The current increase in the availability of natural gas in the U.S. is caused 25% by an increase in supply and 75% by a decrease in demand, Chairman Mark Papa of EOG Resources said Tuesday in a financial conference call, continuing to project an increased supply response this year of only 1% to 1.5% relative to last year (see Daily GPI, May 10).

Papa cited Texas Railroad Commission data that shows essentially flat production despite increased drilling, and similar data from Oklahoma and Louisiana. Also “the Gulf is likely flat, and the only advance is in Wyoming which is showing a 10% increase.” Papa pointed out, however, that Wyoming only has 5-6% of U.S. production, and some of the increased volumes are backed up because of limited pipeline takeaway capacity. This is causing a widening Rocky Mountain basis. To protect against the rise in basis EOG has taken an additional firm transportation to the Midcontinent for about 85% of its 120 MMcf/d of Rockies production.

The 75% in decreased demand is due to “fuel switching and the country’s economic malaise….Once the economy reasserts itself and we get into winter, we predict gas prices will strengthen.” EOG was unhedged on the natural gas side through the first quarter of this year and consequently “we received the entire benefit of the high gas prices and channeled it directly to our earnings and financial structure,” Papa said.

EOG reported record second quarter net income available to common stock of $133.4 million, compared to $74.7 million a year ago. The company’s North American production increased 6.1%, “in excess of the stated 4% goal.”

Reacting to the second quarter price drop, EOG entered into natural gas swaps and collars. Currently 200,000 MMBtu/d of notional volumes are hedged through November with a $4.40/MMBtu floor price and a ceiling price that averages $6.15/MMBtu. An additional 115,000 MMBtu/d of notional volumes are locked in from August through yearend at an average price of $3.38/MMBtu.

For 2002, EOG has 50,000 MMBtu/d of notional volumes locked in at an average price of $3.56/MMBtu. In addition EOG entered into Canadian physical delivery contracts for approximately 46,000 MMBtu/d for August 2001 through December 2002 at an average price of US$3.53/MMBtu, less applicable basis adjustments. Papa characterized EOG’s hedging strategy as “opportunistic.”

“Because of current market weakness, we anticipate purchasing additional shares during the third quarter. EOG has an outstanding 5.3 million share buyback authorization.”

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