normal temperatures.

Meanwhile, gas storage levels are extremely low. EIA said January 2001 is the only time since 1977 that the January natural gas working storage level has been lower than this year, although similar end-of-January levels were seen in 1999, 1996 and 1997. Because storage is so low, it will take above average injections this year to replenish working gas levels and “the industry’s ability to accommodate this requirement without considerable upward price pressure may not be as robust as in earlier years because of other supply factors,” EIA admitted.

After growing by only 1.1% in 2002, gas imports are expected to increase by 5.6% in 2003, which should relieve some of the potential pressure on the domestic market. “Moderate production increases are expected in 2003 and 2004 as high gas prices and strong near-term demand pressures drive drilling activity and well completions to very robust levels over the period,” EIA predicted. “Monthly domestic oil and gas lease revenues, which averaged about $280 million in 2002, are expected to reach the $400 million mark in 2003 and remain near that level in 2004.”

Noting the spot prices have stayed above $5/MMBtu for most of the year so far, EIA predicted that prices likely will remain extremely high possibly through March unless a warm spell suddenly occurs over the next few weeks. The EIA cited the rapidly declining level of natural gas in storage and currently high world oil prices as major factors going forward.

The cold weather has put substantial downward pressure on storage levels, particularly over the last three weeks in which storage withdrawals have averaged 225 Bcf/week and storage levels have fallen to 1,521 Bcf, or 811 Bcf less than at the same time last year and 287 Bcf less than the five-year average.

“Assuming normal weather for the remainder of the heating season (February and March), we project that natural gas wellhead prices this winter (October through March) will average over $4.15/Mcf, or about $1.75/Mcf (67%) above last winter’s price,” EIA said. “In 2003, wellhead prices are projected to show an increase of over $1.30/Mcf over the annual 2002 average, boosting the price for the year to $4.36/Mcf.”

EIA said its projection is based on expected low storage levels for the entire year and continuing increases in demand particularly during the first quarter. In 2004, it sees much of the same with continuing a supply struggle and similar high prices.

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