EOG Resources CEO Mark Papa said Monday he expects total North American gas production to continue falling through next year because of the decline in drilling and the continuing intrinsic decline rate of existing gas wells.

“After depleting the current storage overhang, we expect the supply reduction to set up a strong price recovery in 2003,” Papa said in the company’s second quarter earnings announcement. “When the anticipated pricing rebound occurs, EOG is positioned to benefit, because our drilling program is significantly weighted to natural gas, and we are totally unhedged in 2003.”

EOG’s gas production volumes fell 33 MMcf/d in the second quarter to 898 MMcf/d and its realized gas prices plummeted to $2.77 from $4.16. The decline in prices was partially responsible for a decrease in net income to $35.4 million, or $0.30 per share from $133.4 million, or $1.13 per share. Second quarter results also included a $0.7 million gain on mark-to-market commodity price transactions. Adjusted net income available to common for the second quarter 2002 was $22.1 million, or $0.19 per share.

EOG’s quarter was highlighted by the early startup of the CNC Ammonia Plant in Trinidad, production growth in Canada and continued success in its Texas and Midcontinent natural gas drilling programs.

“Our opportunities continue to expand in Trinidad, as it becomes more closely linked with the North American natural gas market,” said Papa. “With our firm production contracts and reserves discovered to date, we expect to achieve double-digit compound annual growth from Trinidad over the next several years.”

The CNC Ammonia Plant began initial testing in the second quarter and reached full production capacity in late June. Under a 15-year contract, EOG will initially supply 50 MMcf/d of gas from the U(a) block. The new production represents over a 40% increase from the 114 MMcf/d under the current SECC take-or-pay contract. EOG also has increased condensate production from the U(a) block by 1,000 b/d.

Its Canadian gas production increased by 36 MMcf/d to 159 MMcf/d in the second quarter from 2Q 2001 primarily as a result of high return, shallow gas drilling in Western Canada where EOG plans to drill 1,000 wells during 2002. Crude and condensate production increased 18%.

In South Texas, EOG drilled three successful development wells in the deep Wilcox formation year-to-date. Current net production of 18 MMcf/d is expected to increase to 45 MMcf/d by year-end. EOG also reported a gas discovery in Texas County, OK, during the second quarter.

“We continue to show progress in several of our key natural gas plays in North America and to successfully manage our cost structure,” said Papa. “To take advantage of current lower service costs, EOG has accelerated capital expenditures and accreted acreage, primarily in Western Canada. These strategic actions will favorably position EOG for our 2003 drilling program.”

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