EOG Chairman Mark Papa said he expects U.S. gas production to be down 1-3% this year and another 1-2% in 2004, while Canadian supply has been even weaker than expected, down about 600 MMcf/d so far this year. Meanwhile, Mexico continues to draw about 1 Bcf/d from the United States. Despite the supply concerns and continuing high gas prices, however, Papa said E&P competition in several traditional areas has fallen dramatically.

“We have very high product prices and yet the competition for onshore drilling opportunities is considerably lower than expected everywhere in the state of Texas, New Mexico and Oklahoma,” Papa said at Lehman Brothers CEO Energy/Power Conference on Tuesday. “We are seeing a pretty intense level of competition in the Rockies and in Canada, but a lot of our business is really in the state of Texas and I’ve been shocked at the relative lack of competition that we’ve had to deal with this year in light of $5/MMBtu [gas] prices.”

Papa said four years ago it would have been a “four-way dog fight” for new drilling deals or new acreage in South Texas. “The four dogs that were in that fight were: 1) EOG; 2) El Paso, which was a very serious competitor in South Texas; 3) ConocoPhillips, another fierce competitor in South Texas; and 4) ChevronTexaco, which was a moderate competitor,” he said. “All three of those companies have fallen by the wayside in terms of competition in South Texas, El Paso for obvious reasons, Conoco and Chevron apparently because they’ve been tied up with merger activity. The bottom line is when we want to expand in South Texas right now it’s EOG and maybe two or three other smaller cap people in competition… No one has come into the void here.

“And if you count the number of division offices in Midland, TX, it has gone from roughly about eight companies that had offices out there a year ago to EOG and one other. As people centralize in Houston, they are basically viewing the West Texas area as a maintenance area, an area that ‘you can’t grow in, so it’s just hopeless.’ It has given us a lot of running room there.”

In contrast, Papa said EnCana has come into the Rockies with a vengeance over the last couple years to become a “very fierce competitor.” Other companies also have entered the Rockies in response to the National Petroleum Council’s conclusions that “the Rockies is the only place where there is hope to grow gas production,” said Papa.

He also noted that another new trend is beginning with the majors, one that EOG has expected for some time. The majors are beginning to farm out portions of their legacy assets to some of the larger independents that can fully develop the assets at a lower cost.

“The last part of the puzzle that has been interesting is that service costs have been relatively stable,” he added. “Our best guess is that for the full year ’03 service costs will be flat with full year ’02.

“The competition in the areas where we play ball is less than expected. We’re getting a boost in our inventories from the majors on these farmouts, and we are doing it all without service costs going through the roof and that’s a pretty good story.”

Papa said EOG expects a big boost in its production in the fourth quarter, even excluding recent acquisitions such as the company’s Canadian asset purchase from Husky Oil last week (Husky bought the assets from Marathon) (see Daily GPI, Aug. 21). He said the production boost would take place when the company brings online about 1,000 shallow gas wells in southwestern Saskatchewan and southern Alberta. It also is expecting to relieve a gathering bottleneck in the Rockies and bring a Gulf of Mexico well online.

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