Producers – and the lawyers, brokers and analysts they breakbread with – received a second helping of what was for lunch eightmonths ago at Houston’s Petroleum Club: a bullish outlook for gasprices.

Nearly reprising the recipe for gas price strength served up byCoastal Corp. CEO David Arledge at the Texas Independent Producers andRoyalty Owners (TIPRO) luncheon in February (see Daily GPI, Feb. 3), EOG Resources CEO Mark Papaladled out more to make water the mouths of those with gas to sell. Ina nutshell, production is lagging demand; winter is coming; and thingsare looking good for prices for a good while – but not so good, mindyou, as to create a supply scare.

“In our opinion, we’re in the early stages of a multi-yearsupply constrained environment in North American natural gas,” Papasaid Tuesday. “This is not anything that just popped up in the lastthree or four months. This situation has been developing for atleast the last two years, and it’s been masked, however, because ofthe extremely warm winters we’ve had the last two years.”

The ingredients of Papa’s bullish view are not a secret to theindustry. He noted domestic gas production has been flat since1994, even though most of that period saw significant gas drilling.Another item, year-to-date gas drilling is off 23% from a year ago.And decline rates are increasing in the United States and Canada towhere both countries have aggregate reserve to production ratios ofapproximately nine years, Papa said.

“Now in 1999. there’s going to be a more severe decline in thedeliverability of the U.S. It’s our estimate that between last Jan.1st and this Jan. 1st, we’re going to lose 2.2 Bcf/d ofproductivity in the U.S. just because we haven’t drilled enoughwells. Now that is about 4% of the nation’s total deliverability.When you have a commodity, like natural gas, that has a very highprice-demand elasticity [and] in one year you vacate 4% of thatdeliverability, you will see a price response, and that’s whatwe’ve seen today with gas prices.”

While Papa said he expects demand growth to average about 2% peryear, the real gas price story is on the supply side. “If duringthe year 2000, we ran 600 rigs in the U.S., gas wells, year-round,it’s our estimate that all we would do is we would just offset theproduction declines that have occurred.”

In Texas, for example, gas production is off almost 6% for thefirst six months of this year compared to last. “Texas gasproduction is the lowest it’s ever been in the decade of the ’90s.So we’ve got some real issues here.”

In the Gulf of Mexico, new supply from deep waters is notoffsetting declines on the Continental Shelf. And in Oklahoma,which produces 8% of the nation’s supply, production is down 6%during the first five months of this year compared to last year,Papa said. “So you’ve got a picture here where in the Lower 48states, your breadbasket gas areas are having some trouble in termsof even keeping production flat, much less growing it to meetincreasing demand.”

Papa said EOG expects an additional eight-tenths of a Bcf/d ofgas coming to the U.S. from Canada this winter. The same is truefor next winter, he said. But that only adds up to about 1.5 Bcf/dof additional gas for the winter of 2000-2001. “Just this yearalone in the U.S., we’re losing 2.2 Bcf/d. So even with theincrease in Canadian production taken a year out, you’re not goingto offset the decline that we’re seeing in the U.S.”

Wrapping up his talk, Papa said the current “fallacy” in the gasmarket is that an industry hell-bent on drilling in 2000 will floodthe market with gas during 2001. The EOG CEO is skeptical of that.Papa did stress that he and EOG are not projecting supplyshortfalls that would keep the market from growing to 25 to 30 Tcfover the coming years.

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