Earlier this month, Mark Papa, the CEO of EOG Resources Inc., offered a pessimistic assessment for the decline rate in U.S. natural gas production in 2002 (see Daily GPI, Sept. 6). He said then that production would fall between 5-6% over 2001. Tuesday, EOG lowered its expectations, predicting production will fall 7%.

Papa backs up his management team’s forecast with a credible pedigree. Nearly 74% of EOG’s North American production is natural gas. “We do purport to be somewhat experts in North American gas, related to what’s going on with supply” he said Tuesday during an analysts meeting in Houston. “We can only make suppositions on demand, but with not as much credibility.”

Sticking with an earlier estimate that the drilling rate will be down 5-6% through this year, he said that he underestimated the strength of the U.S. production decline, which “does not bode well for supply going forward.”

However, while offering a guarantee of an “immediate and very robust gas drilling recovery” going into 2003, Papa said it won’t bring back the reserves that have continued to drop in the past few years. “That’s what’s needed even to make up,” he said. “There were 1,100 gas rigs at the peak from last July. Basically, we need a drilling intensity that was higher than the peak of last year.”

Reiterating what he said in early September that the North American gas supply was going through changes “not seen in at least 15 years,” Papa also warned that he does not see any relief in 2003 from supply sources from Mexico, Canada or liquefied natural gas (LNG) to make up for the shortfall.

“Basically, we’re going to have to make do with 2 Bcf a day less supply next year,” he said. Papa had no happy news for anyone expecting near-term gas from the Mackenzie Delta, Alaska or LNG imports either. “The Mackenzie Delta isn’t going to happen at the earliest before 2008; the pipeline (from Alaska) if it happens the earliest will be 2010 or 2012. We’ll have more LNG imports by 2006 or 2007, but in 2004 and 2005, it doesn’t look a whole lot different to me in terms of supply.”

Noting that EOG has been criticized for not increasing its volumes in the past two or three years, Papa offered a “snapshot of the real world,” which showed that the company’s “producing area is pretty decent except in the Rockies,” which lacks reserve takeaway capacity, and whose prices are below $1/Mcf.

“We’re not going to chase artificial production goals and sell gas at a loss. We’re not in the business of giving away our gas. We have moderated our production in certain areas because we think prices are just ridiculous in some areas.” About 15 MMcf /d currently in EOG’s Big Piney, WY region has been cut back, he said, because “we don’t have the firm transportation to get it out. There’s been a degree of production moderation, but that’s just flat good business.”

EOG’s production is off about 7.3%; its peers are down 8%, he said. In Canada, however, EOG’s production is up 20.6%, while its peers are up 8%. For North America, EOG is down 2.9%, while similar companies are off 5.4%.

For 2003, Papa expects the company to grow its gas volumes about 4% over this year, with production of about 814 MMcf/d. Currently, EOG is producing 783 MMcf/d. “Assuming we turn everything on, we would be at 790 MMcf/d between now and year end, with a 10 MMcf increase from Canada and the shallow gas wells there, and another 25 MMcf net increase from the Dinn Ranch. The assumption is if everything stays flat, we’ll have an exit rate of 825 MMcf/d.”

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