EOG Resources has started to curtail natural gas production in the Gulf Coast region of Texas and Louisiana because of low gas prices. The company said it is reducing compression at some of its fields to decrease wellhead flows by up to 75 MMcf/d over the next couple months. It plans to reevaluate the market situation this winter before continuing the curtailments into 2002.

“Natural gas is too hard to find, and we’re not going to give it away,” said EOG Resources spokeswoman Maire A. Baldwin. “Certainly we are not going to sell it at prices that don’t meet our hurdle range or economic returns, so we are looking to throttle back some production and moderate some production in some short-lived fields, particularly in the shoulder months — September, October and November. Then we will evaluate December in terms of the weather and gas prices when we get there.

“We’re not necessarily looking at shutting in, just throttling back on compression,” she added. “When gas prices were $9 and $10/MMBtu in January we increased compression to squeeze out. Now we are reducing compression to slow the flow.”

Baldwin said the company doesn’t have a production curtailment target but will focus on particular regions where finding and development costs are high. “We don’t have a specific amount, but we’re looking at moderating anywhere between 50 and 75 MMcf/d in the short-lived fields in the Gulf Coast and South Texas area,” she said. “We’ve been doing a little bit already.

“It’s field-by-field specific. Your economics vary from field to field. Recent activity in gas prices has caused us to run this whole exercise. We have a business to run here. Mark Papa, our chairman, has been with the company 20 years so it’s not the first time that he’s been involved in these type of decisions.”

Lehman Brother Analyst Thomas Driscoll said he hasn’t heard of any other producers planning curtailments, but more could join EOG, particularly if prices fall to less than $1.75/MMBtu.

“The only others that I’ve asked about this are Anadarko, Apache and ExxonMobil, all of whom said they are unlikely to [curtail production]. But I think they are all likely to curtail drilling activity. I think that’s the more logical way to address it,” said Driscoll. “You stop drilling for stuff if it is not economic. As long as your cash flow per find is higher than your finding costs, you should be generating that cash flow and drilling. If it’s Gulf of Mexico gas, your cash costs are probably $0.25/MMBtu, but your finding and development costs could be $1.25-$1.50/MMBtu. F&D costs have been pretty enormous out there. If you are generating $1.25, but it costs you $1.50 to find it, you probably shouldn’t be doing it.”

Driscoll said he still expects to see 3-4% production growth by the fourth quarter of this year compared to 4Q2000 and 2-2.25% growth year over year. “The wells that have been drilled the last two months are going to generate production in the next few months as they come on. They are not going to change that. They still have to bring them on once they spend the money. But for next year, they need to slow production growth.

“If we go in at 4% above, December compared to December of last year, we are set up for some pretty big production numbers unless we lay down a lot of rigs, and that’s happening and will continue to happen.”

Driscoll expects gas prices to remain under $2 for a month or two and hold between $2 and $2.50 for the next nine months or so. “Then I think you should see some recovery. A lot of this is going to depend on how quickly we slow down the drilling rigs. Recent gas rig counts of 1,000 are way too high. We are growing production volumes, and the economy can’t handle it. We don’t have any place to put that gas.”

Part of the reason gas prices have been beaten down so hard, Driscoll believes, is to recapture some power generation demand that was lost to coal-fired generators earlier this year. Driscoll said despite the decline in prices, significant demand (potentially as much as 4 Bcf/d) remains gone from the gas market because of the record high prices this past winter.

“I think [gas-fired power generators] have won some demand back from coal plants. Gas-fired power has been displacing coal of late. I think that the big story here isn’t so much industrial demand,” he said. “I think it is what power demand is going to do. People had banked on gas-fired power to be a huge growth market. In a weak economy if power demand doesn’t grow, what we are going to see is efficient gas-fired power plants generating power at the expense of someone who is less efficient, and it’s not going to be nukes that are knocked off; it’s not going to be hydro. It’s going to be either inefficient gas or inefficient coal. Certainly this year it was inefficient gas plants.

“We need to win that demand back. I think over the last six weeks we have, but unfortunately it’s been at $2-$2.50 gas prices. If that’s what we need to win back the demand from coal, it doesn’t say good things. The impact of the weakening economy is that we shut down some gas-fired power. Perhaps the loss will be enough to keep gas at parity with coal.”

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